MacroScope

Money markets largely braved Cyprus’s bailout saga last week, but figures showing liquidity conditions are tightening suggest sentiment may not be as resilient the next time around.

Data from CrossBorder Capital, an independent financial firm that specialises in analysing global liquidity flows, shows the euro zone saw its biggest capital outflow in March since late 2011 – around the time the ECB injected liquidity into the financial system.

Financial institutions and governments took a net $175 billion worth of bonds and stocks, on an annualised basis, out of the euro zone in March – the biggest outflow since $201.4 billion in December 2011, according to the data.

Capital has been flowing out of the bloc since July 2011, the data showed.

Michael J Howell, CrossBorder Capital’s managing director, said:

Liquidity conditions are deteriorating fast and that’s backed up by the fact that if you look at net financial flows into the euro zone they are basically trending lower. The Cyprus situation clearly hasn’t helped.

He said the trend, along with a reduction in the size of the ECB’s balance sheet as banks repaid ECB crisis loans, was reducing the amount of liquidity in the financial system.

The steady stream of less-bad-than-expected economic data has evidently been working as a builder of optimism. Confidence in improved economies and financlal market conditions is growing.

One of the biggest surprises has been Germany’s ZEW economic sentiment survey — which polls analysts and economists in Europe’s largest economy. Not only did the index jump this month, it entered positive territory for the first time since July 2007. That was before the credit crisis hit.

U.S. financial services firm State Street also reports that the mood among institutional investors in North America, Europe and Asia is at a nine month high. The main point about this survey is that it is extraplolated from the actual buying and selling patterns within $12 trillion that State Street holds for investors as a custodian.

China has long said that its biggest contribution to a world racked by financial turmoil would be to ensure that its own economy grows strongly, implying that a rising Chinese tide will lift all boats. The latest data show that Beijing has delivered on one part of the bargain; its economy, the toast of the world over the past five years, is once again ahead, far ahead, of the pack. 

Many investors and companies are confident that the second part of the bargain will follow – that China's recovery will be just the cure for markets still woozy from the financial battering. Such faith is not yet justified.

To be sure, China has already delivered a cortisone injection to some commodities, notably copper, the price of which has risen more than 40 percent this year. Strong stock markets, from Japan to Canada, since March are in part a play on positive sentiment spilling over from the Chinese rally that began in January. China also stands as the one growth market for global auto makers.