“Earnings don’t move the overall market… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” Stanley Druckenmiller
Global liquidity conditions, as measured by BofA Merrill Lynch's Global Liquidity Tracker, are still firmly in negative territory since mid-2015 (bottom panel). The most recent data shows a steep drop related to Japan, with three of the four components (Japan, Euro Area, and Emerging Markets) now below zero. Though the US is fractionally positive at 0.75, the continual tightening of liquidity conditions abroad is the greatest risk currently, aligning with Yellen's cautious remarks on raising rates.
From Bloomberg:
"Our real-time Global Liquidity Tracker (GLT) is a composite indicator of liquidity conditions in emerging and developed economies. To estimate our GLT indicator, we employ a dynamic factor model used by global central banks. Our Liquidity Tracker extracts a common unobserved factor reflecting the greatest common variation among market spreads, asset prices, monetary and credit data across different frequencies. We combine our US, Euro area, Japan and EM Liquidity trackers into a global composite using financial weights reflecting the average relevance of an economy in terms of market capitalization and private sector credit. All of this allows us to produce timely estimates of liquidity conditions in an effort to assess the state of the global economy. A reading of zero indicates liquidity at its long-run average while activity between -3 and +3 represents the standard deviation from this average."
Bottom line: overall global liquidity conditions are still unfavorable and show increased risks abroad. Japan has seen the greatest deterioration recently, but all components aside from the US are now moving lower into negative (below average) territory. Should this trend continue, the Fed will have ample justification to delay raising rates or, worst-case scenario, eventually be forced to provide liquidity back into the market.
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