1.    Trump Pivot coincides with Credit Impulse Extremes

Qi’s macro models include several factors that speak to"financial conditions" - real yields, curve shape, credit spreads,bond volatility, FX, measures of funding & liquidity.

Looking at these factors in z-score terms we can see when credit is easy to come by (positive) & when credit is getting tight (negative).

This back-up in bond yields, spike in rate volatility & widening in credit spreads by Tuesday had produced a severe contraction in credit conditions.

In fact, post GFC, the fall in our credit impulse has only been worse during Covid lockdowns. We were  on a par with episodes like the 2015 Yuan devaluation or the 2022 Fed hiking cycle.

With the announcement of a 90d delay for negotiations just as this indicator was hitting extremes andrisk premia rising rapidly in US Treasuries, it is telling the market that Trump is indeed reactive when conditions become extreme.

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2.       S&P500– Past peak uncertainty but path still choppy

Our ST model RSq for the S&P500 is high – 96%. Our model uses a multi-month lookback and therefore captures the current chaos well. It’s very clear what this market wants to see in term of macro: stronger dollar, flatter 5s30s,higher WTI, higher inflation expectations, higher GDP, higher 1y1y yields,lower vol, tighter credit. See the first chart.

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The highest sector betas to these drivers – Financials, Technology, Consumer Discretionary, Industrials – no surprise there. See the second chart below showing sensitivity to the dollar as an example.

While the worst case is seemingly off the table and recession odds will drop, for theS&P 500 there is no depressed FVG signal yet (+0.5 sigma) nor in cyclicalsvs. defensives. Similarly, there was no capitulatory signal in fundamentalvaluations. CEOs will no doubt will take down their full year 2025 expectationsin the forthcoming earnings season to keep the hurdle low. Deals still have to made over the next 90 days. This is a delay not cancellation. Further, the uncertainty with respect to the US / China Trade War remains high. The growth /inflation trade-off will remain in focus.

3.       MDAXValue from Recent Chaos

The risky asset sell-off has been indiscriminate given the broad investor deleveraging. Caught up in that sell-off was the German mid-cap stock index which also fell ~18% peak to trough - in-line with other more globally-exposed indices. The narrative of RoW vs. US will likely remain a feature of 2025 ifthe Dollar strength can not sustain. And within RoW, domestic value, benefitingfrom increased fiscal spend but less exposed to US tariffs, will likely outperform.

Bylast Friday, the MDAX index reached > 2 sigma below Qi model fair value -almost the largest valuation gap since 2009. As of last night, it was -1 sigma(5.4% below Qi model value).

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