Equities and other risk assets have rallied partly on hopes of easier monetary policies but major central banks have yet to inject additional liquidity into banking systems.

Previous posts discussed the leading relationship between the US monetary base (i.e. currency plus bank reserves) and US / global equities in operation since early 2009. Stock markets peaked in late April 8-9 weeks after a high in the monetary base in late February while the rally starting in early July similarly followed a trough in the base 8-9 weeks before in early May. The monetary base last week fell to its lowest level since the May bottom, suggesting increased near-term risks for markets – see first chart.

Eurozone trends may also be relevant and are similarly cautionary, with the monetary base in the week before last at its lowest since December (last week's figures are released tomorrow). The recent large decline reflects a fall in demand for ECB credit from stronger banks, partly because new 12-month fixed-rate loans are no longer available. The reduction in excess cash in the system, however, has contributed to unwelcome upward pressure on market rates – second chart.