1. Equities vs. Bonds

Monthand quarter end re-balancing flows will presumably favour equities over bonds given the moves in Q1. But what do asset allocators do in Q2?

Qi models the equity-bond allocation via the RV between the SPY and GOVT (USTreasury bond) ETFs. SPY screens as 1 standard deviation cheap versus GOVT.

That FVG was -2 sigma on March 13th. Equities have started to catch up but remain undervalued relative to bonds according to macro conditions.

Indeed, even at a FVG of -1 sigma, history supports further equity catch-up. Qi shows nineteen -1 sigma FVGs since 2009 with an 84% hit rate and an average return of+4.5%.

2. Inflation vs. Recession

"Liberation Day" is just a week away. One of the key indicators to gauge market sentiment around Trump's tariffs will be inflation expectations.

Survey measures have spiked aggressively and Goolsbee has been the most vocal Fed Governor to warn that, if market-based measures start to follow suit, that would be a "major red flag".

As such 5y5y forward inflation, a Fed favourite, is a must watch. Qi'smacro-warranted fair value sits at 2.46% currently. The market trades around 4bp lower which is around half a standard deviation.

Thatis not a big Fair Value Gap but, from Qi's perspective, it is:

1.        worth noting that lows in Qi's FVG have done a good job of marking lows in 5y5yitself.

2.       worth monitoring macro momentum. Qi model value has spent early 2025 in a 2.40-2.55% range. Shifts will provide insight of whether the market see's tariffs as inflationary or recessionary.  

3. Aussie- a cheap "risk on" bet

The recovery in SPY in the first observation has occurred with VIX falling from alocal high of 28 on March 10th back towards 17 today. That fall in risk aversion has not been felt equally across asset classes.

In several Aussie fx crosses risk aversion features as a prominent driver and has been supportive of a stronger AUD. The currency market, however, has lagged that move.

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AUDJPY and AUDCHF standout with both showing the Aussie as over 1 standard deviation cheap to macro conditions. In the case of AUDCHF, macro-warranted model valuehas risen 4.5% since March 10th thanks mainly to the VIX move.

If Q2 does start in "risk on" mode, these look attractive entry levelsfor AUDCHF upside in particular.

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