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Insights
Insights showcases topical observations from Qi. Pure signals highlighting where assets are rich or cheap versus macro. Or roadmaps to help provide the most efficient way to express any trade. Flags, in real time, highlighting changes in factor leadership or regime shifts.

See below for articles and analysis.

Nasa Hi5Dx2Obas Unsplash
29.07.2021
Trading Central Bank
Policy Divergence II
Yesterday we demonstrated how the Qi framework can identify which currency pairs are being driven by interest rate differentials; & hence show which FX crosses best capture the different speed of Central Bank policy normalisation. The next step is to add a valuation overlay.
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Nasa Hi5Dx2Obas Unsplash
28.07.2021
Trading Central Bank
Policy Divergence
It’s Fed day. Whatever the outcome, what is evident is the growing divergence opening up between global Central Banks. More specifically, how quickly each exits the extraordinary monetary policy easing seen during the Covid pandemic. Currently, the RBNZ / BoC & ECB appear to be the hawkish & dovish bookends respectively.
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Hs 2009 25 Hubble
27.07.2021
Navigating China Stress
Events in China are critical. The implications are widespread & potentially enormous for financial markets. How can investors track across asset classes, across geographies to monitor where the fall-out is leading or lagging?
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Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
27.07.2021
RETINA™ & US Sectors
Whether strong earnings, retail buying of the dip or a simple TINA mentality, US equities are back near the highs. Those looking beyond the moves in big tech, however, should note some cautionary signs under the surface.
Jake Weirick 09Bqxnvo7Eu Unsplash
26.07.2021
US Earnings
Earnings season has been an unambiguous positive for US equities thus far, & gone a long way to propel indices higher despite other headwinds. This week is busy with a number of bellwethers due to report.
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Qieartheye
16.07.2021
RETINA™ goes interactive
RETINA™ scans your instrument universe intraday and notifies you when valuation and/or trend measures align to generate high probability trade ideas. Used by the world’s leading asset managers and hedge funds globally.
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Juskteez Vu Tirxot28Znc Unsplas
16.07.2021
Momentum turns defensive
RETINA™ has two bullish signals on US Consumer Staples. Both are momentum signals, & both advocate defensive Staples versus cyclical sectors.
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15.07.2021
Storm clouds gathering
The S&P500 fell out of macro regime on June 29th. That’s the first time the US equity benchmark has not been explained by macro factors in three-&-half years. Low macro model confidence is often associated with increased volatility.
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Orion Nebula 11107 1920
13.07.2021
US equities & inflation - a regime shift?
In our “Inflation – Friend or Foe?” observation we simply added up the number of S&P500 single stocks with a positive relationship with US inflation expectations (‘inflation tailwind’), versus the number with a negative relationship (‘inflation headwind’). Updating that chart today reveals an interesting shift.
12.07.2021
US earnings season
- macro still matters
US earnings season gets under way this week. A period when bottom-up analysis of company fundamentals typically dominates. This does not, however, mean investors can ignore macro.
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Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
09.07.2021
Fading FX safe havens
The Dollar rally is starting to look somewhat extended on Qi’s macro valuations. However, the majority of USD crosses have fallen out of regime meaning such signals come with a health warning.
Zzz
08.07.2021
Qi & EPFR
EPFR's best-in-class fund flow data is a natural complement for Qi's quantitative framework. Aligning their data on client sentiment/positioning with Qi's macro drivers & macro valuations, makes for a powerful combination.

In this instance we discuss the technology / growth versus cyclical / value rotation in US equities.
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Adam Birkett 77Hmm5Tg N4 Unsplash
08.07.2021
Falling Bond Yields & Financials
Conventional wisdom holds that falling bond yields are especially painful for financials.
07.07.2021
Growth Scare
Poor economic data at the start of the new quarter has prompted widespread angst that the reflation trade of early 2021 is giving way to a growth scare. However, some assets have been pointing to lower growth for a while.
Monday1
06.07.2021
Italy vs Spain
They may be outperforming their European peers in the football, but Italy & Spain are lagging in terms of equity market performance.

Both the FTSE MIB & IBEX 35 are around one sigma cheap versus pan European indices.
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Pexels Sam Willis 3934512
02.07.2021
Hedging China
A key macro theme for H2 2021 is the normalisation of the Chinese policy stance & the implications for slower growth. Falling credit impulse data, for example, is getting a lot of attention.
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Qeye4
01.07.2021
TAA - Emerging Market Bonds
A new 3-bar conviction signal for tactical asset allocators at the start of a new quarter.
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Juskteez Vu Tirxot28Znc Unsplash
30.06.2021
Trading OPEC+
How is an equity investor supposed to navigate the OPEC+ meeting? In many respects the answer is largely intuitive - in both the US & Europe, energy itself plus financials display the strongest relationship with crude oil prices.

However, by aligning sensitivity to Brent with macro-warranted valuation, the standout is actually European Travel & Leisure. It’s not as sensitive as US Energy or US Financials, but it is the biggest beneficiary amongst all European sectors if crude resumes its uptrend.

Moreover, it is the cheapest sector in macro valuation terms. Now 0.7 sigma (9.6%) cheap to macro. Meaning some of the bad news is already priced should Friday’s meeting hurt oil; & it presents the best entry level if crude rallies & prompts a broader risk on move.
28.06.2021
Chinese Tech - end of the bear market?
Since the cancellation of the Ant Group IPO last year there has been a steady stream of negative news for Chinese technology companies. The ongoing threat of regulation has weighed heavily on the sector. Have we now reached the point where all the bad news is in the price?

RETINA™ is flagging a bullish momentum signal for Chinese IT – both short & long term metrics point to the formation of a new uptrend.
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Icircle
24.06.2021
Re-pricing liquidity
For several markets, last week’s fall-out from the Fed’s apparent policy pivot, has now itself been fully unwound. In other areas, the impact lingers.

The lasting effect is most noticeable in the first chart which shows Fed rate expectations as measured by the shape of the Euro$ futures strip. The sharp re-pricing after the Fed dot plot was a 3 standard deviation move which has yet to meaningfully mean revert. That shift in the markets’ pricing of the Fed represents a tightening of financial conditions.
Omega Nebula 11053 1920
23.06.2021
NASDAQ at the highs...
… so, for technology bulls, what is lagging?
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Casey Horner Rmowqdcqn2E Unsplash
22.06.2021
Cue Jerome Powell
Screening across all Qi’s government bond, bond futures, interest rates swaps & STIRT models for the 10 biggest Fair Value Gaps (subject to each model being in regime), produces the chart below.
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21.06.2021
Growth scare - leaders & laggards
Price action increasingly looks like markets are experiencing a sharp mid-cycle growth scare. Which assets are leading & lagging in this move?
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18.06.2021
Defying gravity?
The more the correction in commodities continues, the more crude oil looks like an outlier. Why is it ignoring the move lower in the rest of the commodity complex; & is it merely lagging & therefore a potential short?
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2021 06 17 19 22 16
17.06.2021
What's new: The quarterly Qi update
Get updates on Quant Insight company growth, new solutions, fund manager insights, and media references.
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17.06.2021
Dollar squeeze? AUD not USD
Last night’s Fed surprise has once again raised the prospect of a short squeeze for the US Dollar. What’s the quantitative macro picture for G10 fx?
Dtqi
16.06.2021
Why are 10y US yields down? Two expert views
DataTrek is Wall Street's go-to commentary for differentiated & actionable investment ideas. Their daily note offers a unique blend of market insight & data-driven analysis.

In that respect, DataTrek & Quant Insight offer the same output but arrive there via two distinct processes. Nick & Jessica between them offer 40 years of experience in the investment industry. Quant insight employs a proprietary version of PCA to show the macro profile of any financial asset.

How macro factors explain the variance of stocks, bonds & currencies; valuation gaps (the difference between spot & actual price) to flag potential trade ideas; & regime shifts as the macro environment changes.

Human intelligence & experience remain an invaluable asset but, in the modern & increasingly complex world, adding in a machine driven framework can only add value to the investment process. This is the first Quant insight / DataTrek joint venture, focusing on 10y US Treasury yields. Summary below, full article via the pdf link at the bottom. Further JVs will follow.
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Nasa Hi5Dx2Obas Unsplas
16.06.2021
Need an inflation hedge?
FOMC day. The consensus expects little change with greater focus on August & Jackson Hole for the first signs of a taper. For some, that makes today a non-event. For others, Fed inaction will act as a green light to engage in inflation trades.


10y TIPS break-evens are now 0.5 sigma or 15bp low versus macro-warranted model value. 5y TIPS are 0.7 sigma (29bp) below macro model value. Both are close to 1 year lows in Qi Fair Value Gap terms; attractive entry levels for anyone needing inflation protection.
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Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
15.06.2021
America is back
America is back in geopolitical terms; what about in financial markets?

There is a clear health warning – at 53%, model confidence has fallen below our threshold & out of a macro regime. It is, however, worth noting the extreme Fair Value Gap in Qi’s Euro Stoxx 600 vs. S&P500 relative value model.
Pexels Miriam Espacio 110854
14.06.2021
Brazilian Real
A new regime
Macro model confidence is rising for the Brazilian Real. The chart below shows the 10 biggest changes in macro model confidence across all FX models over the last month. Four of them include the BRL; all four show R-Squared rising. Macro is re-asserting itself as a key driver of the Real.
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Nasa Scbkw9Akgca Unsplash
14.06.2021
Used cars as a lead indicator
Used car prices are at the heart of the US inflation debate. They accounted for around a third of last week’s upside surprise to CPI.
Anna Anikina Ath9Gmakfpe Unsplash
10.06.2021
XLF & XLE - Macro vs. Momentum
Today’s US CPI could change everything once again, but the current narrative dominating markets is that the Fed are focused on employment, not price pressures. Hence the bond market’s ability to look through “transient” inflation scares.

That begs the question – is there a potential fall out for rate sensitive cyclicals like Financials & Energy? The picture is mixed.
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Orion Nebula 11107 1920
09.06.2021
Inflation - friend or foe?
US CPI is released tomorrow & arguably the critical question for stock pickers is whether inflation is positive for their holdings - reflecting a healthy economic upswing - or negative as it results in an early Fed tightening, or compresses margins.
Jake Weirick 09Bqxnvo7Eu Unsplash
09.06.2021
Credit
Last Wednesday the Fed announced it will unwind the corporate bonds it bought as part of its emergency policy response to last year’s initial Covid lockdowns. How has the dust settled since that announcement?
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Tuesday
08.06.2021
South Africa
The chart below shows the 10 biggest valuation gaps across all FX pairs modelled by Qi. Three of them involve the South African Rand which is rich to macro on each occasion.
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Omega Nebula 11053 1920
07.06.2021
The impossibility of a 'bottom-up' equity strategy
Every portfolio is effectively a macro portfolio even when it purports to be bottom up. However you pick the stocks, you usually end up with something that is largely driven by macro factors.
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Pexels Luck Galindo 544268
07.06.2021
RETINA™ - Bullish on Energy
RETINA™ triggered several bullish signals in the energy space on Friday. At the single stock level in US, Europe & Asia. And at the sector level in US relative value space.
Pexels Sam Willis 3934512
28.05.2021
Come fly with me
The airline sector is arguably the purest expression of the re-opening trade. There are hopes next month’s G7 may reach an agreement on travel corridors & vaccination certificates which will help rescue the northern hemisphere’s summer holiday season.
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Hs 2009 25 Hubble
27.05.2021
Asian Tech
In mid April “A turn in Asian tech?” highlighted that ChiNext was back in regime & cheap to macro. This week Hang Seng Tech & the KWEB China Internet ETF have both crossed back above our threshold & entered new macro regimes.

Company fundamentals remain critical &, in the present environment, regulatory risk is a clear & present danger. However, bottom up investors cannot focus exclusively on the idiosyncratic – macro risks are back as an important driver of Asian tech.
Juskteez Vu Tirxot28Znc Unsplash
26.05.2021
Nothing to see here
Yesterday the Conference Board’s measure of consumer expectations for US inflation hit 6.5%, effectively matching a 10 year high. The contrast with market-based expectations for inflation is notable.

5y5y forward inflation swaps in USD & EUR are widely watched & believed to be favourite indicators monitored by the Fed & ECB. Both had showed inflation expectations as high versus model, but the charts show Qi’s Fair Value Gap retracing back to zero yesterday.

Qi FVG - USD 5y5y Inflation
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Orion Nebula 11107 1920
25.05.2021
Peak growth?
Qi pulls in Chinese tracking GDP growth from Now-Casting as a core factor for global economic growth. That hit a local high of +17% YoY & has subsequently slipped lower. The chart below shows that in z-score terms. That surge in growth was a 4 standard deviation event but the subsequent retracement has taken back more than 50% of the move.

The markets’ increased attention on China’s credit impulse – the change in new credit as a percentage of GDP growth – speaks to fears China is transitioning from the engine of global growth, to one that has already peaked.
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24.05.2021
The most important chart in
financial markets today
The trend / momentum outlook for Brent from RETINA™. Unsurprisingly, the profile for WTI is identical. The picture is mixed currently but should both lines move into negative territory, thereby flagging a new downtrend in crude oil, the implications are significant.
Nasa Hi5Dx2Obas Unsplash
21.05.2021
The turn?
In US equities, Growth outperformed Value for a third consecutive day yesterday. On Qi, the valuation gap on the Value / Growth ratio (via Vanguard ETFs VTV vs. VUG) has almost halved. At the highs one week ago, Value was 6.7% rich to Growth; that now stands at 3.9% rich relative to the prevailing macro environment. Spot is catching down to macro fundamentals.
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Evgeni Tcherkasski Bfbhwj4Qafo Unsplas
20.05.2021
US Dollar update
The bears are back in control of the US Dollar which is nearing 2021 lows. Qi’s USD G10 Watchlist is notable on three fronts.

Macro remains important – most models are in macro regimes. The majority of crosses are behaving in line with macro fundamentals – only USDCAD shows a valuation gap of more than one sigma. There is a clear but modest skew to the Dollar being cheap to macro.
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Spbf2
18.05.2021
The Spanish bull
The chart shows the 10 biggest Fair Value Gaps across Qi’s models of relative value pairs for global equity indices. Five of the top 10 show IBEX 35 as rich versus its peers.

On current patterns, Spanish equities look like the high beta play for European reflation. They outperform when inflation expectations rise, crude oil increases, the European yield curve steepens, credit spreads tighten & the Euro is soft.

But a fair amount of that good news is now priced making it a potentially attractive vehicle for those thinking the European re-opening trade is due a pause.
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Pexels Sam Willis 3934512
17.05.2021
Taper Tantrum? Watch the ECB
Last week’s US inflation print prompted USD rate vol rate to spike but it remains just below 2021 highs. Meanwhile, European rate vol hit fresh highs last week.

The chart below captures the move in interest rate volatility, which we use to capture market expectations around Quantitative Easing, in z-score terms. The BoC & BoE have already announced plans to taper; & this picture suggests the market fears the ECB is next. The tantrum is not a uniquely US event.
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Casey Horner Rmowqdcqn2E Unsplas
14.05.2021
The exaggerated death of 60:40
If inflation isn’t transitory then the Fed is committing a huge policy error – one that threatens both bond & equity returns. And the traditional 60:40 balanced fund suffers enormously under this scenario.
Omega Nebula 11053 1920
13.05.2021
Even Taiwan?
When Taiwan, with an exemplary record of managing Covid & home to best-in-class chip makers, suffers a huge equity rout, it is clear there is something else going on. The answer it seems is deleveraging with margin calls accelerating the equity sell-off.

From a Qi perspective, macro fair value for the TAIEX future is rolling over, but the speed of the down trade in spot has opened up a -0.8 sigma (8.7%) Fair Value Gap.
Jake Weirick 09Bqxnvo7Eu Unsplash
12.05.2021
Inflation
Inflation day in the US. The mood music has started to shift with markets ascribing high commodity prices / inflation as a negative for equities. Have we reached an inflection point where price pressures become a drag on equity markets?

The chart below shows the sensitivity of US equity sectors relative to the broader market to 3 factors – inflation expectations, metal prices (copper, iron ore) & energy prices (crude oil).
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11.05.2021
Chinese Cyclicals
Qi has built models for the Global X MSCI universe of ETFs tracking Chinese equity sectors.

Of those in a macro regime, the Chinese Energy sector stands out. The energy complex is rich to macro model in both the US & Europe, but not to the same degree as CHIE which is 2.2 sigma (10.6%) above macro-warranted fair value.
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Ja
11.05.2021
Qi & Bloomberg
The latest analysis from Bloomberg's John Authers pulls together the reaction to a weak US Payrolls report, & the importance of the current inflation narrative. He cites Qi analysis on global equity markets & their sensitivity to inflation expectations - Qi will flag, in real time, when inflation moves from being a tailwind for risky assets, to a headwind. The original work can be seen here
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Pexels Luck Galindo 544268
10.05.2021
Inflation
Wednesday’s US CPI dominates the week ahead. Despite the undershoot in US Payrolls, market expectations for US inflation rose aggressively on Friday. The common narrative being that a weak labour market ensures the Fed keep monetary policy easy for longer.
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Nasa Rtzw4F02Zy8 Unsplash
07.05.2021
Mixed messages
Falling real yields suggest the bond market is signalling peak economic growth. But the commodity market is shouting loudly that inflation is the number one threat.

For now, equity markets seem to be listening to commodities rather than bonds. Hence the cyclical versus tech split in performance this week.

But, if commodities are the main driver, what’s the empirical snapshot – which equities are most sensitive, what do macro valuations look like?
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2021 06 17 19 22 16
07.05.2021
Macroscope:
Nations love inflation until they dont
While equity investors were put on their heels by US Treasury Secretary Yellen's mere utterance of a possible future rate hike, at the moment inflation is the friend and positive macro driver of most global equity markets, according to Quant Insight (Qi) data tracking the influence of macro drivers on asset prices. Yellen later backtracked but her comment still sent shockwaves through global financial markets, especially after recent PMI data pointing to bottlenecks in supply chains and upward pressure on inflation.

Qi data indicate that some global equity markets benefit more from inflation than others with smaller markets in Europe such as Austria, Greece, Norway, Spain and Italy getting the biggest tailwind from rising inflation expectations. On broader macro valuation terms there is a distinct East-West divide as US and European equity markets look consistently expensive while markets cheap to macro are generally in Asia, with Japan (both the Nikkei and TOPIX indices), Indonesia, Korea, India and Emerging Markets both attractively valued and benefitting from inflation.
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Hs 2009 25 Hubble
06.05.2021
BoE Quantitative Easing
& the Pound
Today’s Bank of England meeting will be closely watched for any signs of a taper in their asset purchase programme. The Pound’s sensitivity to BoE QE has crept higher of late.
Juskteez Vu Tirxot28Znc Unsplash
05.05.2021
Global equity indices & inflation
The recent round of global PMI data has sharpened fears about supply bottlenecks & upward pressure on inflation.
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05.05.2021
Nikkei 225 vs. S&P500
The Fair Value Gap on Qi’s Nikkei 225 vs. S&P500 model hit -1.1 sigma (-4.8%) at the end of April. Yesterday’s fall in US equities has enabled the Nikkei to start clawing back some of its recent underperformance & the FVG now sits at -0.8 sigma (-3.6%).

Missing the absolute low in valuation has one potential benefit though – the latest price action looks to have established a trend turn & we now have a momentum signal.
Pexels Sam Willis 3934512
04.05.2021
Tactical opportunity in US Tech
Over the last 10 days the US technology sector has underperformed the broader market by around 2.5%. Yet macro fair value for XLK / SPY ratio has actually increased slightly over the same period. That has opened up a Fair Value Gap of 1.7 sigma (2.8%) & triggered a Divergence signal.
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Orion Nebula 11107 1920
30.04.2021
US vs. Europe
European equities are near recent lows relative to the US. On Qi, the Euro Stoxx 600 vs S&P500 model is 0.7 sigma (1.2%) below macro fair value, towards the bottom of recent ranges.
30.04.2021
European Autos
Qi’s Tactical Asset Allocation work flagged that the uptrend in the European Auto sector was exhausted & rolling over. The momentum picture remains weak – RETINA™ shows a new ST downtrend while the LT uptrend is sharply decelerating. However, from a macro valuation perspective it is starting to screen as cheap relative to several peers.
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Picture1
29.04.2021
Canada: the multi-asset view
No excitement from the Fed overnight but it’s now one week since the Bank of Canada became the first G7 central bank to signal an end to extraordinary monetary policy accommodation. How has the dust settled?
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Bloomberg3
28.04.2021
Qi & Bloomberg
Bloomberg's article "Bitcoin at Inflection Point Amid Recent Selloff, Technicals Show" cites Qi's analysis of the crypto complex.
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Anna Anikina Ath9Gmakfpe Unsplash
28.04.2021
Food Inflation
Commodity prices continue to surge higher. What is striking in the table below is:
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Orion Nebula 11107 1920
27.04.2021
European Re-Opening Trade
For proponents of the re-opening trade, Europe offers a classic value play. And Financials are often the epicentre of the value style, especially in Europe. On Qi, European Financials are now 1.3 sigma (4.3%) cheap versus Technology.
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26.04.2021
Amber light for risk appetite
VIX remains sub 20 but the Qi Vol Indicator continues to tick higher. When macro’s explanatory power starts to fall across global equity, bond & FX markets, it can act as a warning that markets are due a bout of volatility.
Hs 2009 25 Hubble
22.04.2021
Pricing Power
Any second phase of the re-opening trade could be more discerning than a simple growth versus value dynamic. Divergence between winners & losers could take a different shape. Pricing power is one variable that could be key.
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Adam Birkett 77Hmm5Tg N4 Unsplash
21.04.2021
Go Green
It has been announced that Chinese President Xi Jinping will attend the US Climate Summit that starts tomorrow, boosting hopes the two superpowers can cooperate on this issue while still disagreeing on many others.
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Casey Horner Rmowqdcqn2E Unsplash
21.04.2021
Re-visiting Reflation:
XLI vs. XLU
This latest pullback in US equities has seen US Industrials move to 0.8 sigma (5.8% cheap) versus Utilities. That’s a one year low for the Qi Fair Value Gap.
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Chiina
20.04.2021
EM Rates: Time to re-think
China allocations
All 10y yield models within Qi’s universe of EM rates are in regime, & expensive to macro model value. That is especially true in Asia, & China in particular.

After months of substantial inflows, there has been a pause in foreign buying of Chinese government bonds. The WSJ cites valuations, especially narrower yield spreads versus US Treasuries, plus an end to the Renminbi’s 9 month rally as reasons for the hiatus.
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19.04.2021
Saboteur Looks to the Stars for Quant insight Rebrand
Monday 19 April 2021 - Brand studio Saboteur has unveiled a radical new rebrand for financial data company Quant Insight.

Quant Insight (Qi) is an innovative and unique provider of financial market analytics. Mathematical models from the science of astrophysics are used to decode the massive torrents of macro data that flood through the financial markets every minute of every day. It’s an inspired move – astrophysics is the art of finding patterns and connections in complex systems with billions of moving parts. So what happens if this science is applied to the financial markets?
It is, like all great ideas, brilliantly simple.
It’s a radical approach that demanded a radical new design.
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Nasa Rtzw4F02Zy8 Unsplash
19.04.2021
What's happening with US bond yields?
Short covering. Japanese buying at the start of their new fiscal year. Safe haven demand. The usual guessing game to explain the sharp move lower in US Treasury yields is well underway.
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Nasa Hi5Dx2Obas Unsplash
15.04.2021
Copper - the pause that refreshes
After a huge rally over 2020, Copper has paused for breath over the last few months.

Critically though, macro fair value has not deteriorated. Model confidence remains high & tracking GDP growth for US, China, Europe & Japan remain the dominant drivers. Dr Copper retains its role as a bellwether for the global economic cycle.
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Ft1
14.04.2021
Qi & the FT
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Juskteez Vu Tirxot28Znc Unsplash
14.04.2021
Tactical Asset Allocation:
The Global Multi-Asset view
Qi's TAA analysis marries macro regime & macro valuation, with trend & momentum dynamics.
Hs 2009 25 Hubble
13.04.2021
A turn in Asian tech?
Asian exchange ChiNext was the first global technology instrument to fall out of a macro regime last year; moving ahead of similar regime shifts for US & European tech. It remained below our 65% threshold for the last 6 months but has now entered a new macro regime.

Model confidence is currently 71%, having risen 33% in the last 2 months.
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Jake Weirick 09Bqxnvo7Eu Unsplash
13.04.2021
Long & wrong in EM?
Positioning surveys suggest long Emerging Market equities remain a popular position. Yet they have underperformed the S&P500 by almost 15% in 2months & are now at levels not seen since September.
Juskteez Vu Tirxot28Znc Unsplash
12.04.2021
US bank earnings
Financials kick off US earnings season with several blue chip names reporting this week.

All bar one of those reporting this week are in strong macro regimes.
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Orion Nebula 11107 1920
09.04.2021
Mind the gap
VIX closed at its lowest level since February 2020 last night. The “fear gauge” is signalling all is well in the world of US equities.

Qi’s macro valuation shows the S&P500 as largely in line with macro fundamentals. A +0.4 sigma (+2.4%) Fair Value Gap suggests it is only very modestly elevated versus its key macro drivers.

One cautionary note, however, is the divergence between VIX & Qi’s Vol Indicator.
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Pexels Miriam Espacio 110854
09.04.2021
Divergent Recoveries
The IMF have warned about “divergent recoveries” as a potential threat to the global economy in general, & Emerging Markets in particular.
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Anna Anikina Ath9Gmakfpe Unsplash
08.04.2021
Infrastructure Super Cycle
What is the best way to trade President Biden’s American Jobs Plan? Qi’s Infrastructure Super Cycle Watchlist contains a mix of US single stocks, sectors & thematic ETFs.
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07.04.2021
Japan
USDJPY is back in a macro regime. It is also 1.7 sigma (2.7%) rich to macro fair value. It got as high as +2.2 sigma (+3.5%) at the end of March, but model confidence was still just below our 65% threshold.

Now our R-Squared criteria is met & we have an inflection sell signal - both spot price & Qi model value have moved lower over the last 3 days.

If the Yen were to strengthen, traditional perceptions would see that as a potential headwind for Japanese equities. What are the current key drivers for the Nikkei & TOPIX?
Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
01.04.2021
Infrastructure
One option for trading President Biden's new American Jobs Plan is the PAVE ETF which tracks the US Infrastructure Development Index.

PAVE is in a strong & stable macro regime. Model confidence is a robust 94% currently, & it hasn't been below 80% in the last 12 months. Macro matters.

What are the key drivers, & to what extend has it priced in the Democrat's plans?
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Omega Nebula 11053 1920
31.03.2021
Gold vs. Bitcoin
Bitcoin is many things to many people but, on the current pattern of associations, it offers a more efficient inflation hedge than Gold.

Gold has a valuation edge - it is now one sigma (4.7%) cheap to macro fair value.

Bitcoin's model value is around 60,000 so it is effectively in line with its macro environment. Both are in strong macro regimes but the contrast in sensitivity to inflation is the most striking feature.
30.03.2021
Rates on the move
US interest rates are on the move once again. Nominal 10y yields have hit a new 2021 high while 10y real rates have risen 10bp this week alone.

The critical question for equity investors remains whether rising yields are a benefit as they reflect a bullish growth backdrop. Or, by tightening financial conditions, represent a headwind to future performance. Qi empirically demonstrates the sensitivity of different US equity sectors to US real rates.
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29.03.2021
The US Dollar
Screening across all Qi's currency models for the 10 biggest valuation gaps results in seven of them being crosses that involve the US Dollar.

All seven show the Dollar as rich versus macro model value.

Four of those seven show the FVG at a 1 year extreme.
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26.03.2021
EURUSD
The down trade in EURUSD over March has not been driven by deteriorating macro fundamentals. Qi model value has moved sideways & that has opened up a 1.26 sigma (2.8%) Fair Value Gap
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Quant Insight Stacked Logo Light Blue
26.03.2021
Qi & EPFR
EPFR's best-in-class flow/sentiment data, allied with Qi's macro framework is a formidable combination.
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25.03.2021
An efficient 'risk off' play
Nervous about the re-opening trade? That the rotation trade of the last 3months is vulnerable to further unwinds?

Qi has a Divergence signal on the US Materials versus Industrial ratio (XLB vs. XLI). Both are cyclicals but one - Materials - is the more geared to 'risk off' & is currently cheap to Industrials relative to the macro environment.
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25.03.2021
Semiconductors
Earlier this month “Regime Shift in Tech” flagged how Technology was falling out of a macro regime. But while NASDAQ, US IT & European Technology all saw macro’s explanatory power fall, Semiconductors were the outlier – still a macro play.
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Rvdb
24.03.2021
Qi & Real Vision
Qi talk about the NASDAQ & the broader technology space. A change in factor leadership early in Feb left it the most vulnerable to a Fed Taper Tantrum style scenario. Then, early in March, it fell out of macro regime altogether. Real Vision's Jack Farley interviews Qi's Huw Roberts.
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Hs 2009 25 Hubble
24.03.2021
Beware Risk Off?
The Kiwi has turned sharply lower – a warning for broader risk appetite?

The fall in spot NZDUSD fx has prompted spot price to diverge from macro model value & open up a Fair Value Gap of -1.15 sigma (-4.7%)
Nasa Hi5Dx2Obas Unsplash
23.03.2021
Momentum loves Value
The one year anniversary of the 2020 Covid lows has factor investors on watch for a potentially significant shift in momentum strategies. A shift where the composition of momentum pivots away from technology & towards value stocks.
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22.03.2021
US bond sell-off: What's the impact on EM rates
While Chairman Powell seems relaxed about recent moves in the long end of the US Treasury market, it does raise increasing concerns for EM debt markets. More specifically, which EM rates markets are most sensitive to the gyrations in US bond markets?
Pexels Miriam Espacio 110854
19.03.2021
Crude Oil
The sharp fall in spot crude oil prices over the last 10days sits in sharp contrast to macro-warranted model value. In the case of Brent, while spot has fallen 5.2%, macro fair value has risen 8.7%. For WTI, the equivalent numbers are -6.0% & +11.6%.

Commodities always come with a health warning & require strong risk management given the propensity for adverse weather, geopolitical headlines or supply shocks to spark substantial volatility. However, macro model confidence is robust & both have now triggered Divergence signals on Qi. Moreover, back-testing the current -1.1 sigma FVGs on Brent & WTI, results in hit rates in the 70-75% area with double digit average returns.
Pexels Sam Willis 3934512
18.03.2021
The big picture
After last night's Fed meeting the picture left is one of stronger growth, higher inflation, easy monetary policy – it’s a combination that inevitably leads investors to yield curve steepeners, cyclical & value stocks, EM & commodities. But what’s the quantitative picture?
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Pexels Luck Galindo 544268
17.03.2021
A cheap European reflation play
European Basic Resources are cheap versus their peers on macro model valuations; there is a new Qi Divergence buy signal; it is a bet on European reflation.
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Close
Nasa Hi5Dx2Obas Unsplash
29.07.2021
Trading Central Bank
Policy Divergence II
Yesterday we demonstrated how the Qi framework can identify which currency pairs are being driven by interest rate differentials; & hence show which FX crosses best capture the different speed of Central Bank policy normalisation. The next step is to add a valuation overlay.
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CADJPY & CADCHF screen as the two most sensitive G10 fx pairs to cross market rate spreads. In a ‘risk on’ environment with the BoC leading the exit from extraordinary policy stimulus, long CAD / short FX safe havens looks an efficient trade expression. There is, however, no valuation edge. Both crosses trade in line with macro fair value.

From a valuation perspective, NZDCHF looks interesting. Not as sensitive as CAD but rate differentials are the number one driver of the model &, this time, the entry level looks good for RBNZ hawks / proponents of ‘risk on’. The Kiwi is 1 sigma (2.3%) cheap versus the Swiss Franc on Qi.

For a ‘risk off’ scenario, EURNOK is rate-sensitive & slightly rich to model.
Screen Shot 2021 07 29 At 091054
Formulating a view on the different reaction functions of Central Banks is critical but only the first step. This chart provides real-time updates of the best FX trade to express your view.

The chart focuses on G10 fx crosses & interest rate differentials. The further right along the x-axis a currency pair is, the greater the sensitivity to rate differentials. Then the y-axis captures Qi’s Fair Value Gap – red dots above the horizontal are rich to macro, green dots below are cheap. Faded dots mean model confidence is low, i.e. that cross is not in a macro regime.
Nasa Hi5Dx2Obas Unsplash
28.07.2021
Trading Central Bank
Policy Divergence
It’s Fed day. Whatever the outcome, what is evident is the growing divergence opening up between global Central Banks. More specifically, how quickly each exits the extraordinary monetary policy easing seen during the Covid pandemic. Currently, the RBNZ / BoC & ECB appear to be the hawkish & dovish bookends respectively.
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FX markets will be a popular way to play this & interest rate differentials could emerge as a key driver of currencies. Except rate differentials aren’t always the primary driver of FX. The first step is to quantify where & when they are the dominant engine for FX markets.
Screen Shot 2021 07 27 At 155641
Qi’s G10 fx models include rate differentials at three points along the yield curve. 1y1y & 2y2y differentials are pure plays on relative Central Bank rate expectations.

The third is the 5y5y cross market spread. This captures market perceptions of the terminal rate in each country.

In the chart, red (faded) dots capture models that are in (outside) a macro regime. The y-axis shows where the interest rate differential bucket ranks as a driver versus the other variables in the model’s factor set.

If a model is in regime & rate differentials are the number one driver, that FX cross represents an efficient trading expression for any views on the respective Central Banks’ policy stance.

A simple blanket approach does not work. The RBNZ is perceived as hawkish but while NZDJPY & NZDCHF are sensitive to rate differentials, NZDUSD & NZDCAD are not in regime.

Neither is USDCAD. EURUSD is all about real yields not nominal rate differentials. Respective yield curve shape is more important than rate differentials for USDJPY.

Having identified where rates matter, tomorrow we will add a valuation overlay into the mix.
Hs 2009 25 Hubble
27.07.2021
Navigating China Stress
Events in China are critical. The implications are widespread & potentially enormous for financial markets. How can investors track across asset classes, across geographies to monitor where the fall-out is leading or lagging?
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The Qi framework help investors maintain a real-time objective picture of Beijing’s tech crackdown. Optimise Trade Selection allows users to run empirical stress tests. So, for example, if you think a Yuan devaluation is a potential risk scenario, managers can screen their asset class for sensitivity to USDCNH.

Watchlists are useful ways to monitor how different asset classes are faring under the enhanced regulatory regime in China. This “China Multi-Asset” watchlist is now available to all Qi subscribers. Thus far it is worth noting:
Screen Shot 2021 07 27 At 14322
  • Chinese equity indices are all around two sigma cheap to their macro environments. When regulatory risk is the key driver of markets, it might be expected to see low macro model confidence. However, while Shanghai Comp has just 27% R-Squared, every other Chinese equity market – whether index, future or tracking ETF – is in a macro regime.
  • In other areas though the sell-off is less extreme. The S&P500 is ‘only’ 3.4% rich versus Chinese large caps on our SPY vs FXI model. That’s just a 0.5 standard deviation move.
  • KWEB - the China Internet ETF - is approaching one sigma cheap to macro on an outright basis; but is only half a sigma cheap when looking at the relative value versus either US internet (FDN) or US tech more broadly (NASDAQ)
  • Chinese small caps - ECNS is the iShares ETF tracking MSCI’s China small caps index – have not suffered as much. Model confidence is just 51% but the FVG is ‘only’ 0.7 sigma, 6.9%. One to watch if you fear broader contagion?
  • Note the sole Chinese asset with a rich macro valuation is REMX – the VanEck Rare Earth ETF. Ultimately, this is not the end in the secular growth of technology; just about how the data is used, where the companies list & how the industry is regulated.
  • In Fixed Income, Chinese yields have been on a multi-month downtrend. 2y & 5y yield models are not in regime. The 10y is & shows yields as 16bp below macro-warranted model value.
  • Credit is taking a beating. Whether China specific – KCCB is the KraneShares China High Yield ETF & is 1.6% cheap to macro. Or a broader Asian view. China has a 44% weight in the iShares Asia High Yield ETF AHYG. EverGrande, for example, was the second biggest holding as of end-July.
  • Finally, note USDCNH. It is in a strong macro regime & the Dollar is now 1.4% rich versus the Yuan. That’s modest but still the highest FVG since late April. Memories of the 2015/16 devaluation which effectively exported deflation to the rest of the world will be front-&-centre for many investors.
Jake Weirick 09Bqxnvo7Eu Unsplash
26.07.2021
US Earnings
Earnings season has been an unambiguous positive for US equities thus far, & gone a long way to propel indices higher despite other headwinds. This week is busy with a number of bellwethers due to report.
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The models shown below are not exhaustive but includes a number of this week’s benchmark releases across big tech & cyclicals. The chart shows which are in macro regimes versus those that are driven by idiosyncratic risks. And, for the former, whether they are rich or cheap relative to their macro environment.
Monday
In terms of macro’s importance there is a clear skew: most tech stocks lie to the left of the 65% model confidence threshold. Company fundamentals matter more than macro currently. Most of the stocks in macro regimes are industrial names.

In valuation terms perhaps the most striking feature is how close to fair model value most stocks are. Caterpillar is amongst the cheapest but the FVG is only 0.25 sigma, 3.2% below model. Its regime is mixed but the manufacturer is especially reliant on a steeper yield curve.

Boeing is also modestly cheap but this time tight credit spreads, rising crude oil prices & rising US real rates are more important for bulls.

General Dynamics is the richest of those models in regime. At 0.5 sigma, 4.5% the FVG is near 3month highs. Sensitivity to Fed QE is high suggesting it’s a stock that needs to watch event risk like this week’s FOMC & next month’s Jackson Hole.
Qieartheye
16.07.2021
RETINA™ goes interactive
RETINA™ scans your instrument universe intraday and notifies you when valuation and/or trend measures align to generate high probability trade ideas. Used by the world’s leading asset managers and hedge funds globally.
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Users can now interact with RETINA™ and fire requests to the trade bot @qi-trade-bot asking for an updated trend / momentum chart, or the latest valuation picture. Simply ask the bot to “plot momentum” or “plot valuation” for an automatically generated updated chart.

Plot Momentum
  • USDJPY is still in an uptrend but the short term trend indicator is rolling over suggests momentum is waning.
R1
Plot Valuation
  • The spot price of the QQQ / SPY ratio is slightly rich versus Qi macro model value.
R2
Screen Shot 2021 07 14 At 215641
15.07.2021
Storm clouds gathering
The S&P500 fell out of macro regime on June 29th. That’s the first time the US equity benchmark has not been explained by macro factors in three-&-half years. Low macro model confidence is often associated with increased volatility.
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Now, for the first time since October 2020, Qi’s Cross Asset Absorption Ratio shows a sharp rise from a very low level. That suggests financial markets are becoming less diverse – across asset classes & across geographies, markets are being driven by a single factor (probably global Central Bank policy stimulus). Such concentration risk often provides an early warning of a ‘risk off’ event.
Screen Shot 2021 07 14 At 211653
Qi’s Vol Indicator, another measure that looks at macro’s ability to explain the variance of equity, bond & FX markets, is also rising. Again, when macro fundamentals can’t explain the price action of global capital markets, the risk is markets are at the mercy of more volatile drivers such as positioning & sentiment.

The Vol Indicator is not yet at levels that have historically been consistent with significant VIX spikes, but it is moving towards that territory. Moreover, when combined with the other two signals, there are sufficient alarm bells ringing. There are building signs that risky assets could face turbulence ahead.
Screen Shot 2021 07 14 At 211444
12.07.2021
US earnings season
- macro still matters
US earnings season gets under way this week. A period when bottom-up analysis of company fundamentals typically dominates. This does not, however, mean investors can ignore macro.
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Of the 24 US companies releasing this week, over half are in macro regimes. In the chart below, the 9 models to the left of the vertical bound are in micro regimes. It’s business-as-usual for stock pickers who can focus on idiosyncratic earnings. However, all those models to the right of the vertical bound are being driven by macro factors. Equity investors focused exclusively on company news will miss vital market-moving information.
Monday
As always, the start of earning season is dominated by financials & several of this week’s reporting big banks share some common macro characteristics. All are modestly rich to model. JPM & Goldman Sachs are the most expensive, both at +0.5 sigma to macro fair value; amongst the bulge bracket Citi, at +0.2 sigma vs model, is the least expensive.

All the banks want rising inflation, rising real rates & steeper yield curves. Interestingly, Delta Air Lines wants the same macro environment &, given it is at model fair value, what these critical drivers do next will be hugely important for the DAL stock price.

The days ahead will see a wealth of stock specific analysis but, as “The impossibility of a ‘bottom up’ equity strategy” explains, “however you pick [your] stocks, you usually end up with something that is largely driven by macro factors”. It’s earnings season, but macro still matters.
Zzz
08.07.2021
Qi & EPFR
EPFR's best-in-class fund flow data is a natural complement for Qi's quantitative framework. Aligning their data on client sentiment/positioning with Qi's macro drivers & macro valuations, makes for a powerful combination.

In this instance we discuss the technology / growth versus cyclical / value rotation in US equities.
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Ppp
Read the full article here
Monday1
06.07.2021
Italy vs Spain
They may be outperforming their European peers in the football, but Italy & Spain are lagging in terms of equity market performance.

Both the FTSE MIB & IBEX 35 are around one sigma cheap versus pan European indices.
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The chart below shows the IBEX 35 vs. Stoxx 600 Fair Value Gap; the FTSE MIB vs. Euro Stoxx 600 model is slightly less extreme but largely the same. The fall in the spot price of the RV ratio is happening while macro model value remains unchanged.
Tuesday
Both models are in regime & show FTSE MIB / IBEX 35 as high beta plays on a European recovery. Rising economic growth/inflation expectations, steeper yield curves, low risk aversion & tight credit spreads are all consistent with Italian / Spanish outperformance.

Covid - the impact of the Delta variant on the European tourism industry - could be one factor at play. Increasingly though it appears as though the IBEX & FTSE MIB have priced at least some of the bad news in terms of the economic fall-out.

Maybe tonight’s Euro 2020 semi-final will provide a sentiment bounce for at least one of the southern European equity markets.
Pexels Sam Willis 3934512
02.07.2021
Hedging China
A key macro theme for H2 2021 is the normalisation of the Chinese policy stance & the implications for slower growth. Falling credit impulse data, for example, is getting a lot of attention.
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This has been a growing theme on Qi as well with China-related factors rising in importance.

The charts take six global benchmark assets - S&P500, Euro Stoxx 600, 10y US Treasury & 10y Bund yields, plus EURUSD & USDJPY - & shows the ranking of Chinese sovereign CDS as a driver amongst the entire model factor set.

The higher the ranking, the more important this measure of Chinese sovereign stress is for that asset. Sovereign CDS can be interpreted as insurance against default risk. Wider (narrower) spreads implies there is greater (less) demand for protection against a Chinese credit event.
Wed2
China stress is a top 5 driver for 10y US Treasuries & Bunds. However, it is US rates which really stand out. It is the second biggest driver in the entire factor set - second only to crude oil. A one standard deviation widening in Chinese CDS currently equates to a 10bp decline in UST yields.

US & European equity benchmarks were highly sensitive to China in May but that has fallen in June. Note though model confidence for the S&P500 is now 62% - it has fallen out of regime. Declining sensitivity could reflect a broader shift away from macro rather than the driver itself.
Wed1
China stress is the second biggest driver of USDJPY. The relationship is positive – turbulence in China is consistent with higher USDJPY. That paints a mixed picture since USDJPY’s sensitivity to traditional risk aversion metrics (VIX etc) have recently re-established a negative relationship. After months early in 2021 when spikes in VIX benefitted the Dollar, they now favour the Yen once again.
Wed3
This demonstrates that not all ‘risk off’ episodes are created equal. The catalyst for a deterioration in risk appetite can vary. Choosing the right hedge first requires the ability to recognise the source of ‘risk off’; but then to know which assets are sensitive to that particular move.
Qeye4
01.07.2021
TAA - Emerging Market Bonds
A new 3-bar conviction signal for tactical asset allocators at the start of a new quarter.
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RETINA™ is flashing a bullish momentum signal on EM bonds.EMB, the iShares ETF tracking JPM’s hard currency EM bond index, is potentially carving out a new uptrend.
Thursday2
Both ST & LT z-scores are positive denoting an uptrend; the slope is turning increasingly positive suggesting momentum is picking up. Hence the 3 bar conviction level. RETINA™ operates on a 0-4 bar conviction scale; calibrating where macro valuation & trend/momentum dynamics are aligned, or not. One is average conviction; four is full conviction.

This is a 3-bar signal because macro valuation is neutral. The Fair Value Gap is +0.2 sigma (+0.4%).

Note a strong macro regime (83% model confidence) & Central Bank QE Expectations account for almost half of the model. EMB needs ongoing QE to perform.

If you believe the Fed & other CBs keep bond volatility low / prevent another taper tantrum, then the momentum outlook for EM Bonds looks encouraging.
28.06.2021
Chinese Tech - end of the bear market?
Since the cancellation of the Ant Group IPO last year there has been a steady stream of negative news for Chinese technology companies. The ongoing threat of regulation has weighed heavily on the sector. Have we now reached the point where all the bad news is in the price?

RETINA™ is flagging a bullish momentum signal for Chinese IT – both short & long term metrics point to the formation of a new uptrend.
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Monday
This is not a valuation signal. Having spent most of 2021 cheap to macro, the recent bounce has closed the Fair Value Gap. The Qi model for the Global X ETF that tracks MSCI’s China Information Technology sector is now essentially at macro fair value.

With the valuation picture neutral - rather than opposing momentum - that means RETINA™ assigns a 3-bar conviction level to the signal. Four bar signals are the highest conviction trades.

The next Qi upgrade due in early July will include the addition of the RETINA™ trend / momentum charts to each model page. Clients will be able to see all Qi’s traditional macro analysis plus the trend charts for all models across every asset class.

In the case of Chinese technology, investors will need to maintain a close eye on Beijing’s regulatory push. However, subscribers will be able to align macro fundamentals with momentum dynamics, & monitor both in real-time. Signal from noise™
Omega Nebula 11053 1920
23.06.2021
NASDAQ at the highs...
… so, for technology bulls, what is lagging?
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On Qi, the standout is the KraneShares China Internet ETF KWEB which is 1.4 sigma (19%) cheap to macro. As ever with tech, antitrust legislation is a clear risk; & probably explains why, at 63%, Qi’s model is just below the threshold for a macro regime.

That means valuation signals come with a health warning. Still, the valuation gap is close to 1y lows & the contrast with both the NASDAQ & ChiNext is stark. It has also lagged the recovery experienced by other tech favourites.
Wed1
At the index level, while NASDAQ & ChiNext flirt with new highs, in macro terms Hang Seng Tech looks more like KWEB. That may speak to micro factors as the two rival exchanges compete but, at 8% cheap to macro model value, the contrast is again striking.

Another popular tech vehicle are the ARK Invest funds. Qi has models for both ARK Innovation ARKK & ARK Genomic Revolution ARKG. At the lows in mid-May, they were 28% & 24% cheap to model respectively.

Both have now caught up & trade in line with model fair value. Note also both are back in macro regimes. Even funds focused exclusively on disruptive technology are not immune to their macro environment.
Cameron Venti Xkcaeep4Ui4 Unsplash
18.06.2021
Defying gravity?
The more the correction in commodities continues, the more crude oil looks like an outlier. Why is it ignoring the move lower in the rest of the commodity complex; & is it merely lagging & therefore a potential short?
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Usual health warning with commodities & their propensity for supply/demand shocks. However, at 86%, Qi’s model confidence suggests traditional macro factors are doing a good job of explaining the price action in Brent & WTI.
Friday
Crude is close to macro fair value. Spot price (white) & model value (red) in the chart above track each other closely. Spot is 3.9% above but that is a negligible +0.25 in standard deviation terms. Moreover, RETINA™ has been unambiguously bullish on crude from a trend / momentum perspective.

The macro profile displays a desire for healthy Chinese economic growth & no sovereign stress in China or Europe. The other big driver is bond yields - the top 3 positive drivers are 10y US Treasury & Bund yields, plus 10y US real rates. It speaks to a healthy demand backdrop / risk on environment.

Together, they identify one scenario bears should monitor. Slower Chinese credit impulse that weighs on economic growth & credit quality, & potentially fuels a flight-to-quality trade in DM government bonds, is a toxic combination for crude oil on current patterns.
2021 06 17 19 22 16
17.06.2021
What's new: The quarterly Qi update
Get updates on Quant Insight company growth, new solutions, fund manager insights, and media references.
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Growth, product development and unique trading signals

Recently we've opened a US office responding to rapid customer growth. With Qi customers evaluating
the effects of reflation and growth expectations this year, we see particular interest in Relative Value opportunities at the sector or index level, using macro valuation plus price momentum to improve tactical asset allocation, and adding macro screens to
enhance stock selection.
Hot off the press is Qi's new RETINA service providing a pipeline of actionable trading signals. I hope the following client insights and product updates are useful and look forward to hearing from you.

Mahmood Noorani, CEO and Co-Founder

Download the full 'What's new' article below
Dtqi
16.06.2021
Why are 10y US yields down? Two expert views
DataTrek is Wall Street's go-to commentary for differentiated & actionable investment ideas. Their daily note offers a unique blend of market insight & data-driven analysis.

In that respect, DataTrek & Quant Insight offer the same output but arrive there via two distinct processes. Nick & Jessica between them offer 40 years of experience in the investment industry. Quant insight employs a proprietary version of PCA to show the macro profile of any financial asset.

How macro factors explain the variance of stocks, bonds & currencies; valuation gaps (the difference between spot & actual price) to flag potential trade ideas; & regime shifts as the macro environment changes.

Human intelligence & experience remain an invaluable asset but, in the modern & increasingly complex world, adding in a machine driven framework can only add value to the investment process. This is the first Quant insight / DataTrek joint venture, focusing on 10y US Treasury yields. Summary below, full article via the pdf link at the bottom. Further JVs will follow.
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  • 10-year Treasury yields have been bucking consensus ever since the start of Q2 2021, moving lower even as inflation chatter has only grown louder. History and current macro drivers explain why this is happening.
  • DataTrek Research believes Treasury prices anchor on long-run historical inflation trends. Convincing this market that the next 10 years will be different from the last decade could take a long time. It took 25 years, for example, for Treasuries to fully reset after the 1970s.
  • Quant Insight’s proprietary data analysis shows oil prices need to rise materially – and quickly – from here to push yields higher. And even if US equity markets are calm just now, there is actually a relationship between credit concerns in other markets and declining Treasury yields.
  • Bottom line: 10-year Treasuries don’t trade exclusively on current US inflation data. They never have. To predict their next move, you need to look at a wide range of other macro drivers.
Nasa Hi5Dx2Obas Unsplas
16.06.2021
Need an inflation hedge?
FOMC day. The consensus expects little change with greater focus on August & Jackson Hole for the first signs of a taper. For some, that makes today a non-event. For others, Fed inaction will act as a green light to engage in inflation trades.


10y TIPS break-evens are now 0.5 sigma or 15bp low versus macro-warranted model value. 5y TIPS are 0.7 sigma (29bp) below macro model value. Both are close to 1 year lows in Qi Fair Value Gap terms; attractive entry levels for anyone needing inflation protection.
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Wed1
For those unable to invest in Fixed Income securities, the traditional inflation hedge lies in the commodity complex. That trade can take many shapes – spot commodities, commodity currencies, ETFs, or resource stocks. Many have rallied aggressively in 2021 but, more recently, several - like copper - have experienced a sharp pullback.

Relative to the macro environment, which offers the best trade expression currently? Qi’s “Commodity Super Cycle” watchlist is a curated list of potential commodity related plays.
  • The cheapest model is Chilean copper miner Antofagasta. The May sell-off has taken it 1.6 sigma (31%) below macro fair value. But it fell out of a macro regime in April & any FVG comes with a health warning.
  • Not as extreme, but the Global X Copper Miners ETF COPX displays a similar profile – cheap to macro but out of regime.
  • Amongst the single stocks, Korean steel giant POSCO is notable - in a macro regime & 0.6 sigma or 11% cheap to model.
  • Spot commodities are typically rich to model. However, valuation gaps are modest and while Gold & WTI are in regime, Silver & Natural Gas are not currently explained by macro.
  • In FX, valuations are mixed but the one consistent is model confidence – not a single commodity cross is in a macro regime. On current patterns, commodity currencies have divorced themselves from macro fundamentals.
Wed4
Pexels Miriam Espacio 110854
14.06.2021
Brazilian Real
A new regime
Macro model confidence is rising for the Brazilian Real. The chart below shows the 10 biggest changes in macro model confidence across all FX models over the last month. Four of them include the BRL; all four show R-Squared rising. Macro is re-asserting itself as a key driver of the Real.
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Mon2
None have yet to cross the 65% threshold denoting a new macro regime &, as such, their valuation signals come with a health warning. However, the valuation picture is consistent – the BRL looks rich to model.

Looking at the crosses with the biggest jumps in model confidence a clear pattern emerges. AUDBRL, CHFBRL, BRLJPY, BRLCLP have some differences but share the fact that risk aversion is the single biggest driver. Even versus the Chilean Peso, the current pattern shows the Real as the high beta asset that needs VIX & other measures of risk aversion to stay low.

Combining valuations with the key driver of this new regime, suggest the Real could be an efficient vehicle for any risk off scare.

Indeed, RETINA™ has triggered a bearish momentum signal on BRLCLP. The recent uptrend looks overbought & is showing signs of rolling over.
Anna Anikina Ath9Gmakfpe Unsplash
10.06.2021
XLF & XLE - Macro vs. Momentum
Today’s US CPI could change everything once again, but the current narrative dominating markets is that the Fed are focused on employment, not price pressures. Hence the bond market’s ability to look through “transient” inflation scares.

That begs the question – is there a potential fall out for rate sensitive cyclicals like Financials & Energy? The picture is mixed.
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Thursday
The chart above shows XLE spot price (white) versus macro fair value (red). The recent divergence has opened up a +0.8 sigma (+12.4%) Fair Value Gap. But while macro valuation is rich to model, RETINA™ continues to show the uptrend is in good health. Equally, crude oil - unsurprisingly the biggest single macro driver - retains good momentum.

XLF is just 0.3 sigma from model, i.e. in line with macro fair value. The momentum picture, however, is more mixed. Relative to XLE, the uptrend looks less secure.

Both XLE & XLF model value have started to roll over. It is modest thus far, but worth watching. Today’s event risk could be the catalyst for the next big move. Qi users can align macro fundamentals & trend/momentum dynamics in real time. Signal from noise™
Jake Weirick 09Bqxnvo7Eu Unsplash
09.06.2021
Credit
Last Wednesday the Fed announced it will unwind the corporate bonds it bought as part of its emergency policy response to last year’s initial Covid lockdowns. How has the dust settled since that announcement?
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Qi's credit models are in strong macro regimes & valued in line with macro fundamentals. Our Credit Watchlist shows all bar two (EM High Yield & US Municipals) have high model confidence; & all are essentially within 0.5 sigma of macro-warranted model value.

High Yield spreads in both US & Europe are especially notable – macro explanatory power of 90% plus & almost exactly in line with fair value.

No valuation edge in credit itself then, but what about other asset classes?

The Fed’s aggressive policy response in March 2020 resulted in a significant rise in credit’s importance as a factor for risky assets. Given its role as a primary driver, a core Qi theme throughout last year was that, as long as the Fed back-stopped credit markets, any pullback in US equities was a dip buying opportunity. Is the opposite true now?
Image 32
The chart above shows the S&P500’s independent sensitivity to US High Yield spreads. In Q4’20, a one standard deviation tightening in US HY spreads (in isolation, every other factor held constant), was consistent with a 1% rally in SPX.

The equivalent move today is just a 0.2% gain. On this metric, equities still want tight credit spreads but the sensitivity is a fifth of what it was. Last week’s announcement isn’t the huge game changer it would have been in 2020.
Tuesday
08.06.2021
South Africa
The chart below shows the 10 biggest valuation gaps across all FX pairs modelled by Qi. Three of them involve the South African Rand which is rich to macro on each occasion.
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AUDZAR is especially notable. Prior to Friday’s US Payrolls, the FVG was at a 1y low. Even with the recent bounce in spot, the valuation gap stands at -1.1 sigma (-4.2%). Back-testing a buy the dip strategy at a FVG of -1.1. sigma since 2009 produces a 79% hit rate & +1.8% average return.
Tuesday3
While the valuation gaps are less extreme, the Rand is expensive to model on USDZAR, CADZAR & EURZAR as well. Of those, CADZAR’s current -0.7 sigma FVG back tests the best with a 63% hit rate & +0.4% average return.

The macro profile is similar across all 4 crosses. Risk off (wider credit spreads, higher VIX) plus weaker domestic growth (Now-Casting tracking GDP growth for SA) dominate the regime & are Rand negative. Put another way, on current FVGs, the Rand has priced a fair amount of good news on risk appetite & growth.

It is also noticeable how important the Rand is for South African equities currently. The sensitivity of the iShares ETF tracking MSCI South Africa to Trade Weighted ZAR has been rising strongly since mid March, & the currency is now the biggest positive driver.EZA is very close to macro fair value so equity investors need to monitor fx shifts.
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07.06.2021
The impossibility of a 'bottom-up' equity strategy
Every portfolio is effectively a macro portfolio even when it purports to be bottom up. However you pick the stocks, you usually end up with something that is largely driven by macro factors.
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By George Hatjoullis:

One of the first things that I confronted as a young finance academic (this is pre-history) was the impossibility of running a portfolio of stocks selected for their individual merits. The reason was, once the portfolio had more than a certain number of stocks, the specific risks of individual stocks become largely irrelevant. This is the whole point of diversification. Unless the portfolio holdings are skewed towards one or two stocks the portfolio would be defined by its systemic risk; the risk that cannot be diversified away. If the portfolio consists, say, of bank stocks, then its risk characteristics would accord with those factors that impact all banks. The portfolio risk would be dominated by macro factors such as GDP growth, Inflation, interest rates, credit spreads, and so on. If you check the top ten holdings of any of your funds you will notice it is rare for any individual stock to constitute more than 2-3% and the holdings usually exceed 50 stocks. Every portfolio is effectively a macro portfolio even when it purports to be bottom up. However you pick the stocks, you usually end up with something that is largely driven by macro factors. For those that doubt the veracity of the paragraph take a look at Chapter IX of Portfolio Analysis by J.C. Francis and S. H. Archer, Second Edition, Prentice-Hall, 1979. I am sure there are more up to date discussions of this point but this was the Chapter that made me think back in 1979.

If we accept the premise of the above paragraph then this has profound implications for portfolio management and the wider fund management industry. Portfolio outcomes are determined by a well defined and finite set of macro factors. Macro has always been the only game in town. Portfolio outcome variation has been driven by selecting stock portfolios which were unwittingly weighted towards specific macro factors but attributed to marketing objective of the fund. The understanding of this issue has slowly emerged and we have seen much written about factors in terms of value, momentum etc. However useful these broad categories might have proven they are not clean macro factors. Some banks are clearly value stocks but others momentum or growth stocks. The need for a well defined set of macro factors that could capture portfolio differences remained. One attempt to fill this need is a company called Quant-Insight (https://quant-insight.com), and in which I own a small shareholding.

QI offers a set of independent and finite macro factors against which most diversified portfolios can be characterised. QI tells you what you have in terms of well defined factors such as growth, inflation, credit spreads, interest rates etc. QI tells you if the value of your portfolio (or individual stocks or other portfolios) is out of line with the historical relationship with the set of macro factors. QI tells you how strong is this relationship and when the portfolio relationship to macro factors may be changing. QI cannot tell you how these macro factors will evolve (nothing can) but it can show you to which factors your portfolio is presently exposed. QI can also remind you that whatever you think you have what you actually is some weighting of macro factor exposure. It may be that you can achieve a more efficient portfolio with exactly the same factor weighting. A more efficient portfolio would offer a greater return for the same level of factor risk.

Read the George Hatjoullis blog
Pexels Sam Willis 3934512
28.05.2021
Come fly with me
The airline sector is arguably the purest expression of the re-opening trade. There are hopes next month’s G7 may reach an agreement on travel corridors & vaccination certificates which will help rescue the northern hemisphere’s summer holiday season.
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Alongside such political factors, bottom up analysis remains critical. Some carriers are promoting free flights for the vaccinated; others are successfully adapting from passengers to cargo in order to boost revenues. But it is notable in the curated Airlines Watchlist below that every single carrier Qi models - in US, Europe & Asia - is in a strong macro regime.
Friday
The other standout is how close to model fair value every single carrier is. They are all essentially within 0.5 sigma of model. Macro matters for airlines & currently they are behaving in line with macro fundamentals. Watch the relevant macro factors for the next big move.

While model confidence is uniformly high, there is a wide dispersion of macro regimes. Lufthansa is a high beta inflation play with crude oil & inflation expectations accounting for around a third of model explanatory power.

A desire for credit spreads to remain tight dominates all four US airlines – SouthWest, Delta, United & American.

Asian carriers Quantas & Singapore have the most diverse range of drivers but display a notable bias to domestic economic & financial conditions.
Juskteez Vu Tirxot28Znc Unsplash
26.05.2021
Nothing to see here
Yesterday the Conference Board’s measure of consumer expectations for US inflation hit 6.5%, effectively matching a 10 year high. The contrast with market-based expectations for inflation is notable.

5y5y forward inflation swaps in USD & EUR are widely watched & believed to be favourite indicators monitored by the Fed & ECB. Both had showed inflation expectations as high versus model, but the charts show Qi’s Fair Value Gap retracing back to zero yesterday.

Qi FVG - USD 5y5y Inflation
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Usd5Y5Y
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Eur5Y5Y
That retracement was partly a function of macro model value moving higher – itself a function of this week’s bounce in crude oil. But the bigger move, certainly in the US, was the 14bp decline in spot since recent highs.

These are not models forecasting future CPI levels; rather, the empirically observed relationship between market expectations for future inflation versus their macro environment.

Observing where GDP growth is tracking, what financial conditions are doing & how risk appetite is behaving, macro model value has edged higher while the market has re-priced inflation expectations lower. Net-net, spot is now in line with macro fundamentals.

Unsurprisingly, the FVG for 10y USTs has also closed. On this occasion, the signal showing yields as 20bp too high has been closed by spot falling 10bp & model value rising 10bp, again courtesy of the bounce in crude oil prices. Signal from noise™
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25.05.2021
Peak growth?
Qi pulls in Chinese tracking GDP growth from Now-Casting as a core factor for global economic growth. That hit a local high of +17% YoY & has subsequently slipped lower. The chart below shows that in z-score terms. That surge in growth was a 4 standard deviation event but the subsequent retracement has taken back more than 50% of the move.

The markets’ increased attention on China’s credit impulse – the change in new credit as a percentage of GDP growth – speaks to fears China is transitioning from the engine of global growth, to one that has already peaked.
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Tuesday
A more aggressive fiscal response in the US, plus secular trends like green technology remain important arguments for a commodity super cycle. But China’s impact on metal prices is traditionally very strong. Unsurprisingly, the z-scores for copper & iron ore have tracked Chinese GDP growth lower.

Qi’s Optimise Trade Selection enables users to screen their holdings for sensitivity to macro factors such as these.
Tuesday2
Nasa Hi5Dx2Obas Unsplash
21.05.2021
The turn?
In US equities, Growth outperformed Value for a third consecutive day yesterday. On Qi, the valuation gap on the Value / Growth ratio (via Vanguard ETFs VTV vs. VUG) has almost halved. At the highs one week ago, Value was 6.7% rich to Growth; that now stands at 3.9% rich relative to the prevailing macro environment. Spot is catching down to macro fundamentals.
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Friday
That has prompted speculation the recovery in tech & growth potentially contains a broader message – that when the more defensive areas of the equity market outperforms, that rotation is signalling an earlier Fed tightening.

On Qi, that would manifest itself in a change in underlying relationships with the macro factors. The biggest driver in the current regime remains expectations around Fed Quantitative Easing. It alone accounts for 37% of model explanatory power.

The current relationship still shows QT is consistent with Value outperforming Growth. Moreover, sensitivity is not only large but rising.

For now, this looks more like a simple correction from an overshoot rather than any signal the Fed’s policy stance is shifting.
Friday2
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20.05.2021
US Dollar update
The bears are back in control of the US Dollar which is nearing 2021 lows. Qi’s USD G10 Watchlist is notable on three fronts.

Macro remains important – most models are in macro regimes. The majority of crosses are behaving in line with macro fundamentals – only USDCAD shows a valuation gap of more than one sigma. There is a clear but modest skew to the Dollar being cheap to macro.
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Thursday
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The USDCAD model is also interesting for its key drivers. Yes, the Canadian Dollar benefits from higher crude oil prices; but risk appetite & financial conditions dominate the current regime.

A spike in VIX & wider credit spreads are both consistent with higher USDCAD. So, a FVG of -1 sigma (-2.8%) makes it a potentially interesting play for any ongoing sell-off in risky assets.

The Antipodeans stand out as the two Dollar crosses where macro is not presently driving price action. Note, however, that RETINA™ is worth watching here. While macro model confidence is low, there is potential for a momentum signal instead. Both AUDUSD & NZDUSD are potentially carving out new uptrends - RETINA™ is tracking both.
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18.05.2021
The Spanish bull
The chart shows the 10 biggest Fair Value Gaps across Qi’s models of relative value pairs for global equity indices. Five of the top 10 show IBEX 35 as rich versus its peers.

On current patterns, Spanish equities look like the high beta play for European reflation. They outperform when inflation expectations rise, crude oil increases, the European yield curve steepens, credit spreads tighten & the Euro is soft.

But a fair amount of that good news is now priced making it a potentially attractive vehicle for those thinking the European re-opening trade is due a pause.
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Tuesday
Back-testing the significance of these valuations reveals these levels are comparatively rare. For example, selling IBEX vs. Stoxx 600 at a +1.4 sigma FVG (when in regime) since 2009 produces only 5 such trades. The hit rate is 80% for an average return of +1.9%.

The equivalent numbers for the IBEX 35 vs. CAC 40 (+1.5 sigma FVG entry level) is a 73% hit rate & +0.5% average return. Since 2009 there have been 11 such instances. Selling IBEX vs DAX at a +1.1 sigma FVG since 2009 produces 16 trades, a 81% hit rate & a +0.9% average return.

History suggests these RV pairs offer an efficient expression for anyone with a tactically bearish view on European equities.
Pexels Sam Willis 3934512
17.05.2021
Taper Tantrum? Watch the ECB
Last week’s US inflation print prompted USD rate vol rate to spike but it remains just below 2021 highs. Meanwhile, European rate vol hit fresh highs last week.

The chart below captures the move in interest rate volatility, which we use to capture market expectations around Quantitative Easing, in z-score terms. The BoC & BoE have already announced plans to taper; & this picture suggests the market fears the ECB is next. The tantrum is not a uniquely US event.
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Monday
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If we see a European taper tantrum, which of the usual suspects look vulnerable?

QE expectations account for a third of explanatory power for European IG credit, IBCX. Whilst it screens as highly vulnerable, model FVG at 3 month lows (-1.2 sigma, -0.7%), suggest it has already discounted some of the bad news.

European Banks are modestly rich to model, both outright & relative to the broader EU equity market. Reflation, tight credit spds & a weak Euro feature more prominently than QE.

10y BTP-Bund spreads are in regime & are already one sigma (18bp wide) versus model value. But macro fair value is moving wider, just not as quickly as spot. QE isn’t a primary driver currently but the regime shows deflation (falling inflation /growth) & ‘risk off’ (wider credit spds, higher VIX) as critical. Note QT explains almost half of model variance for 10y Bunds.
Jake Weirick 09Bqxnvo7Eu Unsplash
12.05.2021
Inflation
Inflation day in the US. The mood music has started to shift with markets ascribing high commodity prices / inflation as a negative for equities. Have we reached an inflection point where price pressures become a drag on equity markets?

The chart below shows the sensitivity of US equity sectors relative to the broader market to 3 factors – inflation expectations, metal prices (copper, iron ore) & energy prices (crude oil).
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Wed1
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The chart above shows the sensitivity of US equity sectors relative to the broader market to 3 factors – inflation expectations, metal prices (copper, iron ore) & energy prices (crude oil).

The split is clear. A handful of RV pairs display a negative relationship. That Consumer Staples XLP underperform SPY when inflation expectations rise is not surprising. A function of margin compression. Health Care XLV & Home Construction ITB show the same dynamic.

A host of models hug the vertical axis where sensitivity to these macro factors is more muted.

Meanwhile Energy (XLE, XOP), Financials (XLF, KBE), Metals & Mining (XME) reside wide out on the right hand side of the chart where higher inflation/commodities provide a clear benefit.
Apr11
The same chart from a month ago is striking in the sense the profile has not really changed. On Apr 11th the same cyclical sectors were on their own out on the far right of the chart with strong positive sensitivity to the broad inflation narrative.

All that has changed is the valuation picture. On Qi metrics, the value sectors were all cheap to the broader S&P500 a month back, & today are rich. The valuation picture helps explain recent market gyrations more than any fundamental shift in market drivers.

Arguably the most important shift will not be the move north from cheap to rich versus macro fair value. But from right to left – that is when Qi’s independent factor sensitivities will flag a regime change. One where inflation & commodities move from tailwind to headwind.
11.05.2021
Chinese Cyclicals
Qi has built models for the Global X MSCI universe of ETFs tracking Chinese equity sectors.

Of those in a macro regime, the Chinese Energy sector stands out. The energy complex is rich to macro model in both the US & Europe, but not to the same degree as CHIE which is 2.2 sigma (10.6%) above macro-warranted fair value.
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Ccc
Back-tests show when Chinese Energy is in regime, the FVGs have a strong track record of flagging profitable trading opportunities. This FVG level, however, hasn’t been seen before. Combined with macro fair value moving higher (just at a slower pace than spot) & the conclusion is that trying to pick a top in commodity plays currently is not prudent.

Instead, RETINA™ signals an alternative cyclical trade - Chinese Industrials. CHII isn’t in regime currently (55% model confidence) but valuation, even with that caveat, is close to macro fair value.

That leaves a neutral valuation picture but a positive momentum outlook with RETINA™ flagging a new uptrend potentially forming. Growth bulls looking for ongoing rotation to cyclicals, & looking for diversification away from western equities, could consider this alternative expression.
Ja
11.05.2021
Qi & Bloomberg
The latest analysis from Bloomberg's John Authers pulls together the reaction to a weak US Payrolls report, & the importance of the current inflation narrative. He cites Qi analysis on global equity markets & their sensitivity to inflation expectations - Qi will flag, in real time, when inflation moves from being a tailwind for risky assets, to a headwind. The original work can be seen here
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10.05.2021
Inflation
Wednesday’s US CPI dominates the week ahead. Despite the undershoot in US Payrolls, market expectations for US inflation rose aggressively on Friday. The common narrative being that a weak labour market ensures the Fed keep monetary policy easy for longer.
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Monday
5y TIPS break-evens are in line with macro fair value but 10y break-evens & the closely watched 5y5y forward inflation swap are both now high versus model value. The former are 0.5 sigma above, the latter 0.9 sigma; both currently equate to spot being around 13bp high versus model.

So relative to economic growth, commodity prices, Fed rate/QE expectations etc, inflation expectations look elevated.

Qi does not model the US Consumer Price Index. Qi displays the macro anatomy of the financial instruments that reflect market expectations for future inflation. This should not be interpreted as a call on US inflation itself. It shows how aggressive the re-pricing of US inflation expectations has been relative to other macro factors & financial assets.
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07.05.2021
Mixed messages
Falling real yields suggest the bond market is signalling peak economic growth. But the commodity market is shouting loudly that inflation is the number one threat.

For now, equity markets seem to be listening to commodities rather than bonds. Hence the cyclical versus tech split in performance this week.

But, if commodities are the main driver, what’s the empirical snapshot – which equities are most sensitive, what do macro valuations look like?
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Friday
The chart shows equity indices & their sensitivity to metals (copper, iron ore) & energy (crude oil); plus a macro valuation (Qi Fair Value Gap). The further to the right a model is, the bigger the benefit it gets from rising commodity prices.

Russell 2000 is the winner but there is a diverse mix – Indonesia EIDO, Austria EWO & Mexico EWW. The common factor is all are rich to macro already; albeit the Russell only marginally so.

Looking for the equity market with the strongest sensitivity to commodities but a cheap valuation suggests South Africa EZA has lagged & offers an attractive entry level.
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07.05.2021
Macroscope:
Nations love inflation until they dont
While equity investors were put on their heels by US Treasury Secretary Yellen's mere utterance of a possible future rate hike, at the moment inflation is the friend and positive macro driver of most global equity markets, according to Quant Insight (Qi) data tracking the influence of macro drivers on asset prices. Yellen later backtracked but her comment still sent shockwaves through global financial markets, especially after recent PMI data pointing to bottlenecks in supply chains and upward pressure on inflation.

Qi data indicate that some global equity markets benefit more from inflation than others with smaller markets in Europe such as Austria, Greece, Norway, Spain and Italy getting the biggest tailwind from rising inflation expectations. On broader macro valuation terms there is a distinct East-West divide as US and European equity markets look consistently expensive while markets cheap to macro are generally in Asia, with Japan (both the Nikkei and TOPIX indices), Indonesia, Korea, India and Emerging Markets both attractively valued and benefitting from inflation.
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Picture 1
Download our PDF to read more and view:

1. Global Markets this week - Top Macro drivers
2. Key Insights
Juskteez Vu Tirxot28Znc Unsplash
05.05.2021
Global equity indices & inflation
The recent round of global PMI data has sharpened fears about supply bottlenecks & upward pressure on inflation.
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On current patterns, nearly every equity index globally has positive sensitivity to inflation expectations; i.e. they remain a tailwind rather than a headwind to equity performance. When sensitivity flips to negative we will see evidence of a significant regime shift - that markets are worrying about margin compression or an earlier policy response from Central Banks.
Wednesday
In pure sensitivity terms it is European markets - notably Austria EWO, Greece, Norway ENOR, Italy & Spain - that are the biggest beneficiaries from rising inflation expectations.

In broader macro valuation terms there is a distinct East - West split. US & European models are consistently rich to macro model value. Those that are cheap to model include both the Nikkei & TOPIX in Japan, Indonesia EIDO, South Africa EZA, South Korea EWY & the broader EM index EEM
Pexels Sam Willis 3934512
04.05.2021
Tactical opportunity in US Tech
Over the last 10 days the US technology sector has underperformed the broader market by around 2.5%. Yet macro fair value for XLK / SPY ratio has actually increased slightly over the same period. That has opened up a Fair Value Gap of 1.7 sigma (2.8%) & triggered a Divergence signal.
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Tuesday
In outright terms, US technology is currently not explained by macro factors. NASDAQ, US IT, XLK, SOXX etc are all below our threshold for a macro regime. However, the relative value model of XLK vs. SPY is in regime with model confidence at 69%.

That regime demonstrates tech’s resilience in a defensive environment. XLK outperforms when inflation expectations & commodities are falling, when real rates decline & credit spreads widen. This is a good entry level for those thinking the reflation trade is due further consolidation.

Note though that one third of model explanatory power comes from Quantitative Easing expectations. Tech needs ongoing Fed QE to outperform. Long XLK versus the broader market looks good tactically given the entry level, but there is clear event risk on the horizon – if the June 16th FOMC does start the clock for a possible taper of Fed asset purchases, on current patterns that will provide a significant headwind to the US tech sector.
30.04.2021
European Autos
Qi’s Tactical Asset Allocation work flagged that the uptrend in the European Auto sector was exhausted & rolling over. The momentum picture remains weak – RETINA™ shows a new ST downtrend while the LT uptrend is sharply decelerating. However, from a macro valuation perspective it is starting to screen as cheap relative to several peers.
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The chart below shows the 10 biggest valuation gaps across all Qi’s global ETF relative value models. European Autos (EXV5) is in three of the top 10 FVGs; & each time it is cheap & at a one year extreme.
Qqq
There is a strong need for bottom up analysis here - to assess the impact from the shortage in semiconductor chips & possible production cuts. Align Qi’s macro valuation plus trend/momentum analytics with company fundamentals.

From a macro perspective, Autos are 6.8% cheap versus Travel & Leisure EXV5 vs. EXV9, 6.8% cheap vs Banks EXV1 vs. EXV5 & 5.6% cheap vs Media EXV5 vs. EXH6.

All back-test well. Buying Autos vs Banks at 1.4 sigma since 2009, for example, produces a 75% hit rate & +1.7% average return. Moreover, it now has a Divergence signal too with spot price of EXV1 / EXV5 & macro fair value moving in opposite directions over the last 10days.

Separately, Qi RETINA™ has flagged a momentum sell signal on European Industrials. The sector is in a strong macro regime but there is no FVG of note. This is not a valuation call, but a pure trend signal – the uptrend looks stretched & has started to lose momentum.
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29.04.2021
Canada: the multi-asset view
No excitement from the Fed overnight but it’s now one week since the Bank of Canada became the first G7 central bank to signal an end to extraordinary monetary policy accommodation. How has the dust settled?
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Canada
  • Equities. The TSX 60 ETF XIU is in a strong regime & one where it is comfortable with reflation. Rising inflation, higher bond yields are all tailwinds – they currently reflect stronger growth, not tighter financial conditions. A FVG of +0.4 sigma (+2.2%) suggests a modest amount of this favourable scenario is already discounted.
  • FX. Spot CAD has moved aggressively since the BoC last week but, on the whole, it is moving in line with macro fundamentals. Most models are within 0.5 sigma of fair value. The exception is USDCAD at -0.9 sigma (-2.2%). A 1 year low for the FVG & a level that back-tests well (72% hit rate, +0.8% average return).
  • Fixed Income. Canadian credit (VSC, ZCM) & Canadian rates are close to model value. Even with the BoC induced re-pricing of the front end, 1y1y CAD is within 0.5 sigma of fair value. Most interesting is the 2s10s curve – in regime & 18bp too flat versus macro. An attractive entry point for those who believe QT + issuance equates to a steeper yield curve.
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28.04.2021
Qi & Bloomberg
Bloomberg's article "Bitcoin at Inflection Point Amid Recent Selloff, Technicals Show" cites Qi's analysis of the crypto complex.
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Anna Anikina Ath9Gmakfpe Unsplash
28.04.2021
Food Inflation
Commodity prices continue to surge higher. What is striking in the table below is:
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  • Despite idiosyncratic supply shocks, overall the commodity complex remains well explained by macro fundamentals.
  • Only 4 models that are in regime are more than 0.5 sigma away from macro fair value. Commodities are largely trading in line with their macro environment.
  • There is a notable valuation skew to soft commodities being rich to macro.
Soft
  • Copper *, at 0.8 sigma (8.2%) above model fair value, is the only metal in the rich zone.
  • Otherwise the standouts are all agricultural commodities. Wheat is not in a macro regime but rich; Corn is 1.4 sigma (18.2%) rich to macro while the broader Invesco Agriculture ETF DBA is 1.2 sigma (7.7%) above model.
  • Commodities are inherently a unique asset class - macro signals must always be aligned with supply/demand fundamentals. But even with cold & dry weather in US & Brazil, macro factors suggest anyone looking for a pause in this latest leg of the commodity super cycle should consider agriculture first up.
* since April 15th's "Copper - the pause that refreshes" spot copper has rallied 10.5%. The FVG was -0.3 sigma at that time & now stands at +0.8 sigma. Macro-warranted model value has moved higher from $428 to $435, but spot has moved up more aggressively.
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27.04.2021
European Re-Opening Trade
For proponents of the re-opening trade, Europe offers a classic value play. And Financials are often the epicentre of the value style, especially in Europe. On Qi, European Financials are now 1.3 sigma (4.3%) cheap versus Technology.
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Techfin
Improvements in the vaccination programme, increased mobility & the fact that it has lagged the US, are all cited as reasons why Europe benefits from the next wave of the reflation trade.

Qi’s European Technology vs Financials model is in regime (76% model confidence) with an intuitive set of drivers. The European Technology sector may be smaller than its US equivalent but it shares the same defensive characteristics. Falling inflation, declining commodities & wider credit spreads are all consistent with tech outperforming banks.

But at +1.3 sigma (+4.3%) the Fair Value Gap for the SX8P / SXFP ratio is getting towards the top end of recent ranges, suggesting a fair degree of that news is in the price.

Back-testing the significance of the +1.3 sigma FVG as a sell signal since 2009 produces a decent hit rate (63%), a negative average return but positive median return of +1.1%. There is a fat-tail of outsized losses that skew the results. Adding a discretionary overlay & incorporating stop/losses alongside the Qi valuation signal is critical.

Still, as a trade expression for a European re-opening, this merits consideration.
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22.04.2021
Pricing Power
Any second phase of the re-opening trade could be more discerning than a simple growth versus value dynamic. Divergence between winners & losers could take a different shape. Pricing power is one variable that could be key.
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  • Energy & Financials remain the preeminent inflation plays amongst US sectors. Their sensitivity to US inflation expectations has been trending higher all year & they remain, by some margin, the biggest beneficiaries of reflation.
  • Consumer Staples are often touted as the most vulnerable to inflation. They are perceived as lacking pricing power, & hence higher costs equate to lower margins.
  • Staples want higher inflation, but sensitivity is the smallest of all sectors that are in macro regimes. Health Care, Consumer Discretionary & IT all show even less sensitivity but that probably reflects all have seen model confidence drop below our 65% threshold for a regime
Inflation1
The rotation trade that has dominated equity markets has been undergoing a consolidation for the last month. For many, this is a pause before the primary trend re-establishes itself. The second phase of the reflation trade could be more discerning than a simple growth versus value dynamic though.

Divergence between winners & losers could take a different shape. Pricing power is one variable that could be key. Which stocks have the ability to pass higher raw material costs onto the consumer in the form of higher prices?

Bottom-up analysis will provide one answer. It is worth overlaying that with the quantitative top down picture. The chart above shows the eleven GICS Level 1 US sectors & their sensitivity to US inflation expectations.

Should any of these relationships turn negative, we would have an empirical demonstration that rising inflation had flipped from being a tailwind to a headwind for that sector.
Adam Birkett 77Hmm5Tg N4 Unsplash
21.04.2021
Go Green
It has been announced that Chinese President Xi Jinping will attend the US Climate Summit that starts tomorrow, boosting hopes the two superpowers can cooperate on this issue while still disagreeing on many others.
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One vehicle for trading the climate theme is the Invesco Solar ETF. TAN is now one sigma (28%) cheap versus macro fair value on Qi’s model which has a strong (75%) confidence. That FVG has opened up because of a sharp divergence between a stable macro fair value (red line) & sharp fall in the spot price (blue line).
Tan
The model is dominated by two critical drivers. A desire for stronger global growth & ongoing Quantitative Easing from the Fed. In that sense, & in smart beta terms, it reflects elements of both a value play as well as growth. The growth to value rotation has driven some of the profit-taking that has hurt TAN of late, but Qi shows economic growth is a key positive macro driver.

For many, TAN captures two key contemporary themes – climate change, plus President Biden’s infrastructure plans which include a strong element of new environmental technology.

Given the secular shift to green tech, plus the potential cyclical kicker of the reflation trade being juiced by the American Jobs Plan (& assuming no offset from monetary policy), Qi's valuation makes TAN a potentially interesting vehicle.
Casey Horner Rmowqdcqn2E Unsplash
21.04.2021
Re-visiting Reflation:
XLI vs. XLU
This latest pullback in US equities has seen US Industrials move to 0.8 sigma (5.8% cheap) versus Utilities. That’s a one year low for the Qi Fair Value Gap.
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Wednesday
Model confidence is strong (80%) & the drivers are intuitive. Industrials outperform in a reflationary, Goldilocks environment – rising inflation & commodity prices, easy financial conditions (especially tight credit spreads) & low risk aversion (VIX).

At this FVG, XLI vs. XLU has discounted a decent amount of bad news. For those who believe this is simply a pause that refreshes the reflation trade, this provides an attractive entry level.

Indeed, since 2009 buying the XLI/XLU ratio at -0.8 sigma FVG (subject to the model being in a macro regime) has produced 20 trades, a hit rate of 85% & an average return of +2.1%.

The one caveat is that macro model value has also edged lower in the last few days. Watching that via the Historical Model Value chart on the Qi portal will help finesse execution levels. The ideal combination is cheap valuation plus macro model value turning higher.
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19.04.2021
Saboteur Looks to the Stars for Quant insight Rebrand
Monday 19 April 2021 - Brand studio Saboteur has unveiled a radical new rebrand for financial data company Quant Insight.

Quant Insight (Qi) is an innovative and unique provider of financial market analytics. Mathematical models from the science of astrophysics are used to decode the massive torrents of macro data that flood through the financial markets every minute of every day. It’s an inspired move – astrophysics is the art of finding patterns and connections in complex systems with billions of moving parts. So what happens if this science is applied to the financial markets?
It is, like all great ideas, brilliantly simple.
It’s a radical approach that demanded a radical new design.
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Mahmood Noorani , the founder and CEO, knew that he wanted something different. He wasn’t sure what it was, all he knew what that it had to be something that he hadn’t seen before.

And he isn’t afraid of new ideas. He was the one who approached Michael Hobson, Professor of Astrophyics at Cambridge and world-famous in his field, with the idea that they explore the financial markets together.
As a result, the "Look up™" brand was the strategic heart.


Mahmood Noorani, CEO, Quant Insight, said: “When astrophysics is applied to financial data, something extraordinary happens. You can see patterns where others often find confusion and you can make precise and accurate decisions instead of relying on ‘educated’ guesses.
"We needed a brand redesign that could capture and reflect the way we are pushing boundaries in the financial data world. Saboteur was able to see our vision and have translated our complex world into something eye-catching, brave and elegant. A brand redesign which is out of this world. It also brings clarity to a world which is overloaded and clouded with data."

Alex Clegg, The Dreaming Saboteur, said: “The financial sector is instinctively conservative. “Websites can look like they were designed in Excel – Quant Insight were clear from the beginning that they wanted their brand to be as different as the pioneering technology they’ve created.
“Elements float and drift in a seemingly random fashion. But, of course, there is pattern here. All you have to do is look up.”



About Quant insight
Quant insight provides global investors with unique insights and quantitative financial market analytics to help performance. Solutions are delivered through a range of products for easy implementation by investment managers, hedge funds, quant/systematic teams, portfolio managers and risk officers.


For further information, please contact:

Stephen Baldwin
sb@quant-insight.com
Qi Pr 20210412 4
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19.04.2021
What's happening with US bond yields?
Short covering. Japanese buying at the start of their new fiscal year. Safe haven demand. The usual guessing game to explain the sharp move lower in US Treasury yields is well underway.
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There is a surfeit of back-fitted narratives trying to align a story with price action. Instead Qi offers a 10y UST model that has a 95% degree of confidence & which currently shows yields as 0.5 sigma (16bp) low versus fair value. This latest move doesn’t look consistent with macro fundamentals.
Monday
Flows can dominate in the short term but the key macro drivers have strong explanatory power. Tight credit spreads & higher inflation expectations equate to higher yields & between them account for 30% of model confidence. Crude oil is, by some margin, the biggest single driver. Bond yields’ sensitivity to oil has risen sharply since early Feb.
Monday2
Less obvious is the negative relationship with global economic growth; a pattern which emerged over March & runs counter to conventional thinking. It could reflect bond yields as a measure of US fiscal policy. Bad economic news results in a bigger fiscal response, & hence higher bond yields. Viewed in that light, the recent strong run of US data has reduced the likelihood of further fiscal stimulus, & thereby reduced the upward pressure on US yields.

Fitting a narrative to explain price action is inherently a subjective process. The quantitative pattern may not be immediately intuitive but is transparent, updated in real time & often the ‘explanation’ arrives after the fact.
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15.04.2021
Copper - the pause that refreshes
After a huge rally over 2020, Copper has paused for breath over the last few months.

Critically though, macro fair value has not deteriorated. Model confidence remains high & tracking GDP growth for US, China, Europe & Japan remain the dominant drivers. Dr Copper retains its role as a bellwether for the global economic cycle.
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Thursday
From a macro perspective, that period of consolidation never saw a deterioration in fair value. Qi’s model value (red line) tracked sideways. The fall in spot price (white) took it to 0.5 sigma (6%) cheap to macro at the start of this month.

Now, after a bullish report from a US bulge bracket Investment Bank yesterday, spot is starting to rally once again.

Still, for believers in a copper super cycle, the metal still trades cheap to macro-warranted model value. 0.3 sigma is 3.4% below model.

Aside from green / EV dynamics, Dr Copper remains a global growth play. Global GDP growth accounts for nearly a third of model explanatory power. A model which has 90% confidence currently.
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14.04.2021
Qi & the FT
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The Qi work on the shifting macro regime for momentum as a smart beta strategy can be found here
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13.04.2021
A turn in Asian tech?
Asian exchange ChiNext was the first global technology instrument to fall out of a macro regime last year; moving ahead of similar regime shifts for US & European tech. It remained below our 65% threshold for the last 6 months but has now entered a new macro regime.

Model confidence is currently 71%, having risen 33% in the last 2 months.
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