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1、Global ResearchApril 2019J.P. Morgan PerspectivesParadigm Shifts: What Lies Ahead?Cross-Asset Fundamental Strategy John Normand HYPERLINK mailto:john.normand john.normandJ.P. Morgan Securities plcChina Economic and Equity StrategyHaibin Zhu HYPERLINK mailto:haibin.zhu haibin.zhuJ.P. Morgan Securitie

2、s (Asia Pacific) Limited/JPMorgan Chase Bank, N.A., Hong KongEmerging Markets Economic ResearchJahangir Aziz HYPERLINK mailto:jahangir.x.aziz jahangir.x.azizJ.P. Morgan Securities LLCCross Asset Trading Strategy Marko Kolanovic HYPERLINK mailto:marko.kolanovic marko.kolanovicJ.P. Morgan Securities L

3、LCEuropean Economic ResearchDavid Mackie HYPERLINK mailto:david.mackie david.mackieJPMorgan Chase Bank N.A, London BranchUS Rates Research Jay Barry HYPERLINK mailto:john.f.barry john.f.barryJ.P. Morgan Securities LLCLong-Term StrategyJan Loeys AC HYPERLINK mailto:jan.loeys jan.loeys (1-212) 834-587

4、4J.P. Morgan Securities LLCChair of Global ResearchJoyce Chang(1-212) 834-4203 HYPERLINK mailto:joyce.chang joyce.changJ.P. Morgan Securities LLCSee end pages for analyst certification and important disclosures, including investment banking relationships Additional contact details also included in t

5、he back of the presentationA decade beyond the 2008 Global Financial Crisis (GFC), we analyze four paradigm shifts that will define the global economy and market dynamics for years to come: 1) the decline in market liquidity; 2) the Fed pivot; 3) the emergence of a “great power” competition between

6、the US and China; and 4) de-globalization and the rise in populism.Paradigm Shift #1: Decline in market liquidityThe universal decline in market liquidity and market depth across fixed income and equity markets since the 2008 GFC has created a feedback loop between volatility, liquidity, and flows t

7、hat has resulted in increased market fragility.US equity liquidity in the December sell-off was one-third that of previous episodes and about half of the worst liquidity drawdowns of the last decade.US Treasury turnover is two-thirds down from the pre-GFC peak, while US HG and US HY turnover have de

8、clined by 39% and 24%, respectively.Paradigm Shift #2: Fed pivotThe Fed is embarking on a momentous review of its monetary policy framework, and the process of monetary policy innovation is not over, with the current pause already one of the most market-moving in history.Growing recognition by the F

9、OMC that the neutral real rate has likely fallen and is set to remain low.Feds pivot likely extends the life of the cycle, will probably create more asset price inflation, and will modestly raise actual and expected future inflation.Paradigm shift #3: Emergence of US-China “great power” competitionU

10、S policy toward China is moving from a policy of strategic engagement to a “great power” competition.The near-term risk of a trade war between the US and China has decreased significantly, but the conflict will remain for a long time as it reaches much more broadly into areas such as technology, int

11、ellectual property rights, AI, and cyber security, in our view. Chinas AI capabilities will potentially exceed that of the US over the next 5-10 years.While transformative technology is reshaping Chinas economy, its inexorable economic rise is not inevitable, as Chinas share of global output is like

12、ly to stabilize near its current level, ending the era that was characterized by Chinas rising share of global output.Paradigm shift #4: De-globalization and rise of populismSignificant risk that populism, the US/China great-nation conflict, and the drive to develop national champions and self- suff

13、iciency in sectors crucial to national security will further reverse globalization, damaging global growth and profit margins.De-globalization is not inevitable, as many stand ready to defend what they see as the great benefits globalization brought to the world.Investors concerned should strategica

14、lly OW US credit versus equities and commodities, domestic versus multinational companies, small versus large caps, go long DM duration, DM versus EM equities, US/Japan versus European stocks, go long USD, and globally diversified portfolios versus home-biased ones.PageDecline in market liquidityRap

15、id growth of markets coincides with lower liquidity due to regulatory changes3Change of US equity market structure and impact on liquidity and risk10US treasury market making, liquidity and flash crashes11Regulations and year-end liquidity13Credit market making, dealer inventories and liquidity15Mar

16、ket depth declines in MiFID IIs first year16Fed pivotFed Pivot: from inflation to price targeting17ECB unconvinced of the need for a new monetary policy framework18The BoJ has its own problems in raising inflation19What the Fed pivot means for Emerging markets21The Feds slow-motion regime change: An

17、swers to six questions that inform cross-asset strategy into 202022US-China “great power” competitionChinas rise in the global economy23US-China trade talks progress: Reduced risk of tariff war25The Belt and Road Initiative: A grand plan on regional cooperation and globalization26Chinas geopolitical

18、 tensions extend beyond trade28PageCurrent state of cyber competition between China and the US29China: Security spending has upside31De-globalization and rise of populismDe-globalization33The threat to a global EU from populism38Latin Americas populism is rearing its head (again)39The global rise in

19、 income inequality and impact on globalism40The paradigm shift toward populism: macro and market impacts41De-globalization thoughts for EM Equities42EM corporates impact on trade and commodity sectors, and financing45Global bond market ($bn) as of end-2018US bond market ($bn) as of end-201860,00050,

20、00057,1489,000USD HY BondsUSD HG Bonds1,6656,9008,0007,00040,0006,00030,0005,0004,00020,0003,00010,0002,0001,0002000200120022003200420052006200720082009201020112012201320142015201620172018200020012002200320042005200620072008200920102011201220132014201520162017201800Source: J.P. Morgan, Bloomberg, BI

21、S, Central Bank WebsitesSource: J.P. MorganGlobal 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 Q118). Data since then are a combination of monthly and weekly data from ICI, EFAMA and ET

22、F flows from Bloomberg.8498676735956196295625034555124784032822943022172281961731191008510211915-15Equity fundsBond funds-172-209900Worldwide ETF AUM ($bn)4,7544,343 4,3083,1572,5472,3521,9651,5281,108 1,1638837146365,0004,5007005004,0003,5003,0002,5003002,0001001,500-1001,00007080910111213141516171

23、850006-30002007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 201919YTDSource: J.P. MorganSource: J.P. MorganspeedSince July 2018, regulators have continued the process of tailoring and recalibrating existing rules. The passage of the Economic Growth, Regulatory Relief, and Consumer Protect

24、ion Act (EGRRCPA, also known as the Bipartisan Banking Act) raised the asset thresholds at which certain enhanced prudential standards (EPS) apply. In January, to conform with this new law, the Fed proposed modifying company-run stress testing requirements, raising the asset threshold and reducing t

25、he frequency of required stress tests. Additionally, the Fed proposed a framework that would more closely match the regulation for large banking organizations with their risk profiles, and the agencies proposed excluding community banks from the Volcker rule. In the coming weeks, the Fed is also exp

26、ected to propose revisions to certain enhanced prudential standards for foreign banks in the US.The Fundamental Review of the Trading Book (FRTB) was finalized by the Basel Committee on January 14. We expect US regulators to introduce the US version of the regulation in early 2020 with the ruling go

27、ing into effect in January 2022. The initial version of the ruling, which we first covered in 2015, was far more onerous than this final version. Nevertheless, the final ruling has challenges and reinforces many of the issues with the current system. Based on a BIS analysis, FRTB is expected to resu

28、lt in a median increase of 16% in market risk capital requirements for banks overall. For structured products, FRTB builds on what we view as the flawed foundation of the SSFA formula, which does not give any credit to the bond prices and leads to counterintuitive results.Additionally, we have seen

29、continued transition toward replacing LIBOR as a benchmark interest rate:The Fed began publishing SOFR on April 3, 2018. CME launched monthly and quarterly SOFR futures contracts in May. Since July 30, nearly 60 SOFR-based FRNs have been issued in US credit markets. ARRC leadership indicates the dev

30、elopment of SOFR markets has progressed faster than envisioned in the “Paced Transition Plan.” Much of the ARRCs current efforts are focused on developing and deploying fallback language for financial contracts to ensure they are effective in the event that LIBOR ceases to be produced.The Basel Comm

31、ittee released a consultation in December seeking views on revisions to disclosure requirements, and specifically targeting regulatory “window dressing” by some non-US banks. The BIS plans to require banks to disclose daily averages over the reporting quarter instead of just “spot” measurements. Thi

32、s change should lead to lower but steadier repo balances from foreign banks going forward (see HYPERLINK /research/content/GPS-2862441-0 Short-Term Fixed Income, A. Roever, 12/14/18). While US and UK banks already are required to calculate average exposure over the reporting quarter, the finalizatio

33、n of this rule by Basel could require European banking regulators to revise their rules.Summary of proposed requirements; dark blue items reflect changes in the Fed proposal; light blue shading indicates already implemented changes under the EGRRCPASource: Federal Reserve, J.P. Morgan*For firms subj

34、ect to Category III requirements with wSTWF of $75 billion or more, 100% LCR and NSFR requirements would apply. For firms subject to Category III requirements with less than $75 billion in wSTWF, the proposal would request comment on reducing the LCR and NSFR requirements to a level between 70-85%.G

35、lossary: NBA nonbank assets; wSTWF weighted short-term wholesale funding; AOCI accumulated other comprehensive income; CCAR Comprehensive Capital Analysis and Review; GSIB global systemically important bank holding company; TLAC total loss-absorbing capacityBy reducing liquidity and raising the cost

36、 of short-term funding, G-SIB rules make markets more vulnerable to exogenous shocks in the closing weeks of the year, as seen in the past years. The use of single-day snapshots and rigid buckets in G-SIB rules impose costs in the form of higher borrowing costs and less efficient risk transfer, whic

37、h are ultimately borne to a large extent by customers.On average, US G-SIB scores increased 15 points over the first 3 quarters of 2017 before being managed down into year-end, then rebounded somewhat in 2018In 3Q18, many US G-SIBs were again at or near the threshold to move up into the next surchar

38、ge bucketAverage G-SIB scorecard for the 8 US G-SIBs (unitless)3Q 2018 G-SIB Method 2 score and associated surcharge by name based on FR-Y156005004003002001000STWFInterconnectednessCross-JurisdictionalSizeComplexity1451421411441421421421426770727473777574103107107107991061041048182848583848282767676

39、77777878774Q161Q172Q173Q174Q171Q182Q183Q18disclosure; %5.0%4.5%4.0%G-SIB Surcharge3.5%3.0%2.5%2.0%1.5%1.0%0.5%0.0%surcharge bandsJPMGSBACCWFCMSBNYSTT100200300400500600700800900G-SIB Method 2 ScoreSource: FR Y-15, J.P. MorganSource: FR Y-15, J.P. MorganRevised final rule released Jan 14, 2019, follow

40、ing consultative paper on March 22, 2018, to address various issues. Final rule was published Jan 14, 2016, after three rounds of consultations in 2012, 2013 and 2014.Status:Timing:Revised standard comes into effect on January 1, 2022. Awaiting proposal from US regulators; Treasury report recommends

41、 delaying the domestic implementation until the rule can be appropriately calibrated and assessedThe Fundamental Review of Trading Book was undertaken by the BCBS Trading Book Group to produce a revised framework that could be implemented consistently by supervisors and that could achieve comparable

42、 levels of capital across jurisdictionsKey elements of the review include:A clearly defined boundary between the trading book and banking book, to reduce the incentives for regulatory arbitrage.A revised risk measurement approach and calibration, to shift the measure of risk from VAR to expected sho

43、rtfall so as to better capture tail risk“ based on a period of significant financial stress.The incorporation of the risk of market illiquidity, through “l(fā)iquidity horizons in the market risk metric and a risk assessment tool for trading desks with exposure to illiquid, complex products.A revised st

44、andardized approach that is sufficiently risk-sensitive to act as a credible fallback to internal models and appropriate for banks that dont require sophisticated measurement of market risk.Description revised internal models-based approach that relies upon the use of expected shortfall models and s

45、ets out separate capital requirements for risk factors that are deemed non-modellable.Revisions in the 2019 rule include:A simplified standardized approach for use by banks that have small or non-complex trading portfolios.Refined standardized approach treatments of FX risk and index instruments.Rev

46、ised standardized approach of risk weights applicable to general interest rate risk, foreign exchange and certain exposures subject to credit spread risk.Revisions to the requirements for identification of risk factors that are eligible for internal modelling.To further limit incentives for capital

47、arbitrage between the trading book and the banking book, Basel has also finalized standards for capital treatment of Interest Rate Risk in the Banking Book (IRRBB)Implications FRTB is expected to result in a median increase of 16% in market risk capital requirements for banks overallSector(s) impact

48、edFor structured products businesses, it is difficult to say how the switch from the current framework to FRTB will impact capital levels at an absolute level, since the calculations can be bank specificSource: J.P. MorganThe violent 4Q18 sell-off and recovery took place amid liquidity1/3 of that of

49、 other selloffs this cycleThe next crisis will likely see severe liquidity disruptions, asliquidity is strongly negatively correlated with volatility1009590858020122018 Jan2010 20112018 Q42015EventLiquidity2010 Apr60602011 Jul40802012 Apr57002015 Jul21102018 Jan20202018 Q4970021426384 105 126 147 16

50、8 189 210 231 252 273800070006000500040003000200010000S&P 500 Futures Depth vs VIX5101520253035The relationship b/w liquidity and volatility is getting stronger, due to the shift from human to electronic market makersMarket fragility is apparent from the feedback loop between volatility, liquidity a

51、nd flows, and depletion of Value investorsSource: J.P. Morgan Quantitative and Derivatives Strategy, Bloomberg.Source: J.P. Morgan Quantitative and Derivatives Strategy200920112013201420162018Liquidity - Slope to Implied Vol (VIX) Liquidity - Slope to Realized Vol (1M)10000-1000-2000-3000-4000-5000-

52、60000-500-1000-1500-2000-2500-3000800S&P 500 Put Option Delta CTA AUMVolatility Targeting AUM6004002000199720012005200920132017Source: J.P. Morgan Quantitative and Derivatives StrategySource: J.P. Morgan Quantitative and Derivatives StrategyTreasury trading volumes peaked in the post-crisis years an

53、d have since stabilized at lower levelsand it takes longer for the Treasury market to turn overUS Treasury trading volumes, yearly average; $bnDaily US Treasury market turnover,* including and excluding Treasuries held by the Fed; %49955552557055356852851954550548550251754043436640829822718720760050

54、0400300200199819992000200120022003200420052006200720082009201020112012201320142015201620172018100Source: Federal Reserve, J.P. Morgan20%Turnover Turnover (ex Fed)15%10%5%0%1999200120032005200720092011201320152017*Average daily trading volumes divided by amount outstanding Source: US Treasury, Federa

55、l Reserve Bank of NY, J.P. MorganMarket depth remains below pre-crisis levels but has rebounded toward its highest levels since 2013and more sensitive to volatilityOne-month average of 10-year Treasury market depth*; $mnRolling 4-year beta of three-month average of 10-year Treasury market depth ($mn

56、) with600500400300200100020072010201320162019*Market depth is the sum of the top three bids and offers by queue position, using the top 3 bids and offers in Treasury notes and bonds, averaged between 8:30 and 10:30am daily. Source: BrokerTec, J.P. Morganrespect to three-month average of the daily tr

57、ading range in 10-year Treasuries (bp) and slope of 3m/1y3m OIS curve (bp)-20-25-30-35-40-45-50Mar 12Mar 13Mar 14Mar 15Mar 16Mar 17Mar 18Mar 19Note: The intraday trading range is measured between 7:30am11and 5:00pm EST from an interdealer electronic trading platform Source: BrokerTec, J.P. MorganRIG

58、HT: Traders react across a broad span of timescalesShare of trade volume broken out by time elapsed since the prior trade in seconds; unitlessAnd this algorithmic activity ebbs and flows with volatility, creating a pro-cyclical (destabilizing) dynamicRolling one-month fraction of $5mn, multi-trade f

59、lows in current 10s that occur in under a hundredth of a second (LHS; %) compared with 3Mx10Y implieds (RHS, inverted; abp)A few seconds is the timescale youd expect between trades if they were arriving randomly and roughly uniformly through- out the NY session (likely human activity).20082009201020

60、112012201320142015201622018017A hundredth of a second likely represents trades taking advantage ofshort-lived cash/futures mispricings, where informa- tion needs to travel between New York and Chicago, and does so today at nearly the speed of light via microwave networks.A millisecond (one thou- san