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A sudden drop in U.S. stocks at the end of last week that morphed into widespread weakness in global markets on Monday can be traced to abrupt shifts to large pools of central bank liquidity rather than hawkish rhetoric from global policymakers.

In a note published on Monday, Matt King, a global markets strategist at Citibank, noted that reserves at the U.S. Federal Reserve fell by $460 billion last week, the single biggest weekly drop on record.

U.S. stocks are set for a rough start to this week with index futures down 1%. Wall Street slumped more than 2.5% on Friday, marking a third consecutive week of losses for both the S&P 500 and the Nasdaq. [.N]

In a note titled “Sudden stealth QT = weaker markets”, King estimates that a $100 billion drop in reserves translates to a 1% drop in stocks, referring to quantitative tightening or the policy of central banks draining surplus cash from the markets by its popular acronym.

“QT is likely to make the outlook for global liquidity for the rest of this year look much more like the first quarter than like the spring break markets had been afforded in recent weeks,” he said.

World stocks recorded their worst quarter this year since the coronavirus pandemic unleashed havoc in March 2020, while U.S. stocks are down nearly 12% from its peak earlier this year.

In a separate note published on Monday, Morgan Stanley strategists said U.S. stocks are set to join a bear market as defensive stocks offer little upside and margin and earnings per share have likely peaked.

“With defensives the latest big outperformer, they are now expensive, leaving very few places to hide,” Morgan Stanley said in a note. “This suggests the S&P 500 will finally catch up to the average stock and enter a bear market.”

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