Gavekal Research strategists highlighted the unusual trend of US asset prices climbing despite a contraction in money supply, a divergence from the typical correlation where excessive money supply growth favors asset price increases.

While the traditional link has shown signs of weakening, US equity prices, along with other assets such as gold, cryptocurrencies, and industrial metals, have continued to rise.

The research firm suggests that non-monetary factors could be influencing asset prices. For instance, equities have been bolstered by factors such as the rollout of artificial intelligence, which has boosted corporate earnings.

A notable example is the recent earnings beat by Nvidia (NASDAQ:), indicating that the AI boom persists.

Unlike the early 2000s, US tech companies currently do not appear to have excessive capital spending plans.

Gold prices have also surged since February, driven by demand from countries with loose monetary policies, unattractive property sectors, or geopolitical motives to diversify away from US dollar-based assets.

Industrial metals are experiencing increased demand due to the growth of AI data centers and the need to enhance the global electrical grid.

Cryptocurrencies have seen a rally, partly due to regulatory approvals for exchange-traded funds on bitcoin and ether, which are expected to broaden the investor base.

The introduction of gold ETFs in 2004 had a similar effect, increasing accessibility for retail investors and subsequently driving up gold prices.

What about other macro drivers

Macro factors are also at play in the US money supply and market dynamics. 

"In the last few months, however, the RRP drain has abated, suggesting a temporary equilibrium has been reached," Gavekal strategists noted.

"If so, this positive liquidity driver for markets may be ending. Even if the RRP drain resumes, there is only US$496bn left to draw down."

However, the market anticipates a loosening of US monetary policy, with the Fed set to reduce the pace of quantitative tightening starting next month, which could lead to renewed growth in money supply.

Investors are now faced with the possibility that asset prices may decline if the drivers supporting them weaken, especially as most asset prices have shown signs of softening in the past few days. 

"In fact, with most asset prices having softened in the last couple of days—with the notable exceptions of Nvidia stock and the ether currency—one has to wonder if this is already starting to play out," the report noted.