Flows & Liquidity. Are Japanese shifting into equities? See page 19 for analyst certification and important disclosures.

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1 Are Japanese shifting into equities? Japanese investors continue to buy foreign equities driven by both public pension funds and households. While there is a clear shift into equities by state pension funds, this is not true for households. In fact, since 214, Japanese households sold more domestic equities than the foreign equities they bought. ETF flows continue to show a strong preference for bonds over equities and within bonds a strong preference for HY. US & UK pension funds deficits widened sharply in January, continuing the trend that had started in the second half of 214. The UK pension fund deficit currently stands at a record high. Greek bank deposit outflows accelerated to likely more than 3bn per week. At this pace Greek banks have eight weeks before they run out of collateral. We published today a separate note on "Who will sell to the ECB?". We believe that the most likely candidate sellers to the ECB are noneuro area investors but with limited contribution from reserve managers, domestic retail investors as they shift away from bonds towards equities and domestic non-bank financial institutions. Weekly balance of payments data showed that Japanese investors continued to buy foreign equities for 13 consecutive weeks. Total net purchases over these past 13 weeks were 3.5tr or around $3bn. But purchases of foreign equities by Japanese investors were not confined to past three months only. Figure 1 shows that Japanese investors effectively started buying foreign equities in significant amounts since the second quarter of 214. Which sector of the Japanese investor universe is driving this buying? Does this buying represent a broader shift towards equities by Japanese investors? On the first question it appears that "investment trusts", a category largely capturing retail investor flows, accounted for the bulk of foreign equity buying in 214, followed by "others". The latter category includes Pension funds, Insurance companies and Trust Accounts. These two categories were dominant buyers in 215 also but with a reverse order, i.e. "others" accounted for the majority of the buying YTD followed by "investment trusts". How much of this flow is driven by GPIF? Our Japanese colleagues note that GPIF s buying should be mostly flowing via Trust Accounts or Trust Banks which are included in "others" category. Trust Banks do not buy investment trusts because trust banks already charge a management fee and buying of funds would result in a double charge. Therefore investment trusts flows should mainly represent Japanese households. Nikolaos Panigirtzoglou AC J.P. Morgan Securities plc Nandini Srivastava (44-2) nandini.srivastava@jpmorgan.com J.P. Morgan Securities plc Jigar Vakharia (91-22) jigar.r.vakharia@jpmorgan.com J.P. Morgan India Private Limited Mika Inkinen (44-2) mika.j.inkinen@jpmorgan.com J.P. Morgan Securities plc Figure 1: Japanese net purchase of foreign equities Weekly data in bn Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Source: MoF Japan, Bloomberg, J.P. Morgan Click here to visit Library in J.P. Morgan Markets. See page 19 for analyst certification and important disclosures.

2 Nikolaos Panigirtzoglou This is also confirmed by BoJ's statistical definitions: "Investment trusts held by money holders are compiled by deducting "the portion held by financial institutions" from "the total of investment trust issued". The portion held by financial institutions is identified from the source data of Assets and Liabilities of Domestically Licensed Banks and the balance sheets of financial institutions." So GPIF and other public pension funds and financial companies such as Japan Post Bank and Japan Post Insurance, have accounted for around 45% of the buying of foreign equities by Japanese investors since 214. This buying does reflect a broader shift towards equities by Japanese public institutions induced by a change in government policies. What about Japanese households? Is there also a broader shift towards equities by Japanese households, especially as households accounted for 55% of the foreign equity buying by Japanese investors since 214. The answer, in our view, is no. At the same time as households bought foreign equities, they also sold domestic equities. In particular Japanese retail investors sold 3.9tr of domestic equities since 214. During the same period they bought 3.1tr of foreign equities. That is, the selling of domestic equities since 214 surpassed their buying of foreign equities. In other words there no evidence that Japanese households are actively shifting towards equities. In fact the opposite appears to be true as Japanese households sold equities overall. How low is the allocation to equities by Japanese households? To answer this, we look at how their allocation compares with other Japanese investors as well as US and European households. To compare with other Japanese investors, we calculate the share of overall equity investments (including around 2% of outward investment in securities which represents equities as reported by Balance of Payment statistics) as a proportion of their respective total assets (Figure 2). Japanese HHs allocation to equities is amongst the lowest similar to insurance companies at 1%, and only slightly above banks (4%). Pension funds and non financial corporates have the highest proportion of equities. Compared to other countries, Japanese household allocations are the lowest compared to their counterparts in the US, who hold around 34% and in the Euro area who hold 23% of their assets in equities. With the lowest equity allocation within G4, Japanese households are still reluctant to embrace equities (Figure 3). Bond ETFs continue gaining momentum Retail investors continue with their cautious stance so far this year by buying bond funds and selling equity funds (Chart A2). In Flows and Liquidity dated Jan 3th, we highlighted that retail investors started the year with caution and further signs of this strong preference for bond over equity funds are visible from the flow picture so far in February. What is becoming clearer, especially within bonds, is that the appetite to reach for higher yield is increasing. The flow into HY ETFs globally spiked YTD outpacing that of HG or EM bond ETFs (Chart A4). Within the equity space the shift away from European into US equities previously seen between August and December has started reversing in 215. Chart A5 shows that almost 5% of the previous shift away from European into US equity ETFs has been reversed so far in 215. It is not clear what is driving this reversal. We believe it may be a combination of the valuation advantage of European equities, euphoria due to ECB s QE or a belief that the dollar is too strong vs. European currencies. Hedge funds appear to be adopting a similarly cautious stance over equities. The 21-day rolling betas of Macro hedge funds in Chart A17 have been drifting lower since the end of last year. Figure 2: Equity allocations of Japanese sectors Share of equity investments (including 2% of outward investment in securities which is into equities as reported by the IMF Balance of Payment statistics) as a proportion of their respective total assets. Banks 4% Insurance 1% Private PFs 14% Public PFs 21% NFCs 28% HHs 1% Source: Japanese Flow of Funds, J.P. Morgan Figure 3: Equity allocations of US, Euro area and Japanese households Equity allocation of households as percentage of financial assets; data up to 3Q14 It excludes equities held via defined benefit pension plans 45% 4% 35% 3% 25% 2% 15% 1% 5% Japan % Source: J.P. Morgan Euro area US 2

3 Commodities ETFs saw inflows of $4.4bn (or 4.6% of AUM) so far in 215. Gold with $3.bn of inflows was the biggest contributor this year, recovering almost 6% of the $4.9bn of outflows witnessed in 214. UK Pension fund deficit at record high The UK and US defined benefit pension fund deficit widened sharply in Jan 215, continuing the trend started in the beginning of 214. The UK deficit specifically saw the biggest increase which unwound the entire deficit fall seen in 212 and 213. The US deficit saw an increase too, but the pace was more moderate when compared to UK. This is because higher US equity prices benefited US pension funds by more. The UK Pension fund deficit is now well above its May 212 peak of $45bn and at a new all time high of $56bn ( 368bn) since 25 (from when we have the data) according to the UK Pension Protection Fund. The funded ratio declined to 77.6% in Jan-15 from 1.8% a year ago. Similar deterioration is seen with US pension funds. The funded status for the US 1 largest corporate defined benefit pension funds as measured by the Milliman 1 Pension Funding Index declined by $9bn to a deficit of $382bn in Jan-15, erasing half of the improvement seen since Mid-212. This can be seen in Chart A25 in the appendix where we regularly report the funded status of UK and US Pension fund deficits. For the Euro area, we estimate similar big increases in pension fund deficits because of the sharp decline in market interest rates. Although we do not have good aggregate data on the Euro area, one proxy is to look at Dutch pension funds. The Dutch regulator in particular reported that the funded ratio was 19% as of Q3 14. Dutch regulatory rules require pension funds to hold >15% of regulatory liabilities as a minimum (the aim should be a funding ratio above 12% in most cases, so 19% is low in comparison). From an accounting perspective however, this figure is not comparable to the US Milliman index. This is because the Dutch regulator looks at regulatory funding liabilities which use different discount rates. Their calculations include the effect of the Dutch Ultimate Forward Rate (4.2%) which raises the rate used to discount liabilities at the long end (>2yr). Given this discount rate is higher than market interest rates, the funded ratio is unsurprisingly bigger. The regulator noted for instance in 212, that without the UFR, the funding ratio would be 96.3% instead of 11.5%. From an accounting perspective therefore the comparable number for the funding ratio of Dutch pension funds would be around 9-95% for Q3 214 instead of the 19% reported by the regulator. And given the further decline in long interest rates since Q3 214 the current accounting-based pension deficit should be close to or below 9%. For more details see also "Falling yields, rising pension deficits, Peter Elwin and Sharon Fernandes, Jan 22nd). Greek bank deposit outflows accelerate to likely more than 3bn per week Our daily proxy of deposit outflows based on the purchases of offshore money market funds by Greek citizens, which is one way for Greek citizens to deploy their withdrawn deposits, was 118m this week (Mon to Thu), modestly up from 14m during the previous week (between Fed 6th and Feb 13th) and significantly above the 62m seen in the week before (between Jan 3th and Feb 6th). This is lower than the 115m of purchases of offshore money market funds between Jan 23rd to Jan 3th and 3m between Jan 16th to Jan 23rd. It is encouraging that the ECB decision on Wednesday 4th Feb and the stress during this and previous week s Eurogroup meetings did not cause a more significant acceleration of these offshore money market fund purchases. This of course does not offset the fact that the Greek banking system is still bleeding by losing deposits. What do these market fund purchases imply about Greek bank deposit 3

4 Nikolaos Panigirtzoglou outflows? The rule of thumb based on December flows is that each 1m of purchases of offshore money market funds are associated with around 3bn of deposit outflows. Applying December s proportionality to this year, we calculate that the 84m of purchases of offshore money market funds YTD are consistent with bank deposit outflows of around 25bn YTD, 8-9bn of which occurred in February. The ECB, which continues to take its guidance from the Eurogroup, decided to raise its ELA limit on Greek banks by the minimum needed of 3.3bn relative to the 8bn- 1bn requested by Greek banks for precautionary reasons. In our mind this implies that the ECB wants to keep Greek banks on a tight leash putting pressure on the Greek government for a quick agreement. We do not think that the ECB's incremental 3.3bn increase of the ELA limit means that Greek banks have already reached the collateral limit. Greek banks have likely used their maximum ELA limit of 68.3bn, and another 17bn or so was borrowed via regular ECB operations using EFSF bonds as collateral, to arrive at an estimated total central bank borrowing of close to 85bn currently. This means that they have another 8bn of unused EFSF bonds as collateral, which they keep in the (unlikely) event that the ECB stops increasing the ELA limit. Of the 38bn of EFSF bonds, Greek banks had repoed around 13bn in private interbank markets on our calculations, so 25bn were available for ECB operations. And as mentioned above we believe 17bn has already been posted at the ECB for regular ECB operations. We still stick to our projection that the limit on central borrowing based on collateral availability is close to 18bn for Greek banks and this means Greek banks have another 23bn or so before they reach this limit (again assuming current central bank borrowing of 85bn). In all Greek bank deposit outflows accelerated modestly as a result of the stress surrounding the Eurogroup meetings of this past and the previous week, to around 3bn per week pace. At this pace we note that Greek banks will have 8 weeks before they run out of collateral. Who will sell to the ECB This is an abstract of the note published today- Who will sell to the ECB?, G. Salford et. al. The announcement of a very large ECB purchase programme raises the issue of who will be selling to the ECB. To assess the propensity of different sectors to sell, we believe it is important to look at the experience of other QE programs, i.e. those of the Fed, BoJ and BoE. The starting point is the net debt withdrawal. How different net debt withdrawal in the Euro area will be as a result of ECB's QE program relative to that seen in the US, UK and Japan? To answer this question, we look at the experience of various QE programmes conducted by the Fed, the BoJ and the BoE. In the US, the majority of Treasury securities were owned by foreign investors, while in Japan these investors owned a very limited share of JGBs. By contrast, banks were the largest investor group in Japan, followed by insurance companies and pension funds. In the UK, other financial institutions held a larger proportion than in any of the other countries. Compared to the other G4 countries, the Euro area exhibits similarities with the US in that foreign investors hold a substantial share of government bonds, but with a relatively large share held by banks and insurers as well (Figure 4). It is worth noting that QE purchases were considerably less than net issuance in the US, almost matched net issuance in the UK and are exceeding by far net issuance in Japan. Given we expect negative net issuance of around 2.7% of GDP in the Euro area, Japan would appear to provide a better comparison to the Euro situation (Figure 5). Figure 4: Ownership of government debt in the G4 just before QE programmes Proportion of government bonds held by sector, as % of outstanding stock of government debt at time of QE inception. Euro US Japan UK area Proportions as of: 3Q8 1Q13 4Q8 3Q14 Households 4%* 3% 2% 7% Banks 2% 39% 4% 16% Insurance** 3% 24% 11% 38%** Pension Funds** 1% 13% 3% Other financial institutions 6% 4% 22% 5% Foreign holdings 57% 4% 33% 52% Other domestics*** 8% 1% % 2% Central Bank 11% 12% % 4% * For US, households include hedge funds** For the UK, insurance companies and pension funds are not reported separately in the UK Economic Accounts. *** Includes nonfinancial companies, and households for Euro area only Source: BoJ, BoE, Fed, ONS, J.P. Morgan Figure 5: Net issuance of government debt as a share of GDP 12M rolling net issuance, net of central bank purchases, as % of GDP. 12% 1% 8% 6% 4% 2% % -2% -4% Apr-1 Apr-11 Apr-12 Apr-13 Apr-14 Source: BoJ, BoE, Fed, J.P. Morgan UK Japan US 4

5 Nikolaos Panigirtzoglou Given that a key difference between the QE episodes was net issuance of bonds bought by the central banks, the negative net issuance of Japanese government bonds as well as US MBS appear to be the most relevant points of comparison. Our simple counterfactual analysis suggested that most sectors outside the central bank in Japan held fewer government bonds, while in the US all sectors except banks similarly held fewer MBS. Due to the more positive net issuance in US Treasuries and in the UK, most sectors held more government bonds than suggested by the counterfactual analysis, except other financial institutions in the UK. In all, this analysis suggests that the Japanese experience might appear to be a better comparison than the US or UK, and the mere pace of net debt withdrawal points to most investor groups ending up selling to the ECB. We think there are several factors unique to each sector determining their behavior during ECB QE, however. At first, what is clear is that Euro area's QE looks more like Japan's in terms of net bond withdrawal, so several economic sectors will need to sell bonds at the ECB eventually as it happened in Japan. What does the propensity of different agents looks like? Euro area households (HH) equity allocations are currently closer to that of their US counterparts making it more likely that they will also reduce their bond holdings during ECB's QE. The very negative net bond withdrawal should be reflected to a reduction of bond holdings by non-bank financial institutions. This sector sold bonds during all the QE programs of the Fed, BoE and BoJ based on our counterfactual analysis. But these non-bank financial institutions hold along with HHs around 13% of the euro area govt bond universe. This implies that HHs and non-bank financial institutions are unlikely to be the only sellers. Insurance companies were reluctant sellers in the case of Japan but more significant sellers in the case of the US or the UK. We believe insurance companies will eventually sell bonds to the ECB even if Solvency II constraints make insurance companies in the Euro area behave more like their UK rather than US counterparts. Pension funds were reluctant sellers across all regions and the Euro area is unlikely to be an exception given the similarities in demographics to Japan (Figure 6). Banks in the Euro area could also end up selling bonds to the ECB but to a much smaller extent than Japanese banks given their much higher need for liquid assets. Finally non-domestic investors are generally likely to be discouraged from holding Euro denominated assets due to negative yields at the short end of the Euro curve. However, FX reserve managers may have a relatively lower propensity to sell given their focus on government securities for liquidity and capital preservation and reserve diversification. Figure 6: Bond allocation of pension funds and insurance companies as percentage of assets Includes both public and private defined benefit and defined contribution plans as well as insurance companies, last obs Q % 7% 6% 5% 4% 3% 2% 1% Source: BoJ, BoE, Fed, ONS, J.P. Morgan Japan Euro area US UK 5

6 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. Current week data only includes ETF flows. MF & ETF Flows 18-Feb 4 wk avg 13 wk avg 214 avg All Equity All Bond US Equity Intl. Equity Taxable Bonds Municipal Bonds Source: Bloomberg, ICI, J.P. Morgan Chart A1: Fund flow indicator 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. The thin blue line shows the 4-week average of this difference. 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 Feb-7 Feb-8 Feb-9 Feb-1 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Source: Bloomberg, ICI, J.P. Morgan Chart A2: Global equity & bond fund flows $bn per year. Flows include global MF and ETF flows. MF flows are from ICI (global flows up to Q3 14 is from ICI and data since then up to now is combination of EFAMA and ICI). Full year 214 and YTD 215 are estimated flows. ETF flows are from Bloomberg Last observation: 18-Feb YTD Equity funds Bond funds Table A2: Weekly corporate flows $bn, Gross bond issuance includes all corporates incl. financials. United States issuance is all issuance globally by US companies and W. European issuance is all issuance globally by W. European companies. 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. Equity supply and corporate announcements are based on announced deals, not completed. Equity Supply 2-Feb 4 wk avg 13 wk avg y/y chng Global IPOs % Secondary Offerings % Gross corporate bond issuance United States % Western Europe ( bn) % Japan % EM % Corporate announcements M&A - Global % - US Target % - Non-US Target % US buybacks % Non-US buybacks % Source: Bloomberg, Dealogic, Thomson Reuters, J.P. Morgan Table A3: Trading turnover monitor 3 month avg. 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 i.e. the ratio of monthly trading volumes annualized divided by the outstanding amount. 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-25 onwards. Y/Y change is change in YTD deal values over the same period last year. As of Jan-15 MIN MAX Turnover ratio Vol (tr) y/y chng Equities EM Equity* 5.8 $3.6 34% DM Equity* 1. $3.8 13% Govt Bonds USTs 13.9 $1.3-14% JGBs % Bunds % Credit US HG.7 $.3 % US HY 1.2 $.2 21% US Convertibles 2.1 $. -18% Commodities Gold 57.5 $.6 22% Oil 83. $1.2-6% Copper 7. $.8 57% Source: Bloomberg, Federal Reserve, Trace, Japan Securities Dealer Association, WFE, J.P. Morgan. * Data with one month lag Source: Bloomberg, ICI, EFAMA, J.P. Morgan 6

7 ETF Flow Monitor (data as of Feb 18) Chart A3: Global Cross Asset ETF Flows Cumulative flow into ETFs as a % of AUM. Chart A4: Bond ETF Flows Cumulative flow into bond ETFs as a % of AUM. 3% 2% 1% % -1% -2% 35% 3% 25% 2% 15% 1% 5% % EM Global HY Global HG ex-em Equity -3% Bonds Commodity -4% Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15-5% -1% -15% Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Source: J.P. Morgan. Bloomberg Chart A5: Global Equity ETF Flows Cumulative flow into global equity ETFs as a % of AUM. Source: J.P. Morgan. Bloomberg Chart A6: Equity Sectoral and Regional ETF Rolling 3 month and 12 month change in cumulative flows as a % of AUM. Both sorted by 12 month change. 5% 4% 3% 2% EM US WE Japan 5% 4% 3% 2% 1% % -1% -2% -3% US Sectors 3M 12M 1% % 7% -1% 5% 3% EM Countries -2% 1% -3% Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Source: J.P. Morgan. Bloomberg -1% -3% -5% 3M 12M Source: J.P. Morgan, Bloomberg 7

8 Chart A7: Market health map 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 212 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 risky markets. Explanation of indicators: 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. Equity trading volumes: The Y/Y change in the average daily trading volume of stocks on the NYSE. 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 for more details). Credit growth Chart A9: Credit creation in the G4 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 Q % 1% 5% % -5% Equity price momentum Economic momentum Equity trading volumes Flows G4 ex Euro Euro area Value Positions Inversed Conti Explanation of indicators Positions: Difference between net spec positions on US equities and rates. See Chart A14. 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 1. 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 212). Equity price momentum: The 6-month change in the S&P5 equity index. Chart A8: Option skew monitor 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 positive 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. Gold itraxx Main German Bund S&P5 EURUSD Crude 19-Feb Feb Source: Bloomberg, J.P. Morgan Chart A1: 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 Q % 35% 25% 15% 5% EM ex China China G4-1% Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 Mar-14 Source: Central bank, BIS, ICI, Barcap, Bloomberg, IMF and J.P. Morgan calculations -5% Mar-1 Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Source: Central bank, BIS, ICI, Barcap, Bloomberg, IMF and J.P. Morgan calculations 8

9 Spec position monitors Chart A11: 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, commodity positions use the managed money category, while the other assets use the 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. The sample starts on the 13th of June 26. Standard devations from mean weekly position USD VIX Silver US Equities WTI Gold Nikkei US T-Bonds Brent US 1YR RUB CHF 3M Eurodollars US 2YR JPY US 5YR Corn US Rates (ex. ED) GBP Copper Wheat CAD EUR MXN NZD BRL AUD Source: Bloomberg, CFTC, J.P. Morgan Chart A13: S&P5 sector short interest Short interest as a % of shares outstanding based on z-scores. A strategy which overweight s the S&P5 sectors with the highest short interest z- score (as % of shares o/s) vs. those with the lowest, produced an information ratio of.7 with a success rate of 56% (see F&L, Jun 28, 213 for more details) Overall S&P5 Energy Telecom Industrials Utilities Staples Discretionary Health Care Financials Materials Technology Source: NYSE, J.P. Morgan /15/215 1/3/215 3-Feb 15 1-Feb 15 Chart A12: Spec position indicator on Risky vs. Safe currencies Difference between net spec positions on risky & safe currencies 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 26. The risky currencies are: AUD, NZD, CAD, RUB, MXN and BRL. The safe currencies are: JPY, CHF and Gold Source: CFTC, J.P. Morgan Last observation: 1-Feb-15 Chart A14: Spec position indicator on US equities vs. rates Difference between net spec positions on US equities & rates Similar to Chart A12, this indicator is derived by the difference between total CFTC spec positions in US equity futures (in $bn) scaled by open interest (in $bn) minus a duration weighted composite of UST futures and scaled by open interest. The US equity is an aggregate of the S&P5, Dow Jones, NASDAQ and their Mini index. The US rates series is duration weighted aggregate of the UST2YR, UST5YR, UST1YR, UST long bond & the UST Ultra long bond futures. 2% 15% 1% 5% % -5% -1% -15% Last observation: 1-Feb-15-2% Source: CFTC, Bloomberg and J.P. Morgan 9

10 Mutual fund and hedge fund betas Chart A15: Balanced fund equity exposure Rolling 21-day beta of balanced MF returns to returns on the S&P5.Balanced funds are top 2 US-based funds by assets that have existed since 26. It excludes tracker funds and funds with a low tracking error. The thin black line is the average during expansion since Chart A16: Equity mutual fund beta to Euro vs. US and EM vs. US equities relative performance 41-business-day rolling beta of the average daily returns of 2 biggest USdomiciled active equity funds against the daily relative return of Euro area vs. US equities and emerging markets vs. US equities. The betas are based on multiple regressions of the relative performance of the Eurostoxx5 vs. the S&P5, MSCI EM vs. the S&P5 and the S&P5 outright performance Last observation: 18-Feb EM Last observation: 18-Feb Source: Bloomberg J.P. Morgan.5 Euroarea. -.5 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg J.P. Morgan Chart A17: Hedge fund monitor Rolling 21-day beta of macro and equity L/S hedge fund returns to returns on the S&P5. The beta represents the average exposure of macro hedge funds to equities over the previous 21 days Equity L/S HF: beta to the S&P5 Last observation: 17-Feb-15 Macro HF: beta to the S&P5 -.2 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Source: Datastream, Bloomberg, J.P. Morgan Chart A18: Currency hedge fund USD exposure 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 Latest observation: 1-Feb-15 HF beta to the JPM USD tradable Index Net spec positions in the USD Source: CFTC, Datastream, Barclay Group, Bloomberg J.P. Morgan 1

11 Corporate activity Chart A19: G4 non-financial corporate capex and cash flow as % of GDP % of GDP, G4 includes the US, the UK, the Euro area and Japan. Last observation as of Q Chart A2: G4 non-financial corporate sector net debt and equity issuance $tr per quarter, G4 includes the US, the UK, the Euro area and Japan. Last observation as of Q G4 Capex G4 net debt issuance G4 Cash flow Source: ECB, BOJ, BOE, Federal Reserve flow of funds. -.5 G4 net equity issuance Source: ECB, BOJ, BOE, Federal Reserve flow of funds Chart A21: Global M&A and LBO $tr. YTD 215 as of Feb 19, 215. M&A and LBOs are announced. 4.5 M&A ex-lbo (lhs) 4. LBO (rhs) YTD Chart A22: US and non-us share buybacks $tr, YTD 215 as of Feb 19, 215. Buybacks are announced Non-US buybacks US buybacks YTD Source: Reuters ThomsonOne, J.P. Morgan Source: Reuters ThomsonOne, J.P. Morgan 11

12 Pension fund and insurance company flows Chart A23: G4 pension funds and insurance companies equity and bond flows Equity and bond buying in $bn per quarter. G4 includes the US, the UK, Euro area and Japan. Last observation is Q Equities -15 Mar-99 Mar-2 Mar-5 Mar-8 Mar-11 Mar-14 Source: ECB, BOJ, BOE, Federal Reserve flow of funds Bonds Chart A24: G4 pension funds and insurance companies equity and bond levels Equity and bond as % of total assets per quarter. G4 includes the US, the UK, Euro area and Japan. Last observation is Q % 5% 45% 4% 35% 3% 25% Source: ECB, BOJ, BOE, Federal Reserve flow of funds Bonds Equities 2% Mar-99 Mar-2 Mar-5 Mar-8 Mar-11 Mar-14 Chart A25: Pension fund deficits US$bn. For US, funded status of the 1 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 current exchange rates. Last observation is Jan Chart A26: G4 pension funds and insurance companies cash and alternatives levels Cash and alternative investments as % of total assets per quarter. G4 includes the US, the UK, Euro area and Japan. Last observation is Q % UK 25% 2% 15% Alternatives US 1% 5% Cash -6 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Milliman, UK Pension Protection Fund, J.P. Morgan % Mar-99 Mar-2 Mar-5 Mar-8 Mar-11 Mar-14 Source: ECB, BOJ, BOE, Federal Reserve flow of funds 12

13 European Funding market monitor Table A4: Bank deposits and ECB reliance Deposits are non-seasonally adjusted Euro area non-bank, non-government deposits as of Dec 214. We take total deposits (item 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 ) 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 211 and Aug 212 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 %.4% Belgium %.9% Cyprus % -5.2% Finland % 2.% France % 3.9% Germany % 2.4% Greece % -2.1% Ireland % 5.2% Italy % 3.% Luxembourg % 7.5% Netherlands % 1.1% Portugal % 1.4% Spain % -.5% y Spanish and Italian govt spread vs Bunds -7 Spanish and Italian Target2-8 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct Source: Bloomberg, ECB, National Central Banks, J.P. Morgan Chart A27: Euro area gross bank debt issuance Includes secured, unsecured and securitized issuance in any currency. Excludes short-term debt (maturity less than 1-year) and self funded issuance (where the issuing bank is the only book runner). Source: Bloomberg, National Central Banks, J.P. Morgan Chart A28: Excess cash in the Euro area banking system bn, Measured as the difference between the amount in the ECB deposit facility minus that in the lending facility, plus the difference between the current account reserves that banks hold with the ECB minus required reserves. bn 3 25 Periphery Core EMU bank unsecured gross issuance Last observation: 2-Feb Last observation: 18-Feb Jan-14 Apr-14 Jul-14 Oct-14 Jan Source: Dealogic, J.P. Morgan Source: ECB, J.P. Morgan 13

14 Japanese flows and positions Chart A29: Tokyo Stock Exchange margin trading: total buys minus total sells In bn of shares. Topix on right axis Last observation: 13-Feb-15 buys minus sells Chart A3: Domestic retail flows In JPY tr. Retail flows are from Tokyo stock exchange and FX margin trader positions are JPM calculation. FX margin trader positions are in reverse order. A higher number means a larger short and vice versa Last observation: 1-Feb-15 Japanese retail flow (4 wk avg.) Topix Source: Tokyo Stock Exchange, J.P. Morgan Domestic FX margin traders Chart A31: Japanese equity buying by foreign investors. Japanese investors' buying of foreign bonds $bn, 4 week moving average Last observation: 13-Feb-15 Foreign investors' buying of Japanese equities Source: TSE, J.P. Morgan calculations Chart A32: Overseas CFTC spec positions CFTC positions are in $bn. 2 Last observation: 1-Feb Nikkei Spec position Japanese investors' buying of foreign bonds Source: Japan MoF, J.P. Morgan CFTC JPY/USDnet spec positions Source: Bloomberg, CFTC, J.P. Morgan calculations

15 Commodity flows and positions Chart A33: Gold spec positions $bn. CFTC net long minus short position in futures for the Managed Money category Last observation: 1-Feb-15 Jun-6 Dec-7 Jun-9 Dec-1 Jun-12 Dec-13 Source: CFTC, Bloomberg, J.P. Morgan Chart A35: Oil spec positions $bn. CFTC futures positions for WTI and Brent are net long minus short for the Managed Money category Last observation: 1-Feb-15 Chart A34: Gold ETFs Mn troy oz. Physical gold held by all gold ETFs globally Last observation: 18-Feb-15 Oct-3 Apr-5 Oct-6 Apr-8 Oct-9 Apr-11 Oct-12 Apr-14 Source: Bloomberg, J.P. Morgan Chart A36: Energy equity ETF flows Cumulative flow energy equity ETFs as a % of AUM. MLP refers to the Alerian MLP ETF 5% 4% 3% 2% Last observation: 18-Feb-15 Energy ex MLP MLP Brent WTI Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: CFTC, Bloomberg, J.P. Morgan 1% % -1% Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Source: Bloomberg, J.P. Morgan. 15

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