Draining Liquidity Signals Trouble for Equities
Not a pretty day for the NASDAQ 100 or many of its prominent names. The index fell nearly 1.4%, but in some cases, such as Palantir, the losses were much worse. The move appeared to be a de-leveraging event, at least from what I could see, and what it looked like, with many of the high-flyers that had driven the index higher in recent weeks taking a hit.
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If you’ve been following this commentary, or my free work elsewhere, you shouldn’t be entirely surprised—I’ve been telegraphing the liquidity drain hitting the market since mid-July. To be frank, if today’s decline is tied to that drain—as I believe it is, based on the optics—then this selloff is likely just the beginning of a larger liquidity-driven event.
The reverse repo facility is empty, as we’ve discussed, and the TGA needs to rise back to $850 billion, with $300 billion coming out of reserves and draining liquidity from the system. The other factor is that as the Treasury continues to issue debt over the balance of the year, there will be no reverse repo facility to offset the drain. That means funding will have to come from other sources, one of which could be primary dealer balance sheets.
Primary dealers are major participants in overnight repo, but if their balance sheets become saturated with Treasuries, they will prioritize funding those positions, leaving less capacity and higher costs for equity repo
The next big settlement date is on Thursday, which can serve as confirmation of today's price action or not.
Mike
Terms By ChatGPT
Defined Terms and Jargon
NASDAQ 100 – A stock market index comprising 100 of the largest non-financial companies listed on the Nasdaq exchange.
De-leveraging Event – A market move where investors reduce borrowed positions, often leading to rapid selling and heightened volatility.
Liquidity Drain – A reduction in available cash or funding within the financial system, which can tighten market conditions.
Reverse Repo Facility (RRP) – A Federal Reserve program allowing financial institutions to park excess cash overnight in exchange for Treasury collateral, helping manage short-term interest rates and system liquidity.
Treasury General Account (TGA) – The U.S. Treasury’s operating account at the Federal Reserve, which fluctuates based on government spending and debt issuance, directly affecting system liquidity.
Primary Dealers – Large financial institutions authorized to trade directly with the Federal Reserve, critical in Treasury auctions and repo market operations.
Repo / Equity Repo – Short-term borrowing arrangements where securities (such as Treasuries or equities) are sold with an agreement to repurchase them later, providing funding for trading positions.
Settlement Date – The date when a trade or Treasury issuance is finalized, involving the actual transfer of securities and funds.
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