LIVE MARKETS-A less-supportive liquidity environment

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

A LESS-SUPPORTIVE LIQUIDITY ENVIRONMENT

Equity market investors are viewing developments in the Middle East through rose-tinted glasses, with stocks rising again on Tuesday on expectations that peace talks could resume soon.

Analysts at research house Variant Perception believe it is rational for markets to look through short-term disruptions, given China's tacit involvement in peace negotiations and face-to-face talks already taking place, even if they ended without agreement.

"This shows we are nearer the end than the beginning of the crisis," Variant Perception said in a note on Monday.

But there is a risk that they say could be lurking around the corner: a reduction in excess liquidity.

"The mechanical inflation pass-through from the Iran conflict has driven a big shift in monetary policy pricing globally from pricing in cuts towards hikes," Variant Perception wrote.

"If sustained this will lead to a less supportive liquidity environment in 2H26."

Major IPOs like SpaceX and potentially Anthropic and/or OpenAI could also be a drain on excess liquidity.

Worse liquidity would likely result in narrow market breadth, said Variant Perception, with investors likely to prioritise semiconductor or AI exposure.

While they say this is merely a risk for now, it's something that investors should be keeping an eye on.

"A combination of tightening liquidity and narrow market breadth are the typical macro signposts of major equity tops, observed in the dotcom, nifty fifty and 1929 bubbles," they noted.

(Samuel Indyk)

EARLIER ON LIVE MARKETS:

EUROPEAN STOCKS HIGHER, COMPANIES FLAG CONFLICT HIT CLICK HERE

EUROPE BEFORE THE BELL: OPTIMISTIC MARKETS CLICK HERE

FINGERS CROSSED FOR A RESOLUTION CLICK HERE