The relationship between the US monetary base – currency in circulation plus bank reserves at the Fed – and the performance of stock markets, commodities and other "risky" assets remains intact. The new high reached by the Dow Industrials last week followed a 9% surge in the base between the end of September and early November – see first chart.

The base contracted in the week to last Wednesday but this is unlikely to mark a change in trend. The Fed is scheduled to buy $500 billion of mortgage-backed and other agency securities by the end of the first quarter. This cash injection will be offset by a further decline in various forms of "emergency" lending, including term auction credit, discount window loans, commercial paper holdings and liquidity swaps with other central banks. These four items, however, currently sum to $172 billion – even in the unlikely event of the total falling to zero, the effect on reserves would be swamped by securities purchases.

The Fed could, in theory, sterilise the impact of its buying on the monetary base by conducting reverse repurchase agreements (repos), involving banks lending excess cash back to the central bank in return for securities. (The Bank of England has effectively sterilised the base effects of its asset purchases since August by cutting its short-term lending to the banking system.) Such an initiative, however, is unlikely before early 2010 and should be signalled in advance to reduce the risk of a large negative market reaction.

Expectations that US liquidity supply will remain ample at least until year-end have been reflected in further capital outflows from the US to Asia in particular. Currency board arrangements in Hong Kong result in a direct impact on the monetary base, which has climbed by 16% since the end of September, providing strong support for the local stock market and Hong-Kong-listed Chinese "H" shares – second chart.