Key Takeaways:

Cracks in Stoxx 600 Macro Momentum: Factor returns from Qi’s Risk Model are faltering. European credit has notreflected the same enthusiasm as European equities. With the German fiscal spending boom no longer new news, Putin / Trumpnegotiations protracted, and the 2-April “Liberation Day” deadline approaching,the ante has been raised for Europe

Qi Predicted Vol of the S&P500 Relative to the Stoxx 600 is ApproachingStretched Levels, Suggesting Reversal Soon: Not quite in thin air yet, but Qi’s Risk model suggests therelative elastic can reach only so far.

Mag7 Macro Factor Returns Defy Spot Price Weakness in the last 2 weeks: In addition, the correlation of Mag7returns to macro is looking like it has hit extreme levels, last seen in summer2022. If there remains belief in the sustainability of the AI buildout, wecould see a short term reversal in US Tech.

Short Term vs. Structural: Outof the US, back into the RoW to help fund the AI, Climate and Defense buildouts necessary to prosper in Trump 2.0 remains a key narrative. It is also verylikely that household wealth relative to household income can not sustain >8x! This in turn will have ramifications on the US consumer. However, shortterm, the above observations, together with significant US positioning cuts,suggest some respite in the recent US underperformance.

Context: The Evolving Credit Backdrop:

Weare going through an adjustment period given Trump’s intent: The US Administration have made cleartheir intent to deal with the debt situation and keep rates in check. We haveheard now a number of times that they do not want to spend more on debtinterest than Defense. Raising revenues from Tariffs is a crucial part ofTrump’s strategy.

The complexity of dealing with reciprocal tariffs: History shows it is very hard toadminister, putting an onus on BOTH importers and exporters. We should notdismiss potential impacts on global supply chains.

This implies poor risk-adjusted returns:For the last 2 years investors were paid to bet on a soft landing but be hypervigilant of a hard landing. The tables seemed to have turned - you are beingpaid more to bet on hard landing but be hyper vigilant we could just muddlethrough = poor risk-adjusted returns.

Strategists suddenly back onside for Europe:Bloomberg last week: “Nearly half of the strategists in a monthly Bloombergsurvey have raised their forecasts for the Stoxx Europe 600 Index since lastmonth — when about two thirds of strategists were expecting downside ahead”

Is this an amber warning for recent relative price moves? Today’s markets reprice more quickly thanever before, fuelled by algos, fast information and armies of day traders. Thefirst stage explosive move may be over. CTAs are now the most short US stocksin over 2 years with a similar set up in long European stocks. This isunnerving with the 2-April “Liberation Day” deadline approaching.

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Qi’s Risk Model Insights:

1.         Inrecent weeks, macro factor returns have been fading for Europe: The Stoxx 600 is only 2.4% off its highs.However, Itraxx Xover has started to widen, not reflecting the same enthusiasmas equities – see the first chart. This has caused a recent divergence betweenspot and factor returns for the Stoxx 600 – see the second chart. We note thatearnings expectations have also struggled to reach new highs – see the thirdchart.

2.        US spot returns have been closely tracking factor returns – there is no disconnect: See the firstchart. The net result is that the relative factor return of the Stoxx 600 vs.S&P500 has been struggling to make new highs – see the second chart

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3.         Predicted factor vol of the S&P500 relative to the Stoxx 600 is approaching stretched levels, suggesting respite soon:We are not quite in thin air yet, but Qi’s Risk model suggests the relative elastic can stretch only so far. The below chart show shows the difference inthe 2 indices based on their vol deviation from their 50d MA.

4.         Mag 7 factor returns have risen in recent weeks, diverging from the falling spot price: See the chart below. At the epicentre of the US equity correction is the Mag7. If there remains belief in the sustainability of the AI buildout, we could see a shortterm reversal in US Tech.

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5. Macro Pressure on US Tech may be peaking: When macro dominates, it puts pressure of Mag7 multiples. However, the correlation of Mag7 returns to macro is looking like it has hit extreme levels, last seenin summer 2022. If this can stabilise, so will multiples. See the chart below.

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