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📝 Poor Liquidity Continues To Exaggerate Market Moves: J.P. Morgan

Even at $3.3tr, the liquidity it remains well above the $1.5tr-$2.0tr region where signs of reserve scarcity emerged in the previous Fed QT episode from 4Q17 to 3Q19. As highlighted previously in our publication F&L April 27th, it would likely take until 2025 before the previous QE stock effect from end-2019 to end-2021 is unwound. And while the effect of expanding or contracting narrow liquidity clearly has an effect on government bonds, given QE and QT affect the short lived and the past few weeks have seen market depth declining to even lower levels last seen in March 2020. One important equity market liquidity metric is the market depth for the S&P 500 e-mini futures shown in Figure 6. This market depth metric is based on the average number of contracts on the tightest bid/ask. This market depth currently stands at the very low historically levels seen in March 2020 at the peak of the pandemic correction. This very poor liquidity picture implies that the ability by markets to absorb relatively large orders without significantly impacting the price is very low at the moment. Modest flows can create big moves either way. - J.P. Morgan

**Report from 05/19



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