Chart Of The Day: Why Have Central Bank Liquidity Injections Suddenly Stopped Working?

In a must-read report which we will deconstruct shortly, Citi’s Matt King (who, as a reminder, is the person whose “Are the Brokers Broken” report issued in the first week of September 2008 was, according to many, one of the catalysts for Lehman’s failure simply by explaining to a largely clueless Wall Street just how broken the US financial system had become in late 2008) hits it out of the park with just one chart from his latest presentation, the chart which every market bull – whether they know it or not – is losing sleep over:  has the only thing that has worked in the past 7 years, namely the central bank QE transmission channel, broken down.

Or, as Citi’s Matt King notes in what may be the only chart which traders should be obsessing over, “why has it suddenly stopped working“, by which he means the market’s favorable reaction to central bank liquidity injections.

His question: “have central banks lost their touch” and points out that while in the past QE injections have always resulted in improving risk asset prices (in this case represented by junk bond returns), this time is different.

The answer will determine whether the next move in the market is 20% higher or lower.