Meanwhile, cryptocurrencies have increasingly been driven by fluctuations in tech stocks. Since March 2020, there has been a strong positive correlation between Bitcoin and the Nasdaq 100, with the relationship intensifying in this year’s selloff.
The thinking goes that when money is cheap, traders can speculate about future digital trends en masse. But when the liquidity party fades, those bets become more costly.
“I don’t think people fully realize how much QE caused investors to add a lot of leverage to their positions,” said Matt Maley, chief market strategist for Miller Tabak + Co. “Now that we’re going through QT, that leverage has to be unwound.”
Respondents who were active in the market during the financial crisis more than a decade ago are particularly concerned that the Fed’s balance-sheet shrinkage will hurt junk bonds. Newer entrants are more inclined to worry about its impact on crypto and tech shares.
Readers more broadly are sounding the alarm about global trading conditions as the likes of the European Central Bank -- which meets this week -- and the Bank of England look to rein in their expanded balance sheets. Nearly 53% said they’re concerned markets are underestimating the liquidity importance of central banks outside the US.
Only 8% described QT in general as overhyped. Yet the principal concern of MLIV readers remains how far the US central bank will lift benchmark borrowing costs in this cycle. Some 61% said the level at which the terminal fed funds rate peaks is more important than the amount by which the balance sheet shrinks.
As for QT’s end game, around two thirds say the primary catalyst is more likely to emerge from negative developments than victory on the inflation front. Some 38% said economic pain would prompt an end to the balance-sheet rundown, while 20% pointed to market turmoil.
Just 10% voted for problems related to bank reserves and short-term funding markets. That’s an implicit vote of confidence in the measures the Fed has taken to avert logjams in the financial plumbing that caused it to intervene in 2019 during its previous tightening program.
For many, the era of ultra-low rates and big central bank balance sheets is all they’ve known professionally. Some 46% of MLIV respondents weren’t active in markets before the widespread global adoption of quantitative easing in the aftermath of 2008.
Fewer still rode the early long-dated Treasury bull market in the decades past. A strong majority of readers -- 64% -- say the four-decade bullish stretch has finally ended, with experienced market players notably more hawkish than younger counterparts.
“Whenever you’re seeing major shifts in liquidity, there’s potential you could see some disruption in the market and that could trigger some violent trading behavior,” said Ed Moya, senior market analyst at Oanda.
--With assistance from Sebastian Boyd, Alix Steel, Tomoko Yamazaki and Eddie van der Walt.
This article was provided by Bloomberg News.