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Macro Markets Insights
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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
16.01.2025
Qi MacroVantage
1. AAII Sentiment & SPY Qi FVG hit 1yr lows, allowing for risk respite
2. EURCAD - who benefits in any Trump relief rally?
3. Shift in factor leadership for the Euro
4. Long Materials for Offense & Long Staples for Defense
5. European Consumer Goods - efficient trade for tariff gradualism
See more
14.01.2025
Qi Macro Spotlight: Sensitivities ahead of the inauguration
Summary

• Ahead of Trump's inauguration & possible clues on the policy stance around tariffs, taxes, deregulation & immigration, what are the risks from a US sector perspective?
• Qi’s Macro Factor Equity Risk Model (MFERM) untangles the relationship between the daily returns of an asset and a suite of major macro factors. We show the heatmap of pressure points
• Evidently, market focus remains on FCIs to support the market multiple, not economic growth – our models highlight that "good news is still bad news"
• A risk off move that drags credit spreads wider would hurt Technology the most
• If the economic data is strong, Consumer Discretionary is the most vulnerable to "good news is bad news"
• Alternatively, if the net effect from Trump 2.0 is easier financial conditions & a bounce in risk appetite, then Real Estate appears to be the prime beneficiary
See more
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
08.01.2025
Qi MacroVantage
1. The bull vs. bear case for risk rests on whether FCIs bite
2. Value/Growth & bond yields – a regime shift
3. Small Caps – Similarly, the worrying indifference to credit spreads
4. HY credit - canary in the coalmine
5. Time to re-visit India
6. RBA rate cut? Short AUD is not the right trade
See more
08.01.2025
Qi Macro Spotlight: 2025 Macro Risk Observations
Summary

This note highlights some key risk observations from Qi’s Macro Factor Equity Risk Model: This model untangles the relationship between daily asset returns and macro factor returns, to identify factor exposures and, in turn, attribute returns and risk to macro.

Markets now believe the S&P500 is strong enough to withstand a strong dollar, positive real rates and continued Fed QT

A positive dollar / S&P 500 relationship will be an important barometer of confidence in America First

Small caps are still looking for Goldilocks – accommodative policy but alongside a strong nominal growth economy

The tables have turned in the macro drivers of Growth vs. Value – Growth is now less about the discount rate.

Value outperformance is more likely in a risk-off backdrop where confidence on US asset reflation (higher USD / higher stocks) is fading
See more
08.01.2025
Qi MacroSpotlight - 2024 Retrospective
Summary

2024 began where it left off – with momentum behind an immaculate disinflation narrative. Signs of complacency appeared by March when Qi’s model explanatory power dipped.

Into Q2, inflation uncertainty reared its head after 4 consecutive hot prints. The S&P500 saw a 5% pullback. Market commentators spoke of Fed policy error and the primary macro factor drags stemmed from tightening FCIs.



As we progressed through Q2, the “good news is bad news” mantra was cemented with market focus remaining on FCI easing. Factor sensitivity to higher GDP growth fell. The Mag 7 also took center stage.

Q3 saw the narrative flip from inflation to growth focus. Bad news was now seen as bad news following the weak Aug payrolls. The S&P500 saw a 9% pullback. Qi model R-squared jumped sharply in-line with the jump in factor vol. Sensitivity to forward growth expectations (5s30s) rose sharply.

Q4 gave more assurance to markets on the Fed policy reaction function with the Fed cuts starting, alongside rising Trump betting odds and good economic data. Higher rate cut expectations helped returns and macro explanatory power remained broadly steady.

We end the year with that narrative in question again – with the Fed acknowledging the potential risks to inflation vs. growth. Unnervingly, by the time of the last FOMC model risk aversion sensitivity reached YTD lows.

Equities traversed the rocky growth / inflation terrain in 2024 because the Goldilocks porridge was just about the right temperature. Looking ahead, the combo of lower risk premia and Trump’s policy uncertainty is a recipe for higher vol. The Fed will likely have to perform a more difficult balancing act.
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
19.12.2024
Qi MacroVantage
1. Current Volatility & looking out into 2025
2. Re-pricing the Fed
3. US Materials – an efficient China long
4. Bullish bonds? Gilts offer best value
See more
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
12.12.2024
Qi MacroVantage
1. The FX market is risk averse
2. The rates market is complacent
3 Bond vol complacency raising the ante for long duration equities
4. Momentum - buy the dip?
5. Chinese pivot? Equities, maybe. Bonds, not yet.
See more
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
05.12.2024
Qi MacroVantage
1. Red flag on Yen strength
2. R2K : Easy money over?
3. Long duration equity outperformance underplaying risks of inflation vol
4. Semiconductors remain the optimal AI play?
5. FTSE MIB vs DAX: A Europe play?
See more
21.11.2024
Qi MacroVantage
1. S&P500 12mth fwd PE in-line with Qi model
2. Trump tariffs hurt the Euro – but which cross?
3. Take profits in KRE outperformance
4. Time for respite in Value? -
Energy will struggle unless geopolitical risk premia rises further
5. Internationally, Nifty offering value should dollar strength wane
See more
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
11.11.2024
Qi MacroVantage
1. Playing the ball – US equities model momentum holding up
2. US cyclicals vs. defensive is not overdone
3. European equities < Qi model value but with trade uncertainty
4. Better risk-reward in long Bunds than USTs
5. China equities – Qi model value momentum waning
6. Nikkei 225 – beneficiary of higher USDJPY & USDCNH
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
16.01.2025
Qi MacroVantage
1. AAII Sentiment & SPY Qi FVG hit 1yr lows, allowing for risk respite
2. EURCAD - who benefits in any Trump relief rally?
3. Shift in factor leadership for the Euro
4. Long Materials for Offense & Long Staples for Defense
5. European Consumer Goods - efficient trade for tariff gradualism
See more
1. AAII Sentiment & SPY Qi FVG hit 1yr lows, allowing for risk respite

Markets continue to grapple on the question of the magnitude and breadth of tariffs. Arguably, the Dollar and long rates have already risen to partially price in uncertainty and a universal tariff scenario. Indeed, the AAII bulls less bears reading is now sitting at 1yr lows. And this is despite a string of consensus beating data. The implication is that a scenario of lighter / targeted / more gradual tariffs would garner the largest market reaction. Indeed, simply more clarity could alleviate some of the risk premia.
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The S&P500 FVG also reached close to 1yr lows this week, mirroring the AAII sentiment reading (see the chart below). We see here that as market confidence has fallen / risen so has the deviation of SPY spot to Qi model price fallen / risen. Ahead of Wednesday's CPI release, both measures reflected the inclination that the larger price move would be for risk respite vs. further risk pain. Clearly, when macro vol is high the uncertainty error as to whether the spot SPY price will converge back to the Qi model price is higher. That said, with positioning also light, the softer than expected CPI release and Scott Bessent's testimony today, there is still a window for long risky assets. The base case is surely that for both Trump & Bessent stockmarket confidence matters
2. EURCAD - who benefits in any Trump relief rally?

Any suggestion of targeted or gradual tariffs has the potential to spark a relief rally in a number of trades beaten up by the fears of a hard core “America First” approach. In FX, the Euro & Canadian Dollar are amongst those in the firing line. So which is best placed to possibly benefit?

While spot EURCAD has fallen around 1% in January, Qi model value has flat-lined. Real yield differentials have been a tailwind for macro-warranted model value, but wider European peripheral spreads have been an offsetting drag.
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The net result is the cross sits 1.5 sigma (1.5%) cheap to aggregate macro conditions. The health warning is 51% model confidence means we're not in an official macro regime on Qi.

Still, such gaps are rare. When including a 50% RSq constraint, it's only been seen 12x in the last 15years & back tests show a 75% hit rate. There's also been decent correlation between spot EURCAD & Qi's FVG - our way of testing whether any mean reversion happens the "right" way.
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3. Shift in factor leadership for the Euro

It’s not just EURCAD where Qi model value has seen European peripheral spreads play a role. In fact, three Euro majors have seen a significant shift in factor leadership.

Rate differentials are still the number 1 driver for EURUSD but peripheral spreads have become the second biggest factor in our model. In both EURJPY & EURCHF, sensitivity to EuroZone Sovereign Confidence has risen to become the dominant driver of model value.
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European peripheral spreads narrowed in the Trump rally but have started to leak wider once again. Events in France capture the dilemma. A compromise to pass a budget & avoid a no-confidence vote is clearly good for political stability. But the price it pays - watering down pension reform - means deficit concerns remain. Given the resurgence of bond vigilantes, fiscal laxity is a potential problem.

The solace is both EURUSD & EURJPY both screen as over one standard deviation cheap - a degree of bad news is priced in already. But FX investors need to keep an eye on European government bond spreads going forward - their reaction to domestic politics & Trump's policy agenda will have a major bearing on how the single currency trades in the near term.
4. Long Materials for Offense & Long Staples for Defense

Both US Materials & European Basic Resources trade > 1 sigma below Qi model value. Is the market too bearish on the scope for a potential trade deal between the US and China? The CSI 300 is flat in return terms over the last 3mths. In contrast, European and US Materials are ~7% lower over the same period. XME and EU Basic Resources have Qi FVGs of -1.89 sigma and -1.32 sigma, respectively. Below, we show the close relationship between the Qi FVG of EU Basic Resources and the spot price. Both are close to 1yr lows. The caveat is that the sector wants a stronger EURUSD and yields to top out. If treasuries are completing a bottoming process, so is likely this sector.
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Similarly, since 2009 we only see 10 events where Materials sub-sector Metals & Mining traded > 1.5 sigma below model value. Going long the sector at this juncture yielded a 60% trade win rate with an average holding period of 5-6 weeks.
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What’s the cheapest risk-off hedge according to Qi? Consumer Staples. In particular, the equal weighted ETF RSPS – one of the few sectors with a positive sensitivity to VIX. RSPS is now trading 1.65 sigma below Qi model value. See the chart below – the FVG is at 2yr lows.
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5. European Consumer Goods - efficient trade for tariff gradualism

What else could benefit from any relief rally on any more gradual approach to tariffs? EU consumer goods screen as one of the cheapest areas on Qi. GS's basket of European consumer stocks sits 1 sigma (2.8%) cheap to macro conditions.
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That’s towards the cheap end of recent Valuation Gap ranges. It also scores well on back tests (82% hit rate, +2.7% average return); & in terms of Qi FVG doing a good job of capturing local turning points.
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14.01.2025
Qi Macro Spotlight: Sensitivities ahead of the inauguration
Summary

• Ahead of Trump's inauguration & possible clues on the policy stance around tariffs, taxes, deregulation & immigration, what are the risks from a US sector perspective?
• Qi’s Macro Factor Equity Risk Model (MFERM) untangles the relationship between the daily returns of an asset and a suite of major macro factors. We show the heatmap of pressure points
• Evidently, market focus remains on FCIs to support the market multiple, not economic growth – our models highlight that "good news is still bad news"
• A risk off move that drags credit spreads wider would hurt Technology the most
• If the economic data is strong, Consumer Discretionary is the most vulnerable to "good news is bad news"
• Alternatively, if the net effect from Trump 2.0 is easier financial conditions & a bounce in risk appetite, then Real Estate appears to be the prime beneficiary
See more
Details:

Uncertainty ahead of Trump’s inauguration on the 20th will likely continue to weigh on stocks this week. Qi’s MFERM can help dissect the sector impacts from the impending macro volatility.

Below, we show the sensitivity across the 12 major macro factors in our model for the 11 major sector ETFs. Sensitivity represents the percentage change for a 1 daily standard deviation move higher in the factor e.g. for CDX HY that equates to 5.7bps. Our 12 macro factors can be aggregated into 3 major buckets – Financial conditions, growth expectations and risk aversion.

For each individual macro factor, we highlight the sectors most positive (green) / most negative (red) impacted by a 1std move higher in the factor.
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Some examples:

• Higher CDX HY spreads? XLK, XLY hurt most; XLP, XLU least
• Stronger Dollar? IYR, XLU hurt most; XLF, XLC least
• Higher real rates? IYR, XLU hurt most; XLK, XLY least

We stated earlier that a 1std daily move in CDX HY spreads was 5.7bps. Therefore, for a 100bps move wider credit spreads, Technology would fall 11.4% but Staples only ~0.6%, all else equal.

If we next aggregate the sensitivities into the 3 buckets cited above, we can start to draw some conclusions on potential impacts. See the tables below.
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With respect to economic growth expectations , 8 out of the 11 sectors have a negative sensitivity i.e. “good” news is still deemed as “bad” news – most negative for consumer discretionary. The focus remains on FCIs to support the market multiple not growth. Remember, we have CPI on Wednesday which will likely keep risk tentative. The 3 sectors with a positive relationship are Energy, Materials and Technology.

With respect to risk aversion , no surprise that the most vs. least exposed is a reflection of market beta. The sectors most hurt by a vol shock higher would be Technology, Consumer Discretionary and Financials. In a risk-off scenario, as we saw last Friday, the relative winners would be Staples, Utilities and Healthcare.

Now the presumption is that IF Trump is less onerous on tariffs (confirmation Xi will attend the inauguration would be a positive), financial conditions would ease (dollar, rates, credit spreads) but also risk aversion dissipate. Solely based on financial conditions, Real Estate / Homebuilders, Utilities, Consumer Discretionary, Materials would be relative winners. However, below we rank the sector on the combination of easier FCIs and lower risk aversion. Our analysis would see Real Estate, Consumer Discretionary, Technology as relative winners and Energy, Staples, Healthcare as relative laggards.
Picture3
With Real Estate seen as a top beneficiary of any easing in FCIs, it is worth highlighting that within the sector homebuilders (ITB) looks particularly oversold on Qi’s valuation models.
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
08.01.2025
Qi MacroVantage
1. The bull vs. bear case for risk rests on whether FCIs bite
2. Value/Growth & bond yields – a regime shift
3. Small Caps – Similarly, the worrying indifference to credit spreads
4. HY credit - canary in the coalmine
5. Time to re-visit India
6. RBA rate cut? Short AUD is not the right trade
See more
1. The bull vs. bear case for risk rests on whether FCIs bite

The bull case for risk is that positioning and sentiment have reset with the equity market weakness since the election. Alongside, Trump’s tariff agenda might be less disruptive than feared. This pessimism is reflected in Qi’s models through (1) macro explanatory power that has been fading over the last month given the regime uncertainty and (2) SPY reaching 0.75 sigma below Qi model price at the turn of the year – 1yr lows. Together with Qi’s models showing bonds in oversold territory, there is enough for some risk respite.

The bear case for risk is that “hope” is not a strategy – Trump volatility keeps sentiment on the backfoot. Alongside, financial conditions are entering restrictive territory. The 6.2pt surge in ISM Services Prices is hinting at untamed inflation. IF financial conditions are entering restrictive territory, then this week’s NFP data could prove important. Further, we may well be back to “good news is bad news”.

One barometer for the bull vs. bear case is to track the relationship of risky assets to the dollar, real rates and credit spreads. By the turn of the year, we reached a point where this relationship was reaching the top of its historical range i.e. FCIs were deemed a non-issue (under the pretext of US Exceptionalism) - a back drop where the S&P500 was deemed strong enough to withstand a strong US dollar, positive real rates and no concerns on the credit cycle. But of course, in this region the air is thinner…see the first chart.

More simply we would argue that given the success of Trump’s policy agenda will have a large bearing on the performance of US assets, it follows that the strength of a positive relationship between the dollar and S&P500 (i.e. both the Dollar AND Stocks move up) is a reflection of confidence in Trump’s domestic agenda / America First. If the tail risks e.g. inflation are not contained, FCIs will matter and we go back to a negative relationship - USD up / S&P500 down.
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2. Value/Growth & bond yields – a regime shif

The last 2 years have cemented the outperformance of Growth Stocks over Value Stocks. Indeed, the outperformance of Growth over Value continues a trend that has been in place since the start of the last decade through the biggest bull market of our generation!

However, a clear message of the last 2 years is that the fundamental drivers of Growth vs Value has changed:

The last decade norm was that Growth tended to be “hope” and so was much more sensitive to the discount rate on terminal value - current ROI prospects were poor. Now Growth shows prospects of much higher current ROI. The superior performance of Growth over the last 2yrs was largely in recognition of this far superior earnings profile, fueled by the secular AI narrative.

Contrast this with Value – across the forest of investment projects, the lower return ones are more likely to fall in the value camp – a lower ROI requires a lower cost of capital associated with a weaker Dollar / lower rates.

Qi’s models empirically concurs with this view. Over the last two years, for Value to outperform Growth, it was has wanted to see lower real rates and more recently a weaker Dollar. That’s a change from the norms of the past decade where higher real rates implied higher economic confidence allowing respite for Value while tighter FCIs hurt Growth. The tables have turned.

Indeed, Qi’s models send a further message. If we remain in a risk-on / strong $ backdrop, Growth will likely continue to outperform. After all, the S&P500 itself is now dominated by Growth stocks. A Value reversal is more likely in a risk-off backdrop where confidence on US asset reflation (higher USD / higher stocks) is fading.
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3. Small Caps – Similarly, the worrying indifference to credit spreads

Qi’s lens on the Russell 2000 warns of the risk between expectations and reality – R2K factor sensitivity to HY credit spreads has dissipated to almost zero on our model. Ordinarily, there is a large negative relationship i.e. higher spreads, weaker small caps. Back in the Spring, CDX HY spreads hit 312bps vs. 295bps today. Over the same period, the Russell 2000 has rallied 20%.

Now the narrowing of sensitivities to zero has occurred in the past BUT the difference today is that credit spreads are back at their multi-year tights. The below chart shows that sensitivity since 2011 (dark blue). Alongside I show the ratio of the R2K 12mth fwd earnings yield / UST bond yield (light blue) – the message is the same – a “yellow” signal the easy money is over and those earnings expectations better start ramping up soon!
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4. HY credit - canary in the coalmine

All that begs the question, what is the macro perspective on US credit? One interesting model is High Yield which now sits around 1 standard deviation rich versus Investment Grade. This is true looking at both HYG vs. LQD, and HYGH vs. LQDH - the equivalent ETFs that hedge interest rate exposure to provide a 'pure' credit play.

Over H2'24 macro momentum was trending higher, i.e. the macro environment supported HYG outperformance. That has stalled at the start of the new year - in effect the most recent HY outperformance is not justified by macro conditions.

To be clear, in outright terms US credit spreads do not screen as being rich or at risk. This is purely a relative value perspective. The fact that the signal is true for HYGH/LQDH though means it does not reflect IG’s longer maturity profile during this back-up in rates. It is another yellow flag – this time that the credit profile of US HY is, in macro terms, starting to look somewhat extended.
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5. Time to re-visit India

The shine has come off Indian equities of late. The NIFTY has fallen nearly 30% since its September high. The mainstream narrative is slower economic growth plus expensive valuations have hurt.

That sell-off has now gone too far according to Qi. While iShares MSCI India ETF INDA has continued to fall, Qi model value is showing tentative signs of stabilising.
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The model moved back into regime mid-November &, right now, macro explains 76% of the variance in INDA. The regime is Goldilocks with a heavy emphasis on easy money conditions & healthy risk appetite.

This FVG back-tests well historically.
Pic8
6. RBA rate cut? Short AUD is not the right trade

Soft Australian CPI data has re-kindled hopes of an RBA rate cut next month and, in turn, weighed on the Aussie Dollar this week. But Qi suggests a lot of that news is already priced into several AUD crosses. Both AUDUSD and AUDJPY are more than one standard deviation cheap to macro conditions.
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The interesting point is the macro profile. Aussie yields fell hard in November on soft inflation data and that dragged the Qi model value and spot FX lower. But Qi’s macro-warranted model value hasn’t fallen as much as people focused solely on the bond market would believe.

AUDUSD model value has already bounced; AUDJPY model value moved sideways in November rather than lower. Why? Because of the fall in VIX and risk aversion metrics was a positive for Aussie and that offset.

Rate differentials are always important for currencies, but they are not the only driver. Qi offers the wholistic macro picture. And, right now, both AUDUSD and AUDJPY screen as cheap even with yields falling and money markets moving to price in a 75% probability of an RBA rate cut on Feb 18th.

Aussie ASX 200 and iShares MSCI Australia (EWA) look more interesting on Qi – in line to slightly cheap to aggregate macro conditions.
08.01.2025
Qi Macro Spotlight: 2025 Macro Risk Observations
Summary

This note highlights some key risk observations from Qi’s Macro Factor Equity Risk Model: This model untangles the relationship between daily asset returns and macro factor returns, to identify factor exposures and, in turn, attribute returns and risk to macro.

Markets now believe the S&P500 is strong enough to withstand a strong dollar, positive real rates and continued Fed QT

A positive dollar / S&P 500 relationship will be an important barometer of confidence in America First

Small caps are still looking for Goldilocks – accommodative policy but alongside a strong nominal growth economy

The tables have turned in the macro drivers of Growth vs. Value – Growth is now less about the discount rate.

Value outperformance is more likely in a risk-off backdrop where confidence on US asset reflation (higher USD / higher stocks) is fading
See more
Where are we?

The great moderation is over -- the multi-decade period of goods deflation from China balanced by inflation in services (Education Healthcare, Real Estate) and managed by the FED with the power of the world’s reserve currency behind it, appears to have ended. This presents various challenges to the macro framework: i) a new dispensation in the US that is clear about reducing imports, encouraging domestic production and targeting high nominal GDP ii) a slowing China further focusing on export of advanced manufactures to drive growth – e.g. EVs iii) a troubled Europe with the centre (Germany / France) facing fundamental economic/demographic and political problems iv) a strong US$ and a 10y approaching 5% in a highly indebted world. Whatever your investment style, watching macro and understanding the new relationships between global macro and market securities is a MUST.
What are the critical macro factors to watch for equity markets?

Inflation – although moderating, PCE is still above FED target and will have a very significant impact on monetary policy. There is also significant prospective volatility => Trump import tariffs, CNY devaluation, AI productivity growth, Fiscal tightening

10y yield – above 4.5% with real yields at ~2%. As the key discount rate for the world, this has a major impact on US and global investment and economy

US$ – at historically strong levels (almost parity with EUR). Rate differentials, GDP growth and Trump’s economic/industrial policy will keep this an important factor to watch

Risk – as usual credit spreads and the VIX will be the quickest to respond to fear and have to be tightly monitored
Large Caps, Small Caps, Value & Growth – Some key macro relationships

S&P 500 <.strong>

Let’s look at the evolution of sensitivities to macro factors over the last five years that are key to watch going forward. It is interesting how this has evolved during the pre-Covid, Covid, Inflation worries and FED tightening concern periods. Although lingering concerns remain about inflation and the market wants it lower, overall, we seem to be coming out of the post Covid gyrations into a period where the SPX is strong enough to withstand a strong US dollar, positive real rates and continued FED QT.

Notice that the US dollar relationship on our models has turned positive for the first time in almost 3yrs. Why? Well the expectations are that a successful America First policy agenda can boost domestic growth and attract foreign investment, supporting US assets more broadly. It is also worth remembering that history shows US equity outperformance vs. RoW has more often than not been associated with Dollar strength (and vice versa).

Given the success of Trump’s policy agenda will have a large bearing on the performance of US assets, it follows that the strength of the positive relationship between the dollar and S&P500 (i.e. both the Dollar AND Stocks move up) may be seen as a barometer of confidence in Trump’s domestic agenda.
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Russell 2000

The Russell 2000 has had a major evolution over the last few months. It now wants sharply lower real rates, the Fed to revert to QE but is comfortable with fewer Fed rate cuts (presumably reflecting a strong underlying economy).

The clear picture is that the R2K wants an accommodative monetary policy but with a strong nominal growth economy. If Trump succeeds in his NGDP targeting as a way to grow out of the US’s debt/deficit problems then this would be positive for the Russell.
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Growth & Value

Let us look deeper into the two key Styles that are the focus for many investors – Growth and Value. For most of the last 5 years we have seen the sensitivity of Growth to 10y real rates be more negative than the sensitivity of Value to real rates, i.e. Growth has been keener on lower real rates. Now that has changed, it is Value that is asking for greater accommodation (below) while Growth is actually positively sensitive to real rates.

The last 2 years have cemented the outperformance of Growth Stocks over Value Stocks. Indeed, the outperformance of Growth over Value continues a trend that has been in place since the start of the last decade through the biggest bull market of our generation!However, a clear message of the last 2 years is that the fundamental drivers of Growth vs Value have changed.


The last decade norm was that Growth tended to be “hope” and so was much more sensitive to the discount rate on terminal
value as current ROI prospects were poor. Now Growth shows prospects of much higher current ROI. The superior performance of Growth over the last 2yrs was largely in recognition of this far superior earnings profile, fueled by the secular AI narrative.

Contrast this with Value – across the forest of investment projects, the lower return ones are more likely to fall in the value camp – a lower ROI requires a lower cost of capital associated with a weaker Dollar / lower rates.
P7
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
19.12.2024
Qi MacroVantage
1. Current Volatility & looking out into 2025
2. Re-pricing the Fed
3. US Materials – an efficient China long
4. Bullish bonds? Gilts offer best value
See more
1. Current Volatility & looking out into 2025

What happened : The FED was distinctly more hawkish on inflation and more cautious on easing policy. The dot plot was significantly higher. At the same time, we saw the defeat of the bipartisan deal to avoid a government shutdown in the face of criticism from Trump and his allies

Market concerns : The sharp response from the market is an expression of concern that the FED may not be there to save the market in the face of arguably the most volatile potential fiscal policy outlook since Reagan

Multiple sources of volatility : The market will now have to contend with monetary, fiscal, trade/currency and industrial policy volatility going forward. A heady mix which requires a close eye on macro going into 2025 -- GDP, US$ and 10y/Term Premia, to mention but a few factors

So, what is Qi saying? What are the key messages coming from Qi:

Model confidence has dropped even on a short-term basis indicating a macro regime change is coming …
Spy
A large part of the market had become too complacent about Financial Conditions…a chart from two weeks ago…
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The chart shows how the Russell 2000 had virtually stopped worrying about credit spreads and at how far the equity risk premium for the index had dropped. A clear and complacent setup for the near uninterrupted drop over the last half month.

We know the market has bifurcated significantly over the last few years. Supernormal profits and ROIs at secular growth tech stocks have driven incredible stock returns driven principally by EPS growth though PEs are now also high on a historical range (below).

These have been concentrated in the Mag7 though we see a few new stocks enter the group (eg Broadcom recently). The size of this super group has interrupted and changed the normal “investment clock” for the major indices. However, as the move in the Russell 2000 illustrates, large parts of the market are still vulnerable to financial conditions.
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2. Re-pricing the Fed

So, the gunshot reaction is the Fed is no longer the market's friend. Is there any good news from last night's policy announcements? The one possible solace is that a fair degree of the re-pricing has already happened. The chart shows Qi's Fed rate expectations factor in z-score terms. We use the 1y1y forward - spot 1y spread in SOFR swap yields to capture the markets best guess on where policy rates will be 12-24 months’ time.
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A move higher in this instance captures a hawkish shift in policy expectations - as the number of cuts has been reduced (i.e. the terminal rate has moved higher), this spread steepens. It is now nearly 2.5 standard deviations above trend which is towards the top end of ranges in terms of historical moves.

For context, it was at trend as recently as mid-September. This has been an aggressive move. There are historical precedents for bigger factor shifts, but they are comparatively rare. Finally, we would observe that the Fed Funds Target Rate and 2y UST yields have now converged. A crude proxy for the market expecting a neutral Fed in the near term.
3. US Materials – an efficient China long

The latest China bounce has followed the same path as September’s with the initial excitement about a policy pivot petering out. Anecdotal evidence suggests there’s been another wave of client deleveraging, this time with US Materials in particular experiencing heavy selling.

For those who think positioning in all Chinese plays is now heavily skewed short and a lot of bad news is in the price, note the US Materials ETF XHB sits 1.2 sigma (7.8%) cheap on Qi.
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In the last few months Qi's Fair Value Gap has done a good job of capturing turning points. This could be an efficient entry level for contrarians with a more constructive outlook for China & the industrial cycle.
4. Bullish bonds? Gilts offer best value

This week has seen UK wage data and inflation pick-up; a combination that has the market believing the Bank of England will be restricted to just two or three rate cuts next year. Today's MPC meeting may offer more guidance but, thus far, the market has voted with its feet hitting gilts hard.

Qi model value has been pushed higher (now 4.29% versus 4.17% at the start of the week), but the market has moved even further. 10y gilt yields are now 1.2 sigma (22bp) above macro-warranted fair value.
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Strong correlation between spot yields & Qi's Fair Value Gap suggests the recent pattern has seen the "right" kind of mean reversion, i.e. for gilts to mark-to-macro rather than the other way around.
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This Macrobond chart shows just how big an outlier gilts are amongst G7 government bond markets. Most of its peers sit in the middle of recent Valuation Gap ranges. US Treasuries are modestly cheap but it is the UK that offers yield to any bond bulls.
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
12.12.2024
Qi MacroVantage
1. The FX market is risk averse
2. The rates market is complacent
3 Bond vol complacency raising the ante for long duration equities
4. Momentum - buy the dip?
5. Chinese pivot? Equities, maybe. Bonds, not yet.
See more
1. The FX market is risk averse

Last week we flagged how several Yen crosses were too low and risk-reward favoured a bounce in AUDJPY, NZDJPY and EURJPY. All three have bounced but remain cheap on Qi. This week the machine has turned bearish on the world's other safe haven currency, the Swiss Franc.
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Swissy is uniformly rich to its G7 peers on Qi's models. And it's not just today's SNB decision. The SNB's aggressive 50bp rate cut helps; as does the sharp revision in their 2025 inflation forecast (from +0.6% to +0.3%). But Qi was saying the Swiss Franc was already rich to interest rate differentials even before today.

The other factor driving several CHF crosses are commodities. Copper & WTI are the top positive drivers for the three biggest FVGs (AUDCF, NZDCHF & EURCHF) so the uptick after the Chinese policy announcement have pushed Qi model value higher.
In terms of back-tests, AUDCHF has been the strongest signal - it's been in regime and this cheap to model 18x since 2009. The hit rate is 61% with a +0.7% average return. The correlation between spot and Qi FVG is strong too suggesting our Fair Value Gaps have done a good job of marking local highs and lows.

If the FX market can catch some of the equity's market "risk on" vibe, there's more downside for the Yen & Swiss Franc from here.
2. The rates market is complacent

The gunshot reaction to last month's US election was that a Trump Presidency would be inflationary and therefore bond negative. A month later the script has flipped. Bonds have rallied on a new narrative - that growth could suffer if tariffs spark a global trade war, or DOGE takes an axe to things.

Treasury yields have fallen, positioning has moved from short to long and bond volatility has collapsed. The MOVE index got close to the 2024 lows at 82.5. A break below that level hasn't been seen since early 2022, i.e. the start of the Fed's hiking cycle.

Qi uses USD swaption volatility as a proxy for the size of the Fed's balance sheet, but investors can view it as a broader liquidity measure guiding risk on / risk off sentiment. Which means the chart below showing the history of this factor in z-score terms offers a potential warning.

US rate vol is now 1.5 standard deviations below trend. It rarely spends time below -2 sigma. An early sign that interest rate volatility is falling into dangerously complacent territory.
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3. Bond vol complacency raising the ante for long duration equities

We stated in our MacroHub publication this week that macro vol is currently not deemed to be a concern into year end. CDX HY credit spreads have tightened further, VIX is hitting a 13-handle and equity rate vol as measured by the MOVE index is close to its 2024 lows.

Yield curves across DM are back in positive territory i.e. term premium is making a comeback. Hence, the Central Banks will need to proceed carefully to mitigate the risks inflation expectations become unanchored.
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We highlighted last week that the relative performance of longer duration stocks (biotech / non-profitable tech etc.) vs. shorter duration stocks (e.g. oil drillers with visibility on near term cashflows) would be a good barometer to judge the market sentiment to rates. That basket pair has started to underperform this week i.e. nerves are rising. It is becoming more noticeable that SPY has rallied < 1% over the month.

Another expression we think is undervalued relative to the risk of higher volatility ahead is mega cap tech over their non-profitable tech counterparts (pair at -1.75 sigma on Qi FVG). The latter faces much greater duration risk.
4. Momentum - buy the dip?

Since the election, the most popular HF longs have sharply underperformed the most popular shorts. In similar vein, the momentum style is seeing sharp underperformance. This follows a strong performance in 2024 for this style factor. Seasonally, selling pressure on the winners after a strong year is to be expected. The momentum winners are tech-heavy.

Now last week small caps were the bigger underperformers in US equities – our suspicion is that HFs who might have had to cover shorts on small caps post the election are probably done and are looking to buy back into tech winners alongside year-end de-grossing into year end. YTD, the GS most short rolling basket has rallied 26%!

As with the momentum style, the GS VIP basket is trading at a notable valuation discount to the GS most short basket on Qi. The current narrative is maybe not so much about Nvidia as it is about the likes of now Zuckerberg and Bezos also seeking to work with Trump to shape deregulation. Within Tech, the SOXX remains the industry trading at the largest discount to macro warranted fair value (-1.65 sigma).

Buying Momentum when the spot price has dipped 1.6 sigma below the Qi model price (as seen today), has proven to deliver positive returns two-thirds of the time, out of a sample of 15 trade events since 2009. See the two charts below.
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5. Chinese pivot? Equities, maybe. Bonds, not yet.

Here we go again. Beijing has made positive noises about a meaningful shift in policy to support the domestic economy. As in September, the key now is implementation risk - having made positive noises, will we now see practical steps to turn rhetoric into action?

On Qi there are mixed messages. Macro-warranted model value for Chinese equities (FXI) lagged the September rally but led the subsequent correction. Model value is showing tentative signs of stabilising (and maybe bouncing) but there isn't an unambiguous turn higher in macro momentum just yet.
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And, in the meantime, this week's rally has overshot. Model confidence has fallen below our 65% threshold which precludes a bearish signal even if we hit 1 sigma rich (currently 0.9 std dev). This too needs watching as it could possibly indicate a regime shift is unfolding.

But potentially of more significance is the behaviour of the Chinese bond market. Qi’s Short Term model value is doing a better job of explaining price action right now and it continues to fall. In fact, macro momentum is accelerating lower.

The only solace is that the market has front run this move suggesting yields have moved to price in a fair degree of the bad news already. But this is not an encouraging picture from a macro perspective – it suggests there is little sign from the bond market that the outlook for Chinese economic growth is improving.
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6. Oil Stocks vs. Consumer discretionary in the US

US Oil stocks look cheap versus consumer discretionary stocks on the Qi model

The RV (using S5 indices) is trading 1.8sigma cheap in favour of oil stocks -- close to a 5-year high. Momentum is also stretched
We are at the 98th percentile in terms of valuation gap for the year and the there is a 75% correlation between the Qi fair value gap and the price of the RV, so our model has been a decent predictor over the last year

The XLY Consumer ETF has had quite the run since the summer, going from 2sigma cheap to 3.4sigma rich to the SPY -- also a 5-year high

If the recent monetary/Fx moves from China are an indicator/precursor of global easing then there may be a case for oil and commodities over consumption. The key drivers to make oil stocks outperform are stronger EU confidence and easier global financial conditions
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
05.12.2024
Qi MacroVantage
1. Red flag on Yen strength
2. R2K : Easy money over?
3. Long duration equity outperformance underplaying risks of inflation vol
4. Semiconductors remain the optimal AI play?
5. FTSE MIB vs DAX: A Europe play?
See more
1. Red flag on Yen strength

The bond market has moved to price in a good chance of a BoJ rate hike on December 19th. But, on Qi, the Yen has overshot versus overall macro conditions including the recent move in interest rate differentials.

The Yen screens as rich versus every one of its G7 peers on Qi. There are four models which are in regime (model confidence > 65%) and where the Fair Value Gap is greater than 1 sigma. USDJPY, EURJPY, AUDJPY and CADJPY all suggest the risk-reward favours a Yen retracement.
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The profile is the same in each case. Macro-warranted model value is rising, spot has been falling & Qi has a bullish divergence pattern. EURJPY shows the pattern which is consistent for each cross.

It also shows the 1y correlation between spot price and Qi's FVG is decent. That suggests this low in the FVG could mark a local low in spot EURJPY.
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Back-testing the historical efficacy of these signals shows USDJPY here is in "coin toss" territory so it's not the optimal trade expression for tactical Yen bears. But EURJPY (71% hit rate, +1.7% average return), AUDJPY (71%, +1.6%) & CADJPY (69%, +0.9%) all suggest there's decent upside to play for here.

Finally we note the Nikkei 225 was 1 sigma cheap to macro conditions at the start of the week. The FVG has subsequently narrowed but it remains below model value and the Yen features as a negative driver, i.e. a weaker Yen would provide another tailwind for Nikkei upside.
2. R2K sensitivity to HY credit spreads has dropped to zero – the easy money is over

“Long until inauguration day” and “Don’t fight the seasonals” have become common parlance in the financial media. Since the election, the highest short interest stocks have rallied almost twice as hard as the most popular VIP longs as the market jumps to the laggards vs. the mega cap techs of the universe.

The make-up of returns YTD across the major US indices reveals striking differences – 76% of the Mag 7’s 57% return ytd stems from higher earnings growth expectations; contrast that with the Russell 2000 where only 9% of the 20% return ytd stems from rising 12mth fwd EPS – 91% of the return has come from PE expansion.

The point is that easy money on Trump trades have made and are much more priced for higher nominal growth expectations vs. the 2016 setup. We should not be expecting the low vol environment of ~10 VIX in 2017 to repeat. In particular, the debate around a higher neutral rate will continue. The tails have become fatter.

Qi’s lens on the Russell 2000 warns of the risk between expectations and reality – R2K factor sensitivity to HY credit spreads has dissipated to almost zero on our model. Ordinarily, there is a large negative relationship i.e. higher spreads, weaker small caps. Back in the Spring, CDX HY spreads hit 312bps vs. 295bps today. Over the same period, the Russell 2000 has rallied 20%.

The narrowing of sensitivities to zero has occurred in the past BUT the difference today is that credit spreads are back at their multi-year tights. The below chart shows that sensitivity since 2011 (dark blue). Alongside I show the ratio of the R2K 12mth fwd earnings yield / UST bond yield (light blue) – the message is the same – a “yellow” signal the easy money is over and those earnings expectations better start ramping up soon.
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3. Long duration vs. short duration vulnerable, underplaying the risks of higher inflation vol

In the immediate aftermath of Trump’s win, the domestic agenda of deregulation, tax cuts and tariffs was deemed as stoking inflation. In recent weeks, that narrative shifted to the growth risks from DOGE cost cutting, trade wars and a potentially fading Citi economic surprise index.

That said, we should expect inflation volatility to remain elevated compared to the post GFC decade - a backdrop of stalling globalisation and heightened supply risks which are likely reinforced by Trump's policy proposals.

Given high equity valuation levels there could be an asymmetry developing - going forward there will be less of an equity tailwind from lower rates / further policy easing, whereas higher rates have the potential to deliver greater pain
So clearly, the growth / inflation mix needs to be just right otherwise bond term premia will continue to move higher. In turn, this would keep equity / bond correlations elevated i.e. higher bonds -->> lower discount rate -->> higher stocks.

The relative performance of longer duration (e.g. non-profitable tech / biotech growth etc.) vs. shorter duration stocks (e.g. oil drillers dependent on near term cashflows) will likely be a good tactical barometer to judge the reaction function to rates. The former cohort would be more vulnerable to higher rates.

In the election aftermath, long duration stocks have seen significant outperformance i.e. current market sentiment underplays the risks from higher inflation vol. Qi’s macro relational model suggests the GS basket of long duration vs. short duration stocks as sitting 2.4 sigma (~5%) above Qi model value. That valuation gap is close to the highs of the last 5yrs. Further, its high correlation to the spot price of this basket pair suggests it is offering a good mean reversion signal. The pendulum on the inflation vol debate tactically seems to have shifted too far one way…
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4. Semiconductors remain the optimal AI play?

The Trump rotation theme has favoured small caps and value plays, but also coincided with a debate around the next leg of the AI trade. One theory is that semiconductors pass the baton to software stocks as the next beneficiary.

Relative to macro conditions, that thinking may have moved too far in the near term. Qi shows semiconductors are cheap outright, relative to the software sector and relative to the broader market.
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SOXX screens as as 1 sigma (6.4%) cheap to aggregate macro conditions. The RV of SOXX vs. IGV sits 1.1 sigma (8.5%) below Qi’s macro-warranted model value. While the SOXX / SPY model is 1.3 sigma (10.6%) cheap to macro – chart above.

Since 2009, this FVG has only been seen on twelve occasions when the model is in regime. Using this as a +SOXX-SPY entry level produces a 92% hit rate and an average return of 3.04%. Time for semiconductors to reassert their dominance?
5. FTSE MIB vs DAX: A Europe play?

Despite all the concerns about Germany (China auto competition, energy problems), the DAX continues on its merry way making highs driven by expectations of global reflationary GDP growth and easier financial conditions. The MIB on the other hand is flatlining but is driven essentially by the same factors with one exception, the MIB wants the EURUSD to stop dropping and this sensitivity is at a high just as the EUR is close to its lows.

Looking at the RV cross MIB vs DAX we see the following:

• Solid model confidence of 78% -- the RV is being driven by macro
• A valuation gap of ~1.6sigma or 4%+ cheap to model
• Model momentum heading towards multi-year lows and should be watched
• Key drivers being EURUSD stabilisation / reversal, European confidence improving and easier financial conditions

If the EU authorities and the ECB are going to tackle the problems of the European economy with industrial and monetary policies, then this may be an interesting cross with less risk than outright plays.
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21.11.2024
Qi MacroVantage
1. S&P500 12mth fwd PE in-line with Qi model
2. Trump tariffs hurt the Euro – but which cross?
3. Take profits in KRE outperformance
4. Time for respite in Value? -
Energy will struggle unless geopolitical risk premia rises further
5. Internationally, Nifty offering value should dollar strength wane
See more
1. Qi’s macro model value for SPX 12mth fwd PE in-line with spot – Rates deemed a non-issue in Trump World

The initial reaction to Trump’s win is now becoming more complex – higher rates, higher inflation expectations and stronger dollar vs. higher expectations of a US corporate friendly backdrop of de-regulation, tax cuts and America first. The price for higher valuations is a fatter downside tail if the nominal growth narrative can not be sustained.

However, Qi suggests the 12mth fwd PE today is warranted by macro. The below chart show the S&P500 12mth fwd PE through the lens of Qi’s macro-relational model. The rise in model value to ~22x 12mth fwd PE has reflected the compression in vol and credit spreads alongside a positive sensitivity to inflation expectations. Meanwhile, sensitivity to real rates remains small – there is less worry about rates. These observations highlight that markets are giving Trump the benefit of the doubt. The baseline is that markets can take advantage of positive seasonals into year end.

Big picture, as long as the rate market does not break down (and we note that the 5y5y USD forward inflation swap is back to where it was pre-election), equities will try to stick to the script into year end. Lending credence to this view is that Qi’s model momentum for the UST 10yr yield is waning, with a ST / LT model value now of between 4.3%-4.4%.
2024 11 21 11 17 06
2. Trump tariffs hurt the Euro – but which cross?
The chart below shows Qi’s long term models for EUR FX developed market crosses – the Fair Value Gap plus each pair’s sensitivity to interest rate differentials.
2024 11 21 11 19 36
EURUSD is the standout. It has the biggest Fair Value Gap sitting 1.7 sigma or 2.4% cheap to aggregate macro conditions.
And it is also the most sensitive cross to interest rate differentials – current patterns show, all else equal, a one standard deviation shift lower in European yields across the curve (relative to US yields), drags EURUSD 0.7% lower.
This suggests a lot of the relative dovishness of the ECB (higher-for-longer from the Fed) is priced into EURUSD at these levels. Back-tests over the last 15yrs aren’t great but, over the last year, the correlation between spot EURUSD & Qi’s FVG is 84%.
That suggests the mean reversion more recently has happened via the fx market correcting back to Qi model value. At a minimum, even with significant headwinds over the medium to long term, these aren’t great entry levels for EUR downside bets.
2024 11 21 11 24 27
3. Take Profits in KRE Outperformance
In the election aftermath, Financials have been among the best performing sectors – a thesis based on a combination of a steeper yield curve, financial de-regulation and M&A tailwinds. Screening Qi across the US sector universe, the RV pair of KRE vs. SPY is a stand out at +1 sigma (+5.5%) rich to Qi model value. As can be seen in the chart below, the Qi fair value gap exhibits a good correlation to spot price – on the last few occasions where the value gap exceeded 1 sigma, it was an opportune time to take profits.

As cited, KRE outperformance would like to see a steeper 5s30s, and stronger Dollar. However, as highlighted in this note Dollar strength may see some respite - EURUSD is cheap to model, USDCNH is rich to model and model price momentum for USDJPY has been waning. Meanwhile10yr UST yields average a short term / long term model value of ~4.4% - model value momentum seems to have stalled here also (reflecting drift lower in inflation expectations / drift wider in credit spreads).
2024 11 21 11 28 30
4. Time for respite in Value? Energy will struggle unless geopolitical risk premia rises further
Value has outperformed the broader market through this month. Commentators have highlighted that history suggests Republican wins are associated with Value outperformance. Indeed, Financials and Energy have been among the strongest performing sectors post the election.

Scanning Qi’s models across the risk premia landscape, Value is the standout. RPV (Invesco S&P500 Pure Value ETF) vs. RSP (Invesco S&P500 Equity Weight ETF) is +0.9 sigma rich to Qi model value on both ST and LT models.
The below chart shows the strong relationship between the Qi FVG and spot price of this pair. The current level would advocate curtailing a bias to Value. The last few occasions the FVG hit > 1 sigma, it was a time to be fading the styles relative to the broader market.
2024 11 21 11 31 05
Note the size of divergence between Energy stocks and oil is unusual – see the first chart below. If there is little reason to think that oil will rally to close the gap, Energy will likely find it tough going. The sector is the most rich on Qi’s US sector models, on both ST and LT time horizons. See the second chart below.
2024 11 21 11 33 382024 11 21 11 35 31
5. Internationally, Nifty offering value should dollar strength wane
The Nifty 50 Index has seen a 10% correction from its September highs and currently hovering around its 200d MA. Qi’s long term model, where macro explanatory power has been rising over the last month, shows the index now ~4% cheap to Qi model value – in sigma terms -0.8 sigma. Qi model value over the last week is shown tentative signs of stabilisation.

Among the largest upside drivers for the Nifty through Qi’s lens are lower US inflation expectations and a weaker trade-weighted dollar. Indeed, scanning the major indices, internationally it is one of the bigger beneficiaries if dollar strength was to wane. See the first chart below.
2024 11 21 11 38 18
Running backtest to see the efficacy of going long at the current FVG reveals a 60% trade win ratio. The caveat is that dollar strength must wane.
2024 11 21 11 41 12
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