More global liquidity may not keep stock market rally going

Moneycontrol BureauBullishness over a likely extension of the European Central Bank’s monetary stimulus appears to have faded rather quickly. It was expected that the rate cuts in China would help sustain the momentum today, but investors in India are unenthused.The market reaction could be an acknowledgment of the limitations of liquidity in pushing stock prices higher.Indian shares have rallied over 10 percent from the lows of September, along with other global markets. The upbeat mood in world markets is largely underpinned by hopes of ample liquidity. And that has helped overlook concerns about lower-than-expected global growth, and other fundamental issues in China and other emerging markets.Most market players are now betting that cheap money will continue as Fed may not hike rates in December, and that the ECB will increase the size of its quantitative easing.But are these good enough? Not really, feel a section of market players.“It is not exactly clear that further money printing or quantitative easing (QE) can make a difference to the demand/supply situation globally in terms of fundamental economics,” Pramod Gubbi of Ambit Capital told CNBC-TV18 last week.“I am not sure that the market will get swayed from a long-term perspective by this another gush of liquidity, I think the market may see through it this time around and continue to question whether this will have any positive bearing on the fundamentals of global economy,” he says.It is a view shared by Viktor Shvets of Macquarie as well."Liquidity means higher financial asset prices but that is no longer the case," he told CNBC-TV18 in an interview earlier today."That was the case five-six-seven years ago but today global velocity of money is so low and has been slumping so quickly that I do not believe it is sustainable. In fact if anything liquidity is likely to get less not more," he said.The debate on whether monetary easing helps spur economic growth has been getting louder over the last few months."There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity," Stephen D. Williamson, St. Louis Fed vice president, wrote in a white paper analyzing the US Federal Reserve’s actions to counter the global financial crisis.And this article in the Financial Times last month quotes leading European industrialists as saying that cheap money alone would not be an incentive for them to expand capacity when demand is weak.The majority view among policy makers seems to be that QE programs have achieved little other than pushing up prices of stocks, commodities and real estate.Also, the rate cuts in China are being viewed by some as a sign of desperation, and could set the stage for more yuan shocks in the not so distant future.All said, markets globally have more to worry than cheer about the coming wave of liquidity.