15.06.2022
Fed day
Qi has no view on the likelihood or not of a 75bp hike today. Or what that WSJ ‘leak’ does for Fed credibility. We’re not in the prediction business. What the Qi framework does capture is the current relationship between any security & a wide range of macro factors.
One of the biggest moves in this recent re-pricing has been the spike in 10y US real yields. Up ~35bp this week alone.
A material tightening of financial conditions that presumably acts as a headwind to most equity markets. But which are most vulnerable? Are there any beneficiaries?
The chart below shows global equity index models that are in macro regimes, & overlays sensitivity to US real yields with Qi’s Fair Value Gap. Unsurprisingly, nearly all equity markets lie to the left hand side of the chart – they want lower real rates. ChiNext is particularly reliant on the risk free rate remaining low.
There is one outlier – MSCI Indonesia, EIDO – that is okay with higher real yields.
One of the biggest moves in this recent re-pricing has been the spike in 10y US real yields. Up ~35bp this week alone.
A material tightening of financial conditions that presumably acts as a headwind to most equity markets. But which are most vulnerable? Are there any beneficiaries?
The chart below shows global equity index models that are in macro regimes, & overlays sensitivity to US real yields with Qi’s Fair Value Gap. Unsurprisingly, nearly all equity markets lie to the left hand side of the chart – they want lower real rates. ChiNext is particularly reliant on the risk free rate remaining low.
There is one outlier – MSCI Indonesia, EIDO – that is okay with higher real yields.
Interestingly, ChiNext is rich to model value, Indonesia is cheap. That gives bears two possible trade ideas. A hawkish Fed that pushes real rates higher still would hurt ChiNext when it is already almost 2 sigma (27.1%) rich to model.
Prior to the US CPI shock, many investors were buying into the idea of a bounce in Chinese tech. That was predicated on the idea Beijing's regulatory onslaught is easing up. Be aware there is a macro dynamic at play too &, on that front, a fair degree of good news is already priced.
Indonesia’s sensitivity is significantly less but, at the margin, higher real yields help & it is two sigma (10%) cheap to macro.
Two ideas for global equity allocators to consider should real yields spike further.
Prior to the US CPI shock, many investors were buying into the idea of a bounce in Chinese tech. That was predicated on the idea Beijing's regulatory onslaught is easing up. Be aware there is a macro dynamic at play too &, on that front, a fair degree of good news is already priced.
Indonesia’s sensitivity is significantly less but, at the margin, higher real yields help & it is two sigma (10%) cheap to macro.
Two ideas for global equity allocators to consider should real yields spike further.