Watch Out: Less European Liquidity Means Trouble on Wall Street

Ultimately, all financial roads lead to Wall Street.

The big investment banks and trading firms, known as Primary Dealers, all play in one worldwide money pool. When the ECB prints money, it’s not just available to Europe – it is also instantly available to Wall Street.

What happens in Europe doesn’t stay in Europe.

That’s why it’s important to keep track of the performance of the European banking system.

And a couple things about the European banking system performance are standing out lately…

European Bank Lending Has Grown, but Economic Growth Remains an Issue

European bank assets have stagnated since collapsing in 2012-13, including over the past year when the Wall Street media was often touting the European economic “recovery.” If Europe had actually been recovering, bank assets would have grown. They haven’t.


Total assets in European rebounded from a new 4 year low early this year, before dropping sharply in June. Total assets remain down 0.5% over the past 12 months and down 0.7% since NIRP and QE began in September 2014.

European bank lending and deposits have grown in recent months, mostly due to interbank lending, and an ongoing mortgage bubble. Some deposit growth may also be due to repatriation from the US and UK.

There’s no sign of intrinsic, economically driven growth, however. Without interbank lending, loan growth would be negative.

The ECB has been cutting its QE program and has reaffirmed that it will end all bond purchases in December. That should translate to a downturn in deposits.

Watch out for that. There’s a high correlation between European deposit levels and US stock prices. European institutions are big players on Wall Street.

Meanwhile, with the exception of Portugal, and the problems in Italy, Europe’s weak sister banking systems are showing no sign of recovery.

As the ECB cuts QE to zero, liquidity will shrink, and so will the amount of European liquidity flowing into US markets.


Lee Adler

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