J.P. Morgan Warns a Stock Selloff Could Drain Market Liquidity
JPM noted that liquidity in U.S. equity futures fell to historic lows, with market depth running 2 standard deviations below normal levels.
Quick overview
- Market liquidity has worsened during the recent equity selloff, with U.S. equity futures reaching historic lows.
- Investors experienced significant net selling in KOSPI 200, TAIEX, and U.S. 2-year Treasury futures, while net buying was observed in S&P/TSX 60, Bovespa, and Gasoil futures.
- J.P. Morgan indicated that Commodity Trading Advisors (CTAs) have reduced their long positions in equities but still maintain above-average exposure.
- Major U.S. equity indexes saw gains, driven by healthcare and consumer stocks, amid expectations of a potential Federal Reserve rate cut.
Market liquidity deteriorated during the latest equity selloff, according to a new analysis from J.P. Morgan, which warned that recent price action highlights rising two-way flow risks.
The bank noted that liquidity in U.S. equity futures fell to historic lows, with market depth running between 1.5 and 2 standard deviations below normal levels.
This comes after a week of heavy activity: investors recorded net selling in KOSPI 200, TAIEX, and U.S. 2-year Treasury futures, while substantial net buying occurred in S&P/TSX 60, Bovespa, and Gasoil futures, the firm said.
J.P. Morgan also highlighted that the Commodity Futures Trading Commission (CFTC) has resumed operations and is publishing Commitments of Traders (COT) reports in chronological order, with the latest data available as of October 7.
What J.P. Morgan is signaling
Commodity Trading Advisors (CTAs) entered last week’s weakness holding near-max long positions in equities and subsequently trimmed exposure. Despite the reduction, CTAs likely remain above-average long in stocks, according to the report.
J.P. Morgan warned that current flow risks are two-sided, with key momentum signals for U.S. equities sitting within 2% in either direction. Meanwhile, CTAs hold long positions in U.S. rates, but remain short EMEA and APAC rates.
Market backdrop
Major U.S. equity indexes closed higher on Tuesday as gains in healthcare and consumer stocks offset declines in most chipmakers. Expectations for a potential Federal Reserve rate cut remain intact after new data showed slowing U.S. retail sales growth.
The Dow Jones Industrial Average climbed 1.4% to 47,112.14, the S&P 500 rose 0.9% to 6,765.88, and the Nasdaq Composite gained 0.7% to 23,025.59.
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