JPM Flows Liquidity 2016-10-07 2145906

Completed 07 Oct 2016 07:59 PM BST
Disseminated 07 Oct 2016 08:01 PM BST
Global Asset Allocation

07 October 2016
Flows & Liquidity

Gapping markets
Todays flash crash in sterling reinvigorates the debate about market
liquidity and the role of High Frequency Traders as providers of
liquidity.
The FX market appears to be going through structural changes similar
to those experienced by equity markets in the past.
The advent of non-bank liquidity providers such as HFTs have reduced
bid ask spread and increased market efficiency in FX markets, but in
our opinion at the cost of lower market depth and withdrawal of
liquidity provision in periods of stress.
HFTs are already very important in FX spot markets but they look to
build capability in forwards and other FX products in the near future.
Indeed, the latest 2016 Euromoney FX rankings survey is consistent
with a rising share by HFTs as liquidity providers.

Nikolaos Panigirtzoglou
AC
(44-20) 7134-7815
nikolaos.panigirtzoglou@jpmorgan.com
J.P. Morgan Securities plc
Jigar Vakharia
(91-22) 6157-3281
jigar.r.vakharia@jpmorgan.com
J.P. Morgan India Private Limited
Mika Inkinen
(44-20) 7742 6565
mika.j.inkinen@jpmorgan.com
J.P. Morgan Securities plc
Nishant Poddar
(91-22) 6157-3255
nishant.poddar@jpmorgan.com
J.P. Morgan India Private Limited
In contrast, the combined market share of the top five global banks
dropped to just 44.7% for overall FX trading in this years survey.
This market share had peaked in 2009 at 61.5% and was above 60% as
recently as 2014.
The BoJs regime shift signals a slowing in duration absorption.
The capital flow picture deteriorated in China during Q3 but the rest of
EM saw inflows.
Todays flash crash in sterling reinvigorates the debate about market liquidity
and the role of High Frequency Traders (HFTs) as providers of liquidity. Similar
to previous flash crashes such as the August 24th 2015 flash crash in US equities
or the October 15th 2014 flash crash in USTs, market gapping, a step change in
prices from one level to another without much trading in-between, raises
questions about market structure and liquidity in FX markets. This is also
because FX markets are perceived to be a lot more liquid than equity or bond
markets, so the conventional view is that FX markets are unlikely to experience
flash crashes or market gapping in the absence of high impact news.
Click here to visit Flows & Liquidity Library in J.P. Morgan Markets.
Figure 1: Intraday GBP move

x axis denotes UK time
1.28
1.27
1.26
1.25
1.24
1.23
1.22
1.21
1.20
1.19
1.18
1.17
23:00
03:00
07:00
11:00
15:00
19:00
Source: Bloomberg
See page 16 for analyst certification and important disclosures.

www.jpmorganmarkets.com
(44-20) 7134-7815

Flows & Liquidity
07 October 2016
Todays flash crash in a major currency like sterling

questions the above perception and perhaps shows there
are liquidity vulnerabilities in FX markets that are more
similar to those seen in equity or bond markets. A step
change following a significant event such the Brexit
referendum or the SNBs abandonment of its peg is not
problematic as it represents a natural market resetting.
But a step change triggered by an order flow is more
problematic and in our opinion reflective of how
vulnerable market liquidity is in FX markets also.
Liquidity vulnerabilities in equity or fixed income
markets as a result of changing market structures are
well documented. In equity markets the shift away from
principal trading towards agency trading, where markets
makers simply match buyers with sellers without holding
inventory beyond a short period of time, took place well
before the Lehman crisis. But the Lehman crisis caused a
similar shift within fixed income markets. Regulatory
and other forces have made it a lot more costly for
traditional dealers to act as principal traders in fixed
income markets, inducing them to change towards a
more order-driven trading model of matching buyers and
sellers with minimal inventory risk, or to retrench and be
replaced by agent traders.
At the same time electronic trading and advances in
technology has encouraged the emergence of HFTs as
liquidity providers in the most liquid segments of equity,
FX and to some extent income markets. These HFTs use
sophisticated quantitative models coupled with speed
and high trading frequency, to exploit small price moves.
They do so by arbitraging price differences across
venues or by detecting and taking advantage of order
shifts or imbalances or by simply exploiting very short
term momentum or mean reversion signals.
However, different to traditional market makers, HFTs
tend to operate with a much shorter inventory cycle,
meaning that they conduct offsetting trades within
seconds or even shorter, in order to neutralize their
original position. As a result they tend to quote for
smaller sizes and for a very short period of time. This in
turn reduces market depth, i.e. the ability to trade in size
in markets, especially in those markets where HFTs are
important liquidity providers like equity markets. So we
note that while the emergence of HFTs has been
beneficial for bid ask spreads and small investors, it has
likely had a negative impact on the ability of big
institutional investors to trade in size. This is one of the
reasons big institutional investors have resorted to dark
pools for implementing large equity trades.
More importantly, because HFTs models are typically
adapted to exploit small price moves, HFTs have a
higher incentive to withdraw from their market making
role in periods when volatility rises abruptly as they are
reluctant to subject themselves to the risk of large price
moves. In addition, there is a similar incentive to
2
withdraw from market making when they detect a big

order imbalance, i.e. when they detect markets becoming
one-sided, as they are reluctant to subject themselves to
the risk of not being able to close their position in a very
short period of time.
In addition, given HFTs employ similar models, this
creates the risk of a simultaneous withdrawal by HFTs in
periods of high volatility or stress or in periods when
market become more one-sided. A simultaneous
withdrawal by HFTs not only amplifies the initial market
move, but also creates step changes or gapping markets
as liquidity provision gets impaired and quotes are
withdrawn.
How big is the role of HFT in FX markets relative to
other markets? A previous report by the BIS Highfrequency trading in the foreign exchange market,
September 2011concluded that around a quarter to one
third of spot FX trading volumes are due to HFTs. But
given that this study was conducted five years ago, we
suspect that this share has risen since then.
Indeed, the latest 2016 Euromoney FX rankings survey
is consistent with a rising share by HFTs as liquidity
providers. The biggest change in this years rankings has
been the advent of non-bank liquidity providers led by
XTX Markets who was ranked third for electronic spot
FX trading with a market share of more than 10% and
third for FX trading platforms. In contrast, the combined
market share of the top five global banks dropped to just
44.7% for overall FX trading in this years survey. This
market share had peaked in 2009 at 61.5% and was
above 60% as recently as 2014.
Moreover, many of the banks ranked outside the top 10
for overall FX trading are understood to be sourcing
liquidity from non-bank liquidity providers. According
to Euromoney, these non-bank liquidity providers or
HFTs are set to gain more market share in the future,
helped by advances in technology, more defined
business models and a lower-cost infrastructure base
than traditional FX banks. HFTs are already very
important in FX spot markets as mentioned above, but
they look to build capability in forwards and other
products in the near future.
In all, the FX market appears to be going through
structural changes similar to those experienced by equity
markets in the past. The advent of non-bank liquidity
providers such as HFTs has reduced bid ask spread and
increased market efficiency in FX markets, but at the
cost of lower market depth and withdrawal of liquidity
provision in periods of stress.
(44-20) 7134-7815

Flows & Liquidity
07 October 2016
The BoJs regime shift signals a slowing

in duration absorption
With the BoJ having announced a shift in its monetary
policy away from QE and towards yield targeting last
month, and scrapping its 7-12y average maturity target,
we revisit our previous analysis on duration absorption
by G4 central banks (see F&L, Dec 18 2015). Moreover,
the schedule for its gross government bond purchases
released last week showed that, while the target range for
monthly purchases had not changed, the target ranges for
bonds with maturities greater than 5Y were reduced,
implying a shortening in the average maturity of its
purchases (Figure 2). As we have argued previously, the
overall maturity of asset purchases matters for fixed
income markets, as central bank asset purchases of any
given pace at shorter maturities absorb less interest rate
risk, or duration, from the market than the same pace of
purchases at unchanged maturities.
Figure 2: Monthly schedule the BoJs gross purchases by maturity
bucket
tn
Outline of purchases for

Residual maturity
October
September
up to 1Y
0.1-0.2tn
0.1-0.3tn
1-5Y
3.5-6.4tn
3.6-6tn
5-10Y
1.7-3.2tn
1.8-3.6tn
10Y+
1-2tn
1.5-3tn
of which
10Y-25Y
0.7-1.2tn
25Y+
0.3-0.8tn
Ov erall purchases*
8-12tn
8-12tn
* Includes purchases of inflation-linked and floating rate bonds

Source: BoJ, J.P. Morgan.
Indeed, to take into account both the amount of bonds

purchased as well as the duration of those holdings, we
estimate the proportion of duration that central banks
have removed from the market by adjusting both central
bank holdings and outstanding government bonds to 10year equivalent terms, which we initially applied to the
BoJ, Federal Reserve and BoE QE purchases (see Flows
& Liquidity, Mar 28 2014) and subsequently expanded
to include the ECBs purchases (Overview, GFIMS 2016
Outlook, Nov 25 2015). This suggests that over the
course of this year, duration absorption by the BoJ has
continued to increase, from just over 21% of the
outstanding stock of JGBs in 10y equivalent terms to
around 25% in end-3Q16, approaching the peak duration
absorption of the Fed of around 26% in 2014 (Figure 3).
Figure 3: Central bank bond purchases as a proportion of total

outstanding government debt in 10-year equivalent terms
%. Asset purchases and total outstanding debt eligible for purchase*
converted to 10Y equivalents by multiplying the notional amounts by
(portfolio and outstanding debt duration** / duration of 10-year benchmark
bond). Duration of outstanding debt as proxied by GBI country indices*** and
MBS index. Last observation: 3Q16.
45%
Projection^
40%
35%
BoE
30%
25%
Fed
20%
BoJ^^
15%
10%
ECB
5%
0%
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
* Defined as all outstanding JGBs for the BoJ, total outstanding conventional UK gilt issuance
for the BoE, total US Treasury and Agency debt as well as MBS for the Federal Reserve, and
total outstanding Euro area government bonds for the ECB.
** Average maturity for ECB purchases, as it does not report average duration.
*** For the UK, DMO data on average duration of outstanding UK nominal gilts.
^ Projections assume ECB purchases continue at 80bn per month in 2017, that the BoJ keeps
its purchase pace constant at 80tn per year, the BoE continues its asset purchases at 10bn
per month until January, and the Federal Reserve continues to reinvest proceeds of maturing
bonds until at least December 2017. In addition, the stock of debt is assumed to grow in-line
with JPM 2017 government net deficit forecasts.
^^ Alternative projections for the BoJ as described in the text.
Source: BoJ, BoE, Federal Reserve, ECB, Bloomberg, JDSA, DMO, J.P. Morgan
What about the implications going forward? We can

project the duration absorption of the BoJs asset
purchases based on the following set of assumptions.
First, the quantum of asset purchases is clearly
somewhat more path dependent than before, and in
principle the purchase amounts could increase, in the
event the recent bearish momentum in global bond
markets continues and spills over to Japan, as well as
decrease. To abstract from this, for simplicity we assume
that the BoJ continues the current purchase pace of 80tn
per year. Second, that the stock of outstanding JGBs
keeps rising in line with our forecast for general
government borrowing for the remainder of 2016 and in
2017. Third, that the duration of the stock of JGBs,
which we proxy with the GBI Japan index, would rise
broadly in-line with the pace over the past few years.
Finally, we show how the projections would change
based on three different scenarios for the average
duration of the BoJs holdings: a) that the average
duration would expand in line with the average pace over
the past year as a counterfactual for what our duration
absorption projection would look like in the absence of
the regime shift to yield targeting; b) assuming average
duration remains unchanged at its current level of around
6.8 years; and c) assuming a modest decline in average
duration towards its level in end-2015, around the time
3
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Flows & Liquidity
07 October 2016
when the BoJ increased the average maturity range from

7-10y to 7-12y. The dotted lines in Figure 3 show these
three projections.
Figure 4: Average duration and maturity of the BoJs JGB holdings
In $bn per month. Last obs. is Sep16.
raises concerns, especially ahead of potential hike by the

Federal Reserve in December (Figure 5).
( See also see Ng et al., China: FX reserves fell to
$3.1664 trillion in September, Oct 10)
7.8
Figure 5: Monthly changes in Chinese FX reserves, FX valuation

adjusted
7.3
In $bn per month. Last obs. is Sep16.
100
6.8
6.3
5.8
Average maturity
50
5.3
0
4.8
4.3
Average duration
3.8
3.3
Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
-50
-100
Source: BoJ, Bloomberg, J.P. Morgan.
Compared to its previous policy regime, we think the

analysis suggests that the pace of duration absorption is
likely to slow markedly, and could stabilise at current
levels in the case of a modest decline in average duration
of the BoJs holdings. In addition, as we argued after the
BoJs regime shift two weeks ago, the regime shift to
yield targeting creates the risk of reduced bond
purchases in the future, as, in an environment where
markets perceive the target as credible, the quantity of
purchases required to meet the target may well be lower
than the current pace. A reduced quantity of purchases
could reduce the duration withdrawal impact further.
Indeed, the gradual decline of the duration absorption by
the Fed from a peak of just over 26% to just under 20%
currently, partly as a result of a gradual reduction in the
average duration of its holdings and partly due to an
increase in outstanding Treasury and GSE securities,
suggests that, with an unchanged quantum of asset
purchases, the duration absorption would begin to
gradually unwind, with an associated effective tightening
in policy.
The capital flow picture deteriorated in

China during Q3 but the rest of EM saw
inflows
China reported this week its monthly reserves for the
month of September. The headline decrease was
$18.8bn, but net of valuation effects, the decline was
bigger. Adjusted for FX valuation effects, Chinas FX
reserves declined by around $25bn in September. This
follows two months of negative reserve flow of around
-$10bn per month in both July and August. While the
current outflows are small compared to 2015, the gradual
deterioration in capital outflow during the third quarter
-150
Jan-14
Jul-14
Jul-15
Jan-16
Jul-16
What is the FX reserve dynamic outside of China in

other EM countries?
For a group of 15 EM countries ex China that have
reported their FX reserves for the month of September,
there was little change in FX reserves after adjusting for
FX valuation effects (Net outflows of -$2bn in Sep-16,
Figure 6). This follows an accumulation of $26bn in
August. So in contrast to China, EM economies ex China
appear to have seen a decent capital inflow during Q3,
driven by a surge in August. This is consistent with the
equity and bond flow picture which also saw a sharp
improvement during Q3.
Figure 6: Monthly changes in FX reserves for EM ex China, FX
valuation adjusted
In $bn per month, April numbers do not include Saudi Arabia. Last obs. is
Sep16.
80
EM ex China
60
40
20
0
-20
-40
-60
Jan-14
Jul-14
Source: Bloomberg, J.P. Morgan.

4
Jan-15
Jan-15
Jul-15
Jan-16
Jul-16

Flows & Liquidity
07 October 2016
(44-20) 7134-7815
Table A2: Equity and Bond issuance
Fund Flow Monitor

Table A1: Weekly flow monitor
$bn, Includes US domiciled Mutual Fund flows from ICI with a one week lag
and globally domiciled ETF flows from Bloomberg. We exclude China Onshore funds from our analysis.
MF & ETF Flows
5-Oct
4 wk avg
13 wk avg
2015 avg
All Equity
-8.94
-4.1
-3.3
2.6
All Bond
8.92
6.1
7.3
0.8
US Equity
-3.02
-2.4
-1.6
-2.2
Intl. Equity
1.58
-0.9
-1.2
4.8
Tax able Bonds
7.97
5.2
6.0
0.4
Municipal Bonds
0.95
0.9
1.4
0.4
$bn, Equity supply and corporate announcements are based on announced

deals, not completed. M&A is announced deal value and Buybacks are
announced transactions. Y/Y change is change in YTD announcements over
the same period last year. More details on net bond issuances in Chart A31.
Equity Supply
7-Oct
4 wk avg
13 wk avg
y/y chng
Global IPOs
4.3
3.4
2.1
88%
Secondary Offerings
0.4
8.2
8.5
17%
Corporate announcements
M&A - Global
27.9
42.6
49.8
-31%
- US Target
9.8
15.1
21.0
-31%
- Non-US Target
18.1
27.5
28.8
-31%
US buy backs
0.7
14.2
5.5
-45%
Non-US buybacks
0.0
0.6
0.5
-52%
Sep-16
3 mth avg
YTD avg
y/y chng
97
128
124
-4%
-141
-23
53
-28%
Source: Bloomberg, ICI, J.P. Morgan
Net bond issuance
Chart A1: Fund flow indicator
USD
Difference between flows into Equity and Bond funds: $bn per week.
Flow includes US domiciled Mutual Fund and globally domiciled ETF flows.
Current week data only includes ETF flows. We exclude China On-shore
funds from our analysis. The thin blue line shows the 4-week average of this
difference. Dotted lines are mean 1 StDev of blue line. The thick black line
shows a smoothed version of the same series. The smoothing is done using
a Hodrick-Prescott filter with a Lambda parameter of 100.
25
5-Oct-16
Last observation:
20
15
10
5
0
-5
-10
-15
-20
07
08
09
10
11
12
13
14
15
16
Source: Bloomberg, ICI, J.P. Morgan
Chart A2: Global equity & bond fund flows

$bn per year of Net Sales, i.e. includes net new sales + reinvested dividends
for MF and ETFs. Flows are from ICI (worldwide data up to Q116) and data
since then up to now is combination of monthly and weekly data from ICI,
EFAMA and ETF flows are from Bloomberg. YTD 2016 are estimates.
849
900
600
300
673
588
119
219
225
100
06
-172
-210
07
08
09
282
1
0
-300
580
503
452
82
512
478 402 YTD
323
295
196
Non-USD
Source: Bloomberg, Dealogic, Thomson Reuters, J.P. Morgan
Table A3: Trading turnover monitor

Volumes are monthly and Turnover ratio is annualized (monthly trading
volume annualised divided by the amount outstanding). USTs are primary
dealer transactions in all US government securities. JGBs are OTC volumes
in all Japanese government securities. Bunds, Gold, Oil and Copper are
futures. Gold includes Gold ETFs. Min-Max chart is based on Turnover ratio.
For Bunds and Commodities, futures trading volumes are used while the
outstanding amount is proxied by open interest. The diamond reflects the
latest turnover observation. The thin blue line marks the distance between
the min and max for the complete time series since Jan-2005 onwards. Y/Y
change is change in YTD notional volumes over the same period last year.
As of Sep-16
MIN
Equities
EM Equity*
DM Equity*
Govt Bonds
USTs*
JGBs*
Bunds
Credit
US HG
US HY
US Convertibles
Commodities
Gold
Oil
Copper
MAX
Turnover ratio
Vol (tr)
y/y chng
3.9
1.1
$2.4
$4.3
-50%
-6%
16.0
11.1
1.4
$12.1
852
6.4
3%
-12%
6%
0.7
1.0
2.5
$0.3
$0.2
$0.0
11%
18%
7%
39.8
96.9
3.1
$0.6
$1.6
$0.3
46%
-13%
-22%
Source: Bloomberg, Federal Reserve, Trace, Japan Securities Dealer Association, WFE, J.P.
Morgan. * Data with one month lag
-57
Equity funds
10
11
12
13
Bond funds
14
15
16
Source: Bloomberg, ICI, EFAMA, J.P. Morgan

5
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Flows & Liquidity
07 October 2016
ETF Flow Monitor (as of Oct 05th)

Chart A3: Global Cross Asset ETF Flows
Chart A4: Bond ETF Flows
Cumulative flow into ETFs as a % of AUM
Cumulative flow into bond ETFs as a % of AUM
40%
60%
Equity
EM
35%
Bonds
30%
Commodity
Global HY
50%
Global HG ex-EM
40%
25%
20%
30%
15%
20%
10%
10%
5%
0%
0%
-5%
Jan-15 Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
-10%
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Source: J.P. Morgan. Bloomberg
Chart A5: Global Equity ETF Flows
Chart A6: Equity Sectoral and Regional

ETF Flows
Cumulative flow into global equity ETFs as a % of AUM
Rolling 3 month and 12 month change in cumulative flows as a % of AUM.

Both sorted by 12 month change
45%
EM
40%
US
40%
35%
WE
20%
30%
Japan
US Sectors
0%
25%
-20%
20%
-40%
15%
3M
-60%
12M
10%
5%
50%
40%
0%
EM Countries
30%
-5%
20%
10%
-10%
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Note: We exclude China On-shore ETFs, we deduct the BoJ buying of ETFs
and include one leveraged ETF in Japan (1570 JP, which is the biggest) in
our ETF flow monitor (Chart A3 and Chart A5).
0%
-10%
-20%
-30%
-40%
-50%
3M
12M
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Flows & Liquidity
07 October 2016
ETF Short Interest Monitor (as of Sep 15th)

Chart A7: Cross Asset ETF Short Interest
Chart A8: Bond ETF Short Interest
Short interest as a % of outstanding shares. Short interest is for US

Domiciled ETFs and is available bi-monthly from Bloomberg. Short interest is
weighted by AUM

weighted by AUM
14%
Equity
Bonds
Commodity
16%
Global HG
Global HY
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
0%
Jan-13 Jul-13
2%
Jan-14 Jul-14
Jan-15 Jul-15
Jan-16 Jul-16
0%
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Jan-16 Jul-16
Chart A9: Equity ETF Short Interest
Chart A10: S&P500 sector short interest

weighted by AUM
Short interest as a % of shares outstanding based on z-scores. A strategy

which overweights the S&P500 sectors with the highest short interest zscore (as % of shares o/s) vs. those with the lowest, produced an information
ratio of 0.7 with a success rate of 56% (see F&L, Jun 28, 2013 for more
details)
16%
US
EM
WE
Japan
14%
12%
Overall S&P500
Energy
Materials
10%
8%
6%
Industrials
Discretionary
Telecom
Staples
4%
2%
Technology
Financials
Health Care
0%
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Source: J.P. Morgan. Bloomberg.
8/31/2016
Utilities
-2
-1
9/15/2016
1
Source: NYSE, J.P. Morgan

Flows & Liquidity
07 October 2016
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Chart A11: Option skew monitor
Chart A12: Market health map
Skew is the difference between the implied volatility of out-of-the-money

(OTM) call options and put options. A positive skew implies more demand for
calls than puts and a negative skew, higher demand for puts than calls. It can
therefore be seen as an indicator of risk perception in that a highly negative
skew in equities is indicative of a bearish view. The chart shows z-score of
the skew, i.e. the skew minus a rolling 2-year avg skew divided by a rolling
two-year standard deviation of the skew. A negative skew on iTraxx Main
means investors favor buying protection, i.e. a short risk position. A positive
skew for the Bund reflects a long duration view, also a short risk position.
Each of the six axes corresponds to a key indicator for markets. The position
of the blue line on each axis shows how far the current observation is from
the extremes at either end of the scale. The dotted line shows the same but
at the beginning of 2012 for comparison. For example, a reading at the
centre for value would mean that risky assets are the most expensive they
have ever been while a reading at the other end of the axis would mean they
are the cheapest they have ever been. See explanation on the right for each
indicator. Overall, the larger the blue area within the hexagon, the better for
the risky markets.
Value
iTraxx Main
Crude
Equity price
momentum
Gold
Positions
Inversed
EURUSD
S&P500
05-Oct-2016
German Bund
29-Sep-2016
-1.5
-1.0
-0.5
0.0
0.5
1.0
Economic
momentum
1.5
Flows
Source: Bloomberg, J.P. Morgan
Explanation of Market health map: All variables are expressed as the percentile of the distribution that the observation falls into. I.e. a reading in the middle of
the axis means that the observation falls exactly at the median of all historical observations. Value: The slope of the risk-return tradeoff line calculated across
USTs, US HG and HY corporate bonds and US equities (see GMOS p. 6, Loeys et al, Jul 6 2011 for more details). Positions: Difference between net spec
positions on US equities and 10yr UST. See Chart A18. Flow momentum: The difference between flows into equity funds (incl. ETFs) and flows into bond funds.
Chart A1. We then smooth this using a Hodrick-Prescott filter with a lambda parameter of 100. We then take the weekly change in this smoothed series as shown
in Chart A1. Economic momentum: The 2-month change in the global manufacturing PMI. (See REVISITING: Using the Global PMI as trading signal, Nikolaos
Panigirtzoglou, Jan 2012). Equity price momentum: The 6-month change in the S&P500 equity index.
Credit growth
Chart A13: Credit creation in the US,
Japan and Euro area.
Chart A14: Credit creation in EM
Rolling sum of 4 quarter credit creation as % of GDP. Credit creation

includes both bank loans as well as net debt issuance by non financial
corporations and households. Last obs. is for Q216.
Rolling sum of 4 quarter credit creation as % of GDP. Credit creation

includes both bank loans as well as net debt issuance by non financial
corporations and households. Last obs. is for Q116.
20%
EuroArea
15%
Japan
10%
45%
35%
EM ex China
China
G4
US
25%
5%
15%
0%
5%
-5%
-10%
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: Fed, ECB, BoJ, Bloomberg and J.P. Morgan calculations
-5%
Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
Source: G4 Central banks FoF, BIS, ICI, Barcap, Bloomberg, IMF and J.P. Morgan calculations.

Flows & Liquidity
07 October 2016
(44-20) 7134-7815
Spec position monitors

Chart A15: Weekly Spec Position Monitor
Net spec positions are the number of long contracts minus the number of
short using CFTC futures only data. This net position is then converted to a
USD amount by multiplying by the contract size and then the corresponding
futures price. To proxy for speculative investors, for commodity positions we
use the managed money category, for equity positions we use Leveraged
funds and Asset managers (see Chart A16), whereas other assets use the
legacy non-commercial category. We then scale the net positions by open
interest. The chart shows the z-score of these net positions, i.e. the current
net position divided by the open interest, minus the average over the whole
sample divided by the standard deviation of the weekly positions over the
whole sample. US rates is a duration-weighted composite of the individual
UST series excluding the Eurodollar contract. UK ICE Brent positions are
with one week lag. The sample starts on the 13th of June 2006.
Standard devations from mean weekly position
RUB
Silver
JPY
Gold
Nikkei
Brent
BRL
US 10YR
USD
US 2YR
US T-Bonds
Copper
WTI
AUD
CHF
VIX
CAD
EUR
US 5YR
US Rates (ex. ED)
GBP
US Equities
NZD
3M Eurodollars
MXN
Corn
Wheat
-3.0
-2.0
-1.0
Net spec position is calculated in USD across 5 "risky" and 3 "safe"

currencies (safe currencies also include Gold). These positions are then
scaled by open interest and we take an average of "risky" and "safe" assets
to create two series. The chart is then simply the difference between the
"risky" and "safe" series. The final series shown in the chart below is
demeaned using data since 2006. The risky currencies are: AUD, NZD, CAD,
RUB, MXN and BRL. The safe currencies are: JPY, CHF and Gold.
0.8
Last observation:
0.6
27-Sep-16
0.2
0.0
-0.2
-0.4
-0.6
-0.8
07
08
09
10
11
12
13
14
15
16
Source: CFTC, J.P. Morgan
Chart A18: Spec position indicator on US

equities vs. 10yr UST
Difference between net spec positions on US equities & 10yr UST
20-Sep 16
27-Sep 16
0.0
1.0
2.0
This indicator is derived by the difference between total CFTC positions in

US equity futures by Leveraged funds and Asset managers (Chart A16)
scaled by open interest (in $bn) minus the spec position on 10yr UST futures
also scaled by its own open interest.
30%
3.0
20%
Chart A16: Positions in US equity futures

by Leveraged funds and Asset managers
CFTC positions in US equity futures by Leveraged funds and Asset managers
(in $bn). It is an aggregate of the S&P500, Dow Jones, NASDAQ and their
Mini futures contracts.
Latest observation
120
Difference between net spec positions on risky & safe currencies
0.4
Source: Bloomberg, CFTC, J.P. Morgan
140
Chart A17: Spec position indicator on

Risky vs. Safe currencies
10%
0%
-10%
27-Sep-16
-20%
100
Latest observation :
80
-30%
Jun-06
60
40
Dec-07
Jun-09
27-Sep-16
Dec-10
Jun-12
Dec-13
Jun-15
Source: CFTC, Bloomberg and J.P. Morgan
20
0
-20
-40
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Source: CFTC, Bloomberg and J.P. Morgan

9

Flows & Liquidity
07 October 2016
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Mutual fund and hedge fund betas

Chart A19: Equity beta of US balanced
mutual funds
Chart A20: Equity beta of CTAs and Risk

Parity funds
Rolling 21-day equity betas based on a univariate regression of the daily

returns of our balanced mutual fund return index to the daily returns of the
S&P 500..Our balanced mutual fund index includes the top 20 US-based
active funds by assets and that have existed since 2006. Our balanced
mutual fund index has a total AUM of $550bn which is just a fraction of the
total AUM of $1.4tr of US based balanced funds which we hope to be a good
proxy of the overall industry It excludes tracker funds and funds with a low
tracking error.
Rolling 21-day equity betas based on a univariate regression of the daily

returns of the HFRX Systematic Diversified CTA Index and our Risk Parity
fund return index to the daily returns of the S&P 500.Our risk parity fund
index and the HFRX Systematic Diversified CTA Index forms just a fraction of
the total universe which is around $120bn and $150bn respectively, hopefully
a good representative of the entire universe.
0.75
0.7
1.2
Risk Parity Funds
0.6
0.9
Last observation: 06-Oct-16

0.5
0.70
CTAs
0.6
0.4
0.65
0.3
0.3
0.2
0.60
0.0
0.1
0.55
-0.3
0.0
0.50
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16

-0.1
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
-0.6
Source: Bloomberg, Barcap, J.P. Morgan
Source: Bloomberg, Barcap, J.P. Morgan.
Chart A21: Equity beta of Equity L/S and

Macro Discretionary
Chart A22: Currency hedge fund USD

exposure
Rolling 21-day equity beta. The Equity L/S hedge fund and Macro
Discretionary hedge fund equity beta is based on univariate regression of
their daily returns to returns on the S&P500. To proxy Discretionary Macro
hedge funds, a $300bn universe, we use the HFRX Discretionary Thematic
Index and to proxy Equity L/S hedge funds, an $800bn universe, we use
HFRX Equity hedge index.
The rolling 21-day beta of the Barclay Hedge FX index with the JPM USD
tradable index vs. the net spec position in the USD as reported by the CFTC.
Spec is the non-commercial category from the CFTC. Net spec position
below is with one weeks lag.
0.8
0.6
Last observation:
50
2.0
Latest observation:
40
5-Oct-16
1.5
HF beta to the JPM USD

tradable Index
30
Equity L/S HF: beta

to the S&P500
4-Oct-16
1.0
20
0.5
10
0.4
0.0
-10
-0.5
-20
0.2
-1.0
-30
Net spec positions in

the USD
-40
-50
0.0
-0.2
Jan-15
Macro Discretionary HF:

beta to the S&P500
May-15
Sep-15
Jan-16
Source: Datastream, Barcap, Bloomberg, J.P. Morgan.

10
May-16
Sep-16
-1.5
-2.0
07
08
09
10
11
12
13
Source: CFTC, Barclay, Datastream, Bloomberg J.P. Morgan
14
15
16

Flows & Liquidity
07 October 2016
(44-20) 7134-7815
Corporate activity
Chart A23: G4 non-financial corporate
capex and cash flow as % of GDP
Chart A24: G4 non-financial corporate

sector net debt and equity issuance
% of GDP, G4 includes the US, the UK, the Euro area and Japan. Last
observation as of Q1 2016.
$tr per quarter, G4 includes the US, the UK, the Euro area and Japan. Last
observation as of Q1 2016.
Thousands
12.0
G4 Capex
11.5
11.0
2.0
G4 net debt
issuance
1.5
1.0
10.5
10.0
0.5
9.5
0.0
9.0
G4 Cash flow
8.5
-0.5
G4 net equity
issuance
8.0
-1.0
7.5
95
97
99
01
03
05
07
09
11
13
98
15
00
02
04
06
08
10
12
14
Source: ECB, BOJ, BOE, Federal Reserve flow of funds
Chart A25: Global M&A and LBO
Chart A26: US and non-US share buyback
$tr. YTD 2016 as of Oct 07 M&A and LBOs are announced.
$tr, YTD 2016 as of Oct 07. Buybacks are announced.
5.0
M&A ex-LBO (lhs)
1.0
0.8
4.5
LBO (rhs)
0.9
0.7
4.0
0.8
3.5
0.7
3.0
0.6
0.5
0.5
0.4
YTD
2.5
0.4
1.5
0.3
1.0
0.2
0.5
0.1
0.1
0.0
0.0
05
06
07
08
09
10
Source: Reuters ThomsonOne, J.P. Morgan
11
12
13
14
15
16
US buybacks
0.6
2.0
0.0
Non-US buybacks
0.3
YTD
0.2
05
06
07
08
09
10
11
12
13
14
15
16
Source: Reuters ThomsonOne, J.P. Morgan
11

Flows & Liquidity
07 October 2016
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Pension fund and insurance company flows

Chart A27: G4 pension funds and
insurance companies equity and bond
flows

insurance companies equity and bond
levels
Equity and bond buying in $bn per quarter. G4 includes the US, the UK, Euro
area and Japan. Last observation is Q1 2016
Equity and bond as % of total assets per quarter. G4 includes the US, the
UK, Euro area and Japan. Last observation is Q1 2016.
350
55%
300
Bonds
Bonds
50%
250
45%
200
150
40%
100
50
35%
30%
Equities
-50
Equities
-100
-150
Mar-99
25%
Mar-02
Mar-05
Mar-08
Mar-11
Mar-14
20%
Mar-99
Mar-02
Mar-05
Mar-08
Mar-11
Source: ECB, BOJ, BOE, Federal Reserve flow of funds.
Chart A29: Pension fund deficits

insurance companies cash and
alternatives levels
US$bn. For US, funded status of the 100 largest corporate defined benefit
pension plans, from Milliman. For UK, funded status of the defined benefit
schemes eligible for entry to the Pension Protection Fund, converted to US$
at todays exchange rates. Last obs. is Aug16.
300
Mar-14
Cash and alternative investments as % of total assets per quarter. G4

includes the US, the UK, Euro area and Japan. Last observation is Q1 2016.
30%
200
100
25%
Alternatives
0
20%
-100
UK
-200
15%
-300
-400
-500
10%
Cash
US
5%
-600
-700
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Milliman, UK Pension Protection Fund, J.P. Morgan
12
Jan-15
Jan-16
0%
Mar-99
Mar-02
Mar-05
Mar-08
Mar-11
Mar-14

Flows & Liquidity
07 October 2016
(44-20) 7134-7815
Funding market monitor

Table A4: Bank deposits and ECB reliance
Deposits are non-seasonally adjusted Euro area non-bank, non-government deposits as of Jul 2016. We take total deposits (item 2.2.3. in MFI balance sheets
minus deposits from other financial institutions, which includes deposits from securitized vehicles and financial holding corporations among others. We also
subtract repos (item 2.2.3.4) from the total figures to give a cleaner picture of deposits outside interbank borrowing. ECB borrowing and Target 2 balances are
latest available. ECB borrowing is gross borrowing from regular MROs and LTROs. The Chart shows the evolution of Target 2 balance for Spain and Italy along
with government bond spreads. The shaded area denotes the period between May 2011 and Aug 2012 when convertibility risk premia were elevated due to
Greece exit fears.
bn
Target 2 bal. Target 6m chng ECB borrowing Depo 3m chng Depo 12m chng
Austria
-32
-1
10
-0.5%
4.1%
Belgium
-17
-2
13
1.6%
4.3%
Cyprus
5
3
1
3.0%
8.2%
Finland
67
-5
3
1.0%
4.1%
France
-11
58
71
1.2%
5.2%
Germany
677
72
46
0.9%
3.3%
Greece
-78
17
30
2.0%
2.7%
Ireland
-1
-2
7
0.4%
-0.4%
Italy
-327
-77
174
0.4%
5.6%
Luxembourg
152
4
4
2.6%
9.1%
Netherlands
88
30
14
0.7%
-1.2%
Portugal
-66
1
23
1.8%
3.9%
Spain
-314
-50
135
1.5%
1.9%
Source: Bloomberg, ECB, National Central Banks, J.P. Morgan
100
0.5
0
-100
-200
-300
1.5
10y Spanish
and Italian
govt spread vs
Bunds
2.5
3.5
-400
-500
4.5
-600
Spanish and Italian
Target2
-700
5.5
-800
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Source: Bloomberg, National Central Banks, J.P. Morgan
Chart A31: USD and Non-USD net bond

issuances
Chart A32: Global government bonds with

negative yields
Gross issuance minus redemptions in $bn per month. Non-USD issuance

includes bonds issued in EUR, GBP and JPY. Non-USD bond issuance is
converted to USD at todays exchange rate through the full historical period.
In this way net bond issuance fluctuations are unaffected by currency
changes. Our bond issuance figures include Government as well as nonGovernment bonds issued globally, excluding short-term debt (maturity less
than 1-year) and self-funded issuance (where the issuing bank is the only
book runner).Last observation is Sep 2016
In $tr., Market Value of bonds trading with negative yield within the JPM
Global Government Bond Index (JPM GBI Broad Index). Converted to USD at
todays exchange rate. Note: This is a total Market Value number and is not
adjusted for central banks buying, whereas the Market Value reflected in
JPM GBI Broad is adjusted. (i.e. Rinban adjustments in Japan, SOMA
holdings in the US, BoE purchases in the UK and BoC purchases in Canada).
12.0
Last Observation: $8.3tr. as of 05-Oct.
250
10.0
200
150
8.0
100
6.0
50
0
4.0
-50
-100
2.0
USD Issuances
-150
NON-USD Issuances
-200
Jan-14
Jul-14
Source: Dealogic, J.P. Morgan
Jan-15
Jul-15
Jan-16
Jul-16
0.0
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Source: J.P. Morgan.
13

Flows & Liquidity
07 October 2016
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Japanese flows and positions

Chart A33: Tokyo Stock Exchange margin
trading: total buys minus total sells
In bn of shares. Topix on right axis
Chart A34: Domestic retail flows

In JPY tr. Retail flows are from Tokyo stock exchange
Last observation:
0.4
6.0
3500
Japanese retail flow

(4 wk avg.)
0.2
5.0
27-Sep-16
3000
buys minus sells
0.0
4.0
2500
-0.2
3.0
2000
-0.4
2.0
1500
-0.6
1.0
1000
Topix
0.0
89
92
95
98
01
04
07
-0.8
10
13
16
500
12
13
14
15
16
Source: TSE, J.P. Morgan calculations
Source: Tokyo Stock Exchange, J.P. Morgan
Chart A35: Japanese equity buying by

foreign investors. Japanese investors'
buying of foreign bonds
Last observation:
CFTC spec positions are in $bn. For Nikkei we use CFTC positions in Nikkei
futures by Leveraged funds and Asset managers.
Last observation:
40
$bn, 4 week moving average
15
Chart A36: Overseas CFTC spec positions
27-Sep-16
1-Oct-16
30
3.0
20
2.0
10
1.0
0.0
-10
-1.0
Japanese investors' buying

of foreign bonds
10
-5
-10
4.0
Nikkei Spec position
12
13
Source: Japan MoF, J.P. Morgan
14
14
Foreign investors' buying of

Japanese equities
15
16
-20
CFTC JPY/USD net spec positions

12
13
14
Source: Bloomberg, CFTC, J.P. Morgan calculations.
15
16
-2.0

Flows & Liquidity
07 October 2016
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Commodity flows and positions

Chart A37: Gold spec positions
Chart A38: Gold ETFs
$bn. CFTC net long minus short position in futures for the Managed Money
category
Mn troy oz. Physical gold held by all gold ETFs globally
40
90
Last observation: 27-Sep-16
35
80
30
70
25
60
20
50
15
40
10
30
20
10
-5
Jun-06
Dec-07
Jun-09
Dec-10
Jun-12
Dec-13
Jun-15
0
Nov-03
Nov-05
Nov-07
Nov-09
Nov-11
Nov-13
Nov-15
Source: CFTC, Bloomberg, J.P. Morgan.
Chart A39: Oil spec positions
Chart A40: Energy equity ETF flows
Net spec positions divided by open interest. CFTC futures positions for WTI
and Brent are net long minus short for the Managed Money category. UK ICE
Brent positions are with one week lag.
Cumulative flow energy equity ETFs as a % of AUM. MLP refers to the

Alerian MLP ETF
25%
Last observation: 27-Sep-16
70%
60%
50%
20%
Last observation:
5-Oct-16
Energy ex MLP
MLP
40%
15%
30%
20%
10%
10%
5%
0%
Brent
0%
Jan-12
Jan-13
WTI
Jan-14
-10%
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16
Jan-15
Jan-16
Source: CFTC, Bloomberg, J.P. Morgan
Source: CFTC, Bloomberg, J.P. Morgan
15
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07 October 2016
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Flows & Liquidity
07 October 2016
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Global Asset Allocation

Flows & Liquidity

Global Asset Allocation

Figure 1: Intraday GBP move

See page 16 for analyst certification and important disclosures.

Global Asset Allocation

Todays flash crash in a major currency like sterling

withdraw from market making when they detect a big

Global Asset Allocation

The BoJs regime shift signals a slowing

Outline of purchases for

* Includes purchases of inflation-linked and floating rate bonds

Indeed, to take into account both the amount of bonds

Figure 3: Central bank bond purchases as a proportion of total

What about the implications going forward? We can

Global Asset Allocation

when the BoJ increased the average maturity range from

raises concerns, especially ahead of potential hike by the

Figure 5: Monthly changes in Chinese FX reserves, FX valuation

In $bn per month. Last obs. is Sep16.

Source: BoJ, Bloomberg, J.P. Morgan.

Compared to its previous policy regime, we think the

The capital flow picture deteriorated in

What is the FX reserve dynamic outside of China in

Source: Bloomberg, J.P. Morgan.

Source: Bloomberg, J.P. Morgan.

Global Asset Allocation

Table A2: Equity and Bond issuance

Fund Flow Monitor

MF & ETF Flows

Tax able Bonds

$bn, Equity supply and corporate announcements are based on announced

Source: Bloomberg, ICI, J.P. Morgan

Net bond issuance

Chart A1: Fund flow indicator

Source: Bloomberg, ICI, J.P. Morgan

Chart A2: Global equity & bond fund flows

Source: Bloomberg, Dealogic, Thomson Reuters, J.P. Morgan

Table A3: Trading turnover monitor

Source: Bloomberg, ICI, EFAMA, J.P. Morgan

Global Asset Allocation

ETF Flow Monitor (as of Oct 05th)

Chart A4: Bond ETF Flows

Cumulative flow into ETFs as a % of AUM

Cumulative flow into bond ETFs as a % of AUM

Source: J.P. Morgan. Bloomberg

Source: J.P. Morgan. Bloomberg

Chart A5: Global Equity ETF Flows

Chart A6: Equity Sectoral and Regional

Cumulative flow into global equity ETFs as a % of AUM

Rolling 3 month and 12 month change in cumulative flows as a % of AUM.

Source: J.P. Morgan. Bloomberg

Source: J.P. Morgan. Bloomberg

Global Asset Allocation

ETF Short Interest Monitor (as of Sep 15th)

Chart A8: Bond ETF Short Interest

Short interest as a % of outstanding shares. Short interest is for US

Short interest as a % of outstanding shares. Short interest is for US

Source: J.P. Morgan. Bloomberg

Source: J.P. Morgan. Bloomberg

Chart A9: Equity ETF Short Interest