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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.

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18.04.2024

Qi MacroVantage

MacroVantage scans all asset classes globally, looking for timely observations from Qi's AI driven framework.

Where an asset price has become divorced from macro fundamentals and offers a potential trade opportunity; where factor leadership may be changing or regimes shifting; employing Qi factor sensitivities to run scenario analysis on critical themes.

Topical, timely, machine-driven signals and observations.

17.04.2024

Qi Market Spotlight: Attributing this pullback - is macro back?

Qi equity model momentum has stalled across markets – SPX in particular has definitively rolled over with non-US indices also following suit.

The bounce from the October 2023 lows was initially driven by macro but YTD 2024 has been prinicipally a fundamentals/idio story with macro sensitivities at low levels, as we have reported.

However, this has begun to change in the last two weeks with the risk attributable to macro heading upwards from multi-year lows. The concerns around macro have been exacerbated by the continuing uptrend in US inflation and geopolitical events stoking oil price worries.

The key Qi macro factors leading this re-emergence of macro are risk aversion, credit spreads and the USD.

A lot of money has been made this year in risk assets – US equity L/S YTD in the US is up in the high single digits but it might be time to be more circumspect on positioning as the macro impact on markets increases.

11.04.2024

Qi MacroVantage

04.04.2024

Qi MacroVantage

03.04.2024

Qi Market Spotlight: Gold is talking...What's it Saying?

Gold is pushing $2300 after Easter

There has been much commentary on the breakdown in the traditional relationships between Gold and Real Rates and the US Dollar

The significance of the Gold moves of the last couple of years is interpreted variously as a market verdict on the US debt/deficit, the credibility of the FED, US Fiscal Dominance and the general geopolitical environment driving decoupling

So what does Qi show as the key macro drivers around this…?
1. Qi confirms a significant lowering of Gold sensitivity to US$ real rates relative to the last 10yrs - particularly the “spiky” behaviour
2. Similarly, the US$ seems to have lost some of its signalling power over Gold recently

Qi shows that Gold does appear to be signalling concern in the US’s ability to run at this level of debt/deficits AND be the world’s reserve/trade cussrency AND have US$ real rates at 1.5-2%

With the traditional drivers of real yields and the dollar doing a poor job explaining Gold, the real answer may well be that real assets are a safer bet than US government debt. The diminishing sensitivity to real yields is particularly evident post Covid

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28.03.2024

Qi MacroVantage

26.03.2024

Qi Scenario Spotlight: What if this is a Fed Error?

The debate has intensified on whether the Fed is making policy error. They are backing themselves into a corner. Is there a risk of disinflation now stalling?

Currently, there is a strong positive correlation between the dollar and inflation expectations. Warning signs would be flashing if we see this correlation sharply fall i.e. inflation expectations breaking out of their range alongside a weaker dollar.

We show the equity winners and losers from a scenario of higher inflation expectations and higher rate vol. Commodity-sensitive equities outperform – Energy, Materials, GDX. Financials, Real Estate, Technology underperform.

Qi’s signals on the three largest weights in the trade-weighted dollar suggest the risk-reward on the dollar is shifting with USD now looking expensive. The key driver is policy rate differentials => a major policy change/error would shift the low volatilty of the USD Fx crosses.

Qi's modern platform offers objective, quantified macro-on-market relationships that allow our clients to make purely evidence-based decisions.

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22.03.2024

MacroVantage

17.03.2024

Qi Market Pulse – Choppy Seas Ahead

Goldilocks is being questioned – strong employment & inflation data

Sentiment is at optimistic extremes – AAII bulls - bears

Monetary Policy Risk – both FOMC and BOJ are meeting this week, more hawkishness?

Qi flagging some defensive warnings – we have been pointing out how both VIX and SPX are moving upwards which can be a sign of volatility ahead

14.03.2024

Qi MacroVantage

MacroVantage scans all asset classes globally, looking for timely observations from Qi's AI-driven framework.

Where an asset price has become divorced from macro fundamentals and offers a potential trade opportunity; where factor leadership may be changing or regimes shifting; employing Qi factor sensitivities to run scenario analysis on critical themes.

Topical, timely, machine-driven signals and observations.

# 1 European equities - momentum waning?

Looking under the hood of European equity markets we note that Autos are 1.8 sigma rich to Utilities. This RV pair has been a reasonable barometer of risky asset sentiment.

Auto's outperformed in the 2020/21 post Covid rally, and again over the last few months since the Fed's policy pivot. A higher SXAP / SX6P ratio moved in lockstep with rallying Euro Stoxx 600. Until the end of last month.

18.04.2024

Qi MacroVantage

1. Attributing the pullback to macro – financial conditions and risk aversion are front & centre

The S&P500 index has fallen x.x% from its local peak on 28th March. Qi's macro return attribution model is able to reveal the macro components of the drawdown thus far - important for any risk manager to understand as cross-asset vol rises, alongside any traditional style / industry exposure analysis.

Through a macro lens, the largest drags have come from risk aversion and financial conditions. Risk aversion is proxied by VIX; while the primary drag within financial conditions comes from wider HY credit spreads, dollar strength and higher Fed QT expectations (i.e. rate vol). The pullback thus far has NOT been about growth concerns - indeed, in aggregate the component of returns from our growth expectations bucket has been positive. Specific returns are the residual of returns that cannot be explained by macro - this component is also positive. In other words.

2. The S&P500 Macro Beta Impulse is also starting to rise led by sensitivity to real yields and the dollar

Had apathy grown about the ability of equities to rally regardless of the news?

We have said in several recent reports that risky asset vulnerability would be reflected in
1) Falling model price momentum and
2) A rising macro beta impulse. Both of those boxes are now ticked.

Further, we are seeing signs that financial conditions are starting to matter – it is not merely about the growth outlook.

We had previously commentated that in Q1 the S&P500 sensitivity to real yields almost turned positive – a reflationary mindset.
That is now changing into Q2 where we see the sensitivity to real yields turning more negative – a sign of market nervousness.

3. All eyes on Janet Yellen

Her "serious concerns" comment effectively gives the Japanese a green light to intervene in USDJPY. She is also in charge of the Quarterly Refunding Announcement due in 2 weeks time.

Aside from earnings season, these are arguably the two most important bits of event risk facing markets today. The preferred scenario for risky asset bulls is:
1.) MoF intervention - it has marked the top in the Dollar & US yields on the previous two occasions they've stepped in
2.) a repeat of November's QRA that skewed US debt issuance from bonds to bills &, alongside the Fed pivot, was the catalyst for the "everything rally" over the last 5 months.

If that transpires, FX players will be back seeking strategies that work in a low vol, high carry environment. On Qi, USDMXN looks the most interesting for believers in a Dollar reversal.

It's been 0.8 sigma (1.9%) rich to macro & in regime just 8x since 2009. Back-testing that FVG as a sell signal elicits a 63% hit rate & +1.5% average return. Over the last year Qi's FVG & spot price have posted a strong correlation suggesting there's good risk-reward on the current gap closing the 'right' way.

4. SANOFI – Cheap with Interesting Macro Exposure Characteristics for Portfolio Construction

• Sanofi is cheap to the Qi macro warranted model price by 1.2 standard deviations or 8.4%
• This is close to the cheapest it’s been in the last year on macro model valuation while macro has been significant in terms of explanatory power of share price
• The drivers are also interesting for portfolio construction purposes as they are fairly opposite to the SXXP index, Sanofi wants

1. Higher inflation
2. Higher real rates/credit spreads
3. Lower GDP and a flatter curve

• Stock was hit in Q4 last year owing to concerns about further R&D spend and Q124 earnings are out next week

5. Market breadth stifled - US Technology model momentum now waning, led by the more speculative end i.e. ARKK

In a sticky inflation world, the improvement in S&P500 breadth is now stifled and folk will try to hide in quality, mega cap tech over small caps and bond proxies. However, this isn’t really a great recipe for a risk-on market. For breadth, we need speculative areas to outperform. See the first chart.

We track Qi model price momentum across all securities. Zooming in on our universe of 179 equity ETFs, we note that only 25% of this subset have seen their macro warranted model value rise over the last 4wks. See the second chart below. Digging further into where macro momentum has been weakest, we see the more speculative end of Technology as the biggest laggards e.g. ARK Innovation, Biotech, ARK Next Generation Internet, Global Autonomous and Electric Vehicles etc. Indeed, these pockets are the most sensitive to financial conditions.

Qi has constructed a measure of the US credit impulse which speaks to financial conditions relative to trend. Be aware that credit has now turned a net headwind for markets / the economy. See the third chart.

6. Across commodity equities, energy still cheap to macro model value but precious / base metal equities still rich

In the scenario of a Fed policy error actually manifesting, the dollar would ultimately succumb to weakness. The equity market destination would be commodity sensitive equities, in the desire to increase exposure to real assets.

However, there is a distinction to be made within commodity equities. Recently, we highlighted GDX as a sell idea – dislocating from higher real yields and dollar strength. While GDX has started to weaken, it is still 1.7 sigma rich to Qi’s macro-warranted fair value. Alongside, COPX (Global Copper Miners) is still 0.6 sigma rich (first chart below). Copper itself is particularly sensitive to financial conditions, namely rate vol and CDX HY. Copper is 2 sigma rich to its Qi macro-warranted fair value.

The flipside is that US Energy equities trade cheap to their Qi model value and at the cheaper end compared to its US sector peers. Particularly, on an RV basis to US Financials (see the second chart below).

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17.04.2024

Qi Market Spotlight: Attributing this pullback - is macro back?

Qi equty model momentum has stalled across markets -- SPX, DAX, Nikkei

Risk asset model uptrends that had been holding on are now also being challenged – the USD model in Qi is strengthening over EUR, JPY and Asian currencies, the high yield credit model is also getting hit with spreads widening, among commodities the Copper model has rolled over but oil and precious metals are still holding up well in Qi

Overall though, there appears to be a definitive shift downwards in our risk models – the first we have seen since the October bottom

Qi returns attribution shows that the bounce from the October 2023 lows was initially driven by macro but much of the YTD 2024 move in SPX has been prinicipally a fundamentals/specific story but now macro is re-asserting itself from low levels. This time around, further mean-reversion of the impulse may well coincide with an elevated risk of the Fed compromising its inflation-fighting credibility.

The key Qi macro factors driving SPX since the end of Q1 are risk aversion, credit spreads and the strengthening dollar, specific risk has countered this downtrend making the coming earnings season yet more important:

The sector implication of the latest CPI release is pressure on (1) the most inflation sensitive sectors which are the classic domestically-geared sectors of regional banks, construction, homebuilders and real estate and (2) the sectors most sensitive to the tightening of financial conditions which are more speculative tech like ARK, long duration like BioTech, renewables and small caps.
If we start to see financial conditions tighten in earnest then also Momentum longs will come under pressure. Below we show the screen of the most vulnerable sectors / ETFs to both higher inflation AND tighter financial conditions

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11.04.2024

Qi MacroVantage

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#1. Qi's US equity model momentum now fading, led by NASDAQ

Just 3 months ago, 6 Fed cuts were being priced this year. Risky assets well digested the move from 6 cuts to 3 cuts as it coincided with rising growth expectations. However, from 3 cuts to a plausible zero cut scenario, equities will take note. Especially in light of the proximity of the September meeting to the US election.

In other words, the rate outlook uncertainty has just risen post the March CPI release. Into 2024, falling rate vol (which we use as a proxy for Fed QT expectations) has been one of the most supportive drivers for the US equity rally. However, in z-score terms, CB QT expectations are now sitting 2 standard deviations below trend – that is a poor risk-reward area given its mean-reversion tendency and not helped by the latest CPI release.

This is feeding through to Qi’s model value for SPY and NDX. In particular, for the latter. Nasdaq macro-driven strength requires weaker commodities, a weaker dollar, fading real yields and inflation expectations. The chart above shows the inverse relationship between inflation expectations and NDX. The chart below shows NDX Qi model value momentum is starting to fade (shown below as the 3mth % change and 1mth % change).
#2. Under the hood, the US momentum trade was relying on a soft CPI print & supportive financial conditions - is the party over?

The US momentum trade has reflected investor comfort with key secular themes over the last year (e.g. AI / Biotech). However, through a macro lens, the Qi machine shows a high reliance of Momentum to lower real yields, credit spreads and rate vol i.e. supportive financial conditions.

See the first chart below showing the high negative Qi sensitivity of the Momentum style to real yields. The second chart illustrates the inverse relationship, with the divergence most notable since February.
#3. Screening for sectors / ETFs most vulnerable to higher inflation expectations / higher rate vol

In a note on 26th March What if this is a Fed Error?”, we screened for winners and losers from a scenario of higher inflation expectations alongside higher Fed QT expectations (a proxy for rate volatility).

Commodity-sensitive equities outperform – Energy, Materials, GDX. Financials (in particular regional banks), Real Estate, Technology underperform. In other words, increase exposure to real assets if the dollar’s secular bull run come under threat.

See the first chart below. The second chart comes straight from the Qi portal to simply show sector winners / losers from higher inflation.

There is a caveat that if the initial reaction of higher rates & higher dollar persists, GDX will struggle for now. GDX strength is reliant on a weaker dollar.
#4. USDJPY - fundamentals versus jawboning

Qi's USDJPY model is displaying renewed macro momentum. Model value has risen 2.8% in the last month. That's the one of the biggest 4 week moves across G10 fx pairs.

There's no valuation edge - spot sits close to our 152.64 fair value. It is more a reminder that fundamentals - particularly the moves in US yields & commodity markets - point to a weaker Yen. The authorities may be moving through the gears on verbal intervention, but they are fighting strong headwinds.

It is also a reminder that global investors see the MoF's headache as a tailwind for Japanese equities. The second chart shows the role a weak Yen plays in helping Nikkei perform versus US stocks.
#5. Heading into earnings season, the S&P500 macro beta impulse is rising - a big onus on earnings.

The timing of this CPI release is poor – we are just about to head into earnings season. Given the multiple expansion we have seen in the S&P 500, the index is trading as if forecast estimates through to 2025 have already been banked. See the first chart.

The second chart shows the deviation of SPX 12mth fwd PE and PB (combined into a single measure) relative to its model value from a simple regression to credit spreads, the dollar and real yields – another way of showing valuations are extended.

Finally, the third chart reminds us that the S&P 500 macro beta impulse is now rising from multi-year lows. When macro sensitivities rose over Q4 last year it was supportive for risky assets given the favourable moves in the macro data itself. This time around, further mean-reversion of the impulse may well coincide with an elevated risk of the Fed comprising its inflation-fighting credibility.
#6. Credit - this time it's different?

In 2023, credit was the proverbial dog that refused to bark - even after aggressive rate hikes & a mini-financial crisis in March, credit conditions never really tightened. Nothing (systematically important) has broken, yet.

To date, this re-pricing of US bond yields has been a grind; and credit spreads have continued to tighten. The net result being overall credit conditions haven't materially worsened.

Credit may be relying on the same argument as equities - a strong economy / earnings offset the lack of rate cuts. But, after this week's CPI, will this more aggressive move in UST yields change the dynamic?

Any spread widening would raise a possible red flag about deteriorating credit quality & a tightening of financial conditions more broadly. We are watching Qi model value in US Investment Grade Credit & the JNK ETF closely to see if macro momentum is definitively turning.
#7. L'Oreal - "because it's worth it", on macro

L’Oreal is 1.2 standard deviations cheap on Qi’s macro model valuation.

It has only been cheaper 5% of the time in the last 12 months, on a standard deviation basis.

The key drivers are EU inflation and oil price – L’Oreal wants both to drop, unlike the US, EU inflation has been heading downwards.

L’Oreal is also a play on a potential China consumer stimulus (North Asia is a quarter of L’Oreal revenues) – we have seen Thailand recently announce a $14 billion cash handout program to stimulate the economy, could China follow?

Earnings are next week.
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04.04.2024

Qi MacroVantage

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#1. GDX & Gold Over-Extended

Earlier this week, in the insight “Gold is talking…What’s it Saying?”, we highlighted that the diminishing negative sensitivity to real rates possibly reflected investor belief that real assets are a safer bet than US government debt. However, from a valuation perspective, both gold and gold miners are trading well above their Qi macro-warranted fair value.

Consider that GDX is trading +2.2 sigma (10.6% above its Qi model value), at its 100th percentile over the last 12mths, and Qi model value has flatlined over the last 3 weeks. See the first chart below overlaying GDX to its FVG. GDX is looking for a weaker dollar and lower real yields. However, against these two macro factors GDX is clearly over-extended – see the second chart.

#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything” rally

Consider that (1) DVY trades at +0.8 sigma (92nd percentile over last 12mths) (2) US Utilities at +1.4 sigma (100th percentile) (3) an equity basket of bond proxies (GSXUBOND) trades at +1.2 sigma (100th percentile). The message is that income yield plays look over-extended.

Qi has created an equity L/S basket tracking US 10yr yields (GSPQ10YR, available from Goldman Sachs). This tracking is shown below. The first observation is that the equity tracker has recently been outperforming the 10yr yield level itself, likely reflecting reflation optimism – see the first chart.

The second observation is that while the long leg of this basket has been performing strongly, the short leg has also shown strong performance since mid-February – see the second chart. This short leg is primarily bond proxies, which ordinarily would care more about the possibility of higher long end rates.
#3. FTSE 100. From YtD laggard to tactically over-extended

The fact that the FTSE 100 benefits from a weaker GBP and higher energy / metal prices is well known, given its constituent make-up. Qi shows similar drivers also. The FTSE 100 has been a laggard ytd but an outperformer over the last month as manufacturing / commodity optimism has risen, alongside a weaker pound.

However, today the FTSE stands at +1.9 sigma (97th percentile over the last 12mths) and has rarely traded much above 2 sigma. See the first chart below. Running a backtest selling when the FTSE 100 is above 1.5 sigma had resulted in an 86% Win Rate, albeit on only 7 trades – it is a rare event.
#4. CHFJPY - New carry king?

Qi's CHFJPY model confidence has risen 22% in the last 2 weeks and is back in regime for the first time in a year.

There's no valuation edge currently; spot is only slightly below our 168 fair value. The bigger standout is the sharp shift lower in macro momentum.

Macro-warranted model value has fallen 2.25% since March 19th & the BoJ rate hike. Two days later the SNB surprised with a rate cut. That policy divergence has FX investors pivoting to use the Franc as their preferred funding vehicle.

Qi shows interest rate differentials are the main driver of the cross accounting for around a quarter of model explanatory power. Otherwise it is worth noting that, on current patterns, higher crude oil and copper prices are consistent with Swiss Franc depreciation.

For a long time, the Yen has been the sole funding currency in G10 fx. Now, carry dynamics plus the commodity rally point to a new downtrend in macro momentum in CHFJPY.
#5. 10y US Treasury yields at 2024 highs on Qi

At the start of March Qi flagged that 10y UST yields were 35bp too low relative to macro-warranted fair value. Since then yields have backed up around 25bp, a move that has helped partially close Qi's Fair Value Gap.

But rising crude oil prices and higher inflation expectations have kept pushing model value higher at the same time. Currently, Qi says 10s should yield 4.48%.

That's the high for 2024. Any break higher would suggest renewed macro momentum in the reflation trade & ongoing pressure in the US bond market.
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28.03.2024

Qi MacroVantage

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#1 Commodity equities – From agriculture, to precious / base metals, to energy – all trading macro-rich

Consider the following:
• DBA – Invesco DB Agriculture: +2.1 Sigma FVG
• SXEP – EU Energy: +1.5 Sigma FVG
• GDX – Gold Miners: +1.5 Sigma FVG
• S5ENRS – US Energy: +1.4 Sigma FVG
• COPX – Global Copper Miners: +0.9 Sigma FVG

While DBA’s fate seems dependent on the fortunes of cocoa, energy equities have been rallying ahead of crude itself. See the first chart. Both in the US and Europe, the FVG for the Energy sector is close to 12mth highs. While Qi’s analysis from earlier this week showed real asset exposure would outperform in the event of a perceived Fed error where inflation expectations harden, at this juncture commodity equities are at profit taking levels as opposed to long entry levels.

The second chart shows the GDX FVG vs. spot price. Qi shows an inverse relationship between GDX and the dollar – and currently there is a dislocation. See the third chart.

#2 US Value is no longer cheap to macro, in contrast to beginning of March

At the start of March, we wrote a note “Value in Value”. We highlighted that US Banks and US Energy were among the cheapest sectors relative to the macro backdrop. Since then both of these typical value sectors have strongly outperformed. Today, they both trade macro-rich on Qi’s models.

This is perhaps best illustrated looking at RPV – the Invesco Pure Value ETF. The fair value gap is only +0.6 sigma but still large relative to recent history. See the chart below.
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite

Periphery Eurozone bond spreads feature as a key driver across Qi’s equity models, globally. Given the prevalence in Qi’s models, we view this measure of Eurozone confidence as a key barometer of risk appetite. After all, European equities have outperformed the S&P500 ytd. The Sharpe of the rally of the last five months is a stand-out compared to the last few years.

With this in focus, we note that the sensitivity of European equities to this macro driver is at post Covid highs. See the first chart below. The second chart shows the z-score of the BTP-Bund spread – any loss of momentum would likely imply caution for risky assets. The sector flagbearer of Europe, EU Banks (SX7P) is already trading rich to macro at a FVG of +1.2 sigma.
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts

The macro beta impulse shows how the sensitivity of the S&P 500 to macro drivers is changing, using our short term model. Sensitivities to macro have collapsed. Indeed, the sensitivity to real yields is almost positive. Similarly, the sensitivity to risk aversion has sharply diminished. Real yields were previously such a focal point (as a drag) from late last year into February – no longer.

The below chart shows the relationship between the macro beta impulse vs. the S&P500 deviation from its 50d MA – it is negative. Our hypothesis is that Mr. Market is a neurotic patient that would prefer a backdrop of macro factor stability / low beta to macro over a backdrop of increasing macro factor volatility / high beta to macro. Now that hasn’t been the case in recent months – the macro beta has been rising BUT in favour of the index.

We are at a point now where the beta impulse sits at multi-year lows. This indicator does not trend; rather, it mean-reverts. Mean-reversion from current levels would likely coincide with a more choppy market.
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow

We have been highlighting the strong Qi model price momentum across developed market equities. See the charts below. Note that the 3mth change in the model price is close to the highs of their multi-year ranges. The outlier is EEM. Qi model price momentum has risen only 1% over the last 3mths. Further, relative to the S&P500, the divergence looks particularly wide relative to history. Under the assumption that the elastic is unlikely to stretch much further, EEM underperformance likely sees some respite from here.
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22.03.2024

MacroVantage

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# 1 Risk-Reward shifting on the Dollar - EURUSD

For some investors Fed credibility is becoming an issue. This week's FOMC revised growth and inflation forecasts higher, yet they maintained the idea of three rate cuts this year.

If the Fed have deliberately placed themselves behind the inflation curve, the obvious trades include shorting the Dollar, short duration, long TIP break-evens. FX looks the most interesting on Qi right now.

On Qi, EURUSD now screens as 1.1 sigma (1.5%) cheap to model courtesy of a growing divergence between macro-warranted model value and spot FX. Qi model value has risen to almost 1.10; spot EURUSD has sold off.

Back-testing the efficacy of a -1.1 sigma FVG as a buy signal since 2009 & when Qi's model is in regime, produces mediocre results. A 56% hit rate suggests we're just on the right side of coin toss territory, but only modestly.

But, looking at the pattern between Fair Value Gap & spot EURUSD suggests more recently our FVG has done a decent job of capturing market turning points.
# 2 Risk-Reward shifting on the Dollar - USDJPY

Moreover, it is not just EURUSD. USDJPY sits 0.9 sigma (1.9%) rich to aggregate macro conditions on Qi.

The same divergence is pattern is evident - the recent Dollar rally has not been justified by macro fundamentals. Back-tests reveal similar results. Historically using this FVG as a sell signal has produced a 58% hit rate.
And the FVG versus spot chart again looks similar to EURUSD. Some false signals but more instances where Qi's Fair Value Gap has been an efficient way to signal local highs and lows.
Cable may be the most effective expression currently. It is 1 sigma (1.8%) cheap to macro. Using this FVG as a sell signal produces a 67% hit rate and a +0.56% average return.

# 3 Qi Model Price Momentum for SPY - since 2009, only higher coming out of GFC & Covid

Qi’s macro-warranted model price for SPY has shown strong momentum since November.

Indeed, if we look at the 3mth change in Qi’s model price since 2009, we can see just how strong it has been – momentum has been higher only coming out of the GFC and Covid.

While cognisant of the dovish FOMC, this should point to a degree of tactical caution and the need for some consolidation. We hit similar levels in August 2023 which subsequently saw a market correction. The point is, momentum even at the Qi model value is becoming stretched.
# 4 Equity sensitivity to Financial Conditions - more value in Russell 2000 Growth than S&P500 Growth

We screened for ETFs most sensitive to financial conditions. No surprise, there is a momentum / beta bias. The list includes Biotech, renewables, homebuilders, semis, regional banks, growth and small caps.

Notably, 12 out of the list of 20 still screen as macro-cheap to Qi model value. VMFO, the Vanguard Momentum ETF, is now trading below Qi model value.

Also notable is that at both ends of the spectrum Russell 2000 Growth is trading at -0.5 sigma but S&P 500 Growth (RPG) at +0.4 sigma; i.e. there is more value looking down the cap size. The Russell 2000 itself still trades at -0.3 sigma.
# 5 US Financials are not the best cyclical here

Screening US sectors reveals Financials look rich relative to several peers. XLF looks over-extended versus Industrials, Metals & Mining and Real Estate.

XLF vs. IYR looks the most interesting right now. Financials are 1.4 sigma (6.1%) rich. Both sectors want lower inflation / interest rates but XLF has discounted more good news. Even if you favour immaculate disinflation and 3 rate cuts, IYR looks the better cyclical sector if you're seeking a broadening in the rally.

Finally, we note that RETINA has just flagged a bearish signal on KBE outright.
# 6 What is most extended in Europe? European Insurers.

SXIP vs. SXXP trades at +2.0 sigma rich to Qi macro model value - the 100th percentile over the last 12 months. Model price momentum is also fading.

The first chart overlays spot price to model price; the second chart Qi FVG to spot price. This again highlights the risk of mean reversion.

European insurers have been amongst the best performing sector YtD in Europe. Qi shows one of the key drivers is EuroZone confidence (peripheral bond spreads). Insurers are trading rich to this driver.
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17.03.2024

Qi Market Pulse – Choppy Seas Ahead

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From the point of view of Goldilocks, recent macro data has been uneven – firmness in inflation data & jobless claims, but softness in retail sales. The Citi economic surprise indices have been edging lower both in the US and Europe.
At the same time, sentiment gauges are at range highs e.g. see the AAII bulls less bears retail sentiment at extended levels or merely look at Dogecoin for a sense of speculative fever. From a simple price action perspective, the S&P 500 is testing the 5mth rally trend-line with an RSI exhibiting negative divergence.

We enter a policy-centric week. 3mths ago the market was pricing 6 rate cuts in 2024. Are 3 cuts now looking optimistic? Couple the FOMC this week with speculation mounting on the BoJ exiting NIRP, and we potentially have reason to believe the sea will move from smooth sailing to choppy ahead.
This would be consistent from Qi’s perspective – in a recent note “Vol Check” we highlighted some early flags of caution (1) RSq on Qi’s short term models across major equity, bond and FX benchmarks have sharply collapsed and (2) S&P500 short term sensitivity to VIX turning positive. Triggers for our indicators were hit in early March.
This likely reflects recent relationships are being tested e.g. equities higher but real yields and VIX also both higher in recent weeks. If the current macro narrative can not be explained coupled with signs of speculative activity – that is a sign of more choppy seas ahead.
In a report last week “MacroVantage”, we note that 4 out of our 6 observations were all defensive in nature. Namely, selling European Autos vs. Utilities (an anti-momentum risk on / off barometer?), selling AUDJPY on a hawkish BoJ, buying Software over Semiconductors, and noting that our L/S equity tracker for HY credit spreads is pricing HY credit spreads back at its tights. See our baskets tracking credit spreads and GDP growth expectations below
Indeed, screening across equities most sensitive to financial conditions there is a momentum / beta bias. We list these below – which will not surprise – Biotech, renewables, homebuilders, semis, regional banks, growth, small caps would all be vulnerable areas.
Tactically, Qi shows the recent enthusiasm on Copper Miners may be short term vulnerable. Qi continues to see downside in the Invesco Pure Growth S&P 500 ETF (RPG) vs. equal-weighted ETF (RSP) . In Europe, we would also highlight European insurers screening as macro rich and vulnerable to more hawkish CB rhetoric. See the charts below where we overlay FVG vs. the spot price.
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14.03.2024

Qi MacroVantage

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If the early signs of Utilities outperforming gathers momentum, that could serve as an early warning sign for broader caution.

The chart above shows the high correlation between this RV pair's FVG and spot price relative. The table below shows the historical efficacy of using a +1.5 sigma FVG as a sell signal - an 87.5% hit rate.
# 2 AUDJPY - an efficient hawkish BoJ play

Screening Yen G10 crosses in Qi reveals AUDJPY as the biggest outlier. It's in regime (69% model confidence) and is 0.8 sigma (1.26%) rich to macro-warranted fair value.

History shows the FVG can become very (3 sigma) extended. But, that said, right now it looks the most efficient way to express Yen upside if you believe next week's BoJ produces a hawkish surprise.
The AUDJPY fx cross is often viewed as a barometer for broader risk appetite - a high beta China play versus a safe haven asset.

How could lower AUDJPY influence equity markets? One impact could be an end to the Nikkei's spectacular run of outperformance.
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights

Qi’s out of sample equity tracker for HY credit spreads is back at its 2021 lows.

This basket by construction has a strong defensives vs. cyclicals bias. This has aligned closely with HY credit spreads which can be seen as a good proxy for risky appetite.

With this basket pricing credit spreads at its tights, any vulnerability to the prevailing growth optimism would likely see this basket start to turn.
# 4 Software > Semiconductors

A comparatively protected RV pair trade that speaks to the anti-momentum theme.

IGV, the iShares Expanded Tech Software ETF is 1.9 sigma cheap relative to SOXX, the iShares Semiconductor ETF.
#5 Long Brazil - IBOV

Last week's "Value in Value" insight flagged Brazil's Ibovespa as an efficient Value catch-up play.

Recent history shows a fairly tight relationship between Qi's FVG and the spot price. Conviction levels are aided by decent back test results.
#6 Long Brazil - Real

This week we also note that Qi has USDBRL as 1.4 std dev (2.4%) rich to macro conditions.

The pattern shows more of a "drift" than a sharp divergence. However, it is notable that Qi's macro-warranted model value is threatening to make new lows. A stronger Real would be supportive to Brazilian equities.
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