EFTA01362013

4 September 2015 US Fixed Income Weekly Sources of central bank liquidity - change yoy 180 160 120 80 60 40 --Ettheralittex- 20 0 -20 20031 20081 20131 Scam tikartergend Daticts Bent 'Sources of central bank liquidity - billion 16000 14000 I 12000 10000 8000 6000 4000 2000 reserves Other C8ks ex Reserves 0 20031 &trot Soembhv end OfttsoNt An* Let's start with risk assets, proxied by global equity prices. It would appear at first glance that the correlation is negative in that when central bank liquidity is expanding, equities are falling and vice versa. Of course this likely suggests a policy response in that central banks are typically "late" so that they react once equities are falling and then equities tend to recover. If we shift liquidity forward 6 quarters we can see that the market "leads" anticipated" additional liquidity by something similar. This is very worrying now in that it suggests that equity price appreciation could decelerate easily to -20 or even 40 percent based on near zero central bank liquidity, assuming similar multipliers to the post crisis period. From q2 levels that implies an MSCI level of around 1350 for 2015q4 (reference q2 @ 1735). the end August level was 1645 i.e. still another 10-15 percent decline. World equities yoy vs. central hank liquidity yoy 50 WORLD EQUITIES YOY 20 Fed.pfn fx r!se ... .1u pier I,exfxl_nrhsI 10 — -- 10 20 _w wait 30 40 50 20041 20101 Jana Skeethapard Daises Sit 35i 30i 25I 20 isl Si ° I 20081 20131 J World equities yoy vs. components of liquidity yoy 10 -10 50 —FX Othe s ks ex Reserves quities yoy world 20031 20081 20131 Sputa _wy gni At althe Beni Interestingly, the components of liquidity themselves behave a little differently with FX reserves and Fed balance sheet being more in line recently than other central bank liquidity. This reflects the ECB and BoJ tardier reactions to balance sheet expansion in the post crisis period. If we only consider the FX and Fed components of liquidity there appears to be a tighter and more contemporaneous relationship with equity prices. The suggestion is at one Deutsche Bank Securities Inc. Page 9 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0051310 SDNY_GM_00197494 EFTA01362013