Global liquidity is the tide that lifts or sinks all boats. When the G4 central banks collectively expand their balance sheets, the excess money flows into risk assets — equities, commodities and credit. European cyclical stocks are particularly sensitive because they are leveraged to commodity prices (which rise with liquidity) and industrial demand (which accelerates with credit growth).
The most powerful combination is when Signycle's commodity signals (Brent, copper, BDI) are at BUY levels and global liquidity is rising. This was the setup in March 2020 — commodity prices had crashed, central banks unleashed the largest liquidity injection in history, and European cyclicals delivered 200-400% returns over the next 2 years.
Currently (March 2026): commodity signals are at SELL levels and liquidity is mixed/neutral. The Hormuz oil shock is acting as a de facto liquidity drain by raising energy costs. This is not an ideal combination for new cyclical positions.
What is the global liquidity cycle?
The global liquidity cycle refers to the expansion and contraction of money supply and credit driven by central bank policy. When central banks cut rates and expand balance sheets (QE), liquidity rises and risk assets tend to appreciate. When they hike rates and shrink balance sheets (QT), liquidity falls and risk assets decline. The cycle typically runs 3-5 years from peak to trough.
How does central bank liquidity affect stock prices?
Central bank liquidity affects stocks through three channels: (1) the portfolio rebalancing effect — when central banks buy bonds, investors shift to riskier assets like stocks; (2) lower discount rates — cheaper borrowing raises the present value of future earnings; (3) the wealth effect — rising asset prices stimulate consumption and investment. Historically, rising global M2 leads equity markets by 6-12 months.
Is global liquidity rising or falling in 2026?
Mixed. The ECB is cutting rates gradually, which is supportive for European equities. The Fed is on hold after pausing cuts. The PBOC is providing targeted Chinese stimulus. The Bank of Japan is slowly normalising from extreme accommodation. The Hormuz crisis oil shock is acting as a de facto liquidity drain by increasing energy costs globally. Net result: a neutral-to-slightly-negative liquidity environment.
What is the relationship between M2 money supply and stocks?
The correlation between global M2 money supply growth and equity market returns has been remarkably consistent since the 1970s. Periods of above-trend M2 growth (above 8% annually) have historically coincided with strong equity bull markets. Below-trend M2 growth (below 3%) has coincided with bear markets or weak equity performance. Current global M2 growth is approximately 4-5% — in the neutral zone.