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09.10.2024
Qi MacroVantage
1. Re-pricing inflation risks
2. A US sector cheat-sheet for CPI
3. Qi bearish divergence signals across US cyclicals
4. Canada’s TSX – short term over-optimism?
5. French downgrade – EURUSD vs. EURCHF
2. A US sector cheat-sheet for CPI
3. Qi bearish divergence signals across US cyclicals
4. Canada’s TSX – short term over-optimism?
5. French downgrade – EURUSD vs. EURCHF
See more
08.10.2024
Qi Sector Spotlight: ITB through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
Homebuilders have delivered among the strongest returns over the last year of any US industry. Qi’s MFERM reveals the macro anatomy of the ITB Home Construction ETF and concludes the macro backdrop has now become a drag to performance. At the heart is whether FCIs have now seen their floor – thus far, ITB has been a beneficiary of a weaker dollar, lower real rates, tighter HY corporate credit and bull-curve steepening.
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03.10.2024
Qi MacroVantage
1. S&P500 Macro Beta Impulse close to multi-year lows. A sign of complacency
2. Despite the rally, SPY Qi model price momentum has been fading over the last month
3. Amber warning in credit
4. Amber warning in Asia
5. A Trump surge is underpriced by equities
Premium content, for a full analysis sign up to a month of insights2. Despite the rally, SPY Qi model price momentum has been fading over the last month
3. Amber warning in credit
4. Amber warning in Asia
5. A Trump surge is underpriced by equities
26.09.2024
Qi MacroVantage
#1 Time for a high beta breather
#2 Shanghai Composite : From > 1 sigma cheap to now at Qi fair value – focus on model momentum
#3 AUDUSD – an efficient way to fade the China hype
#4 URA – Qi says over-exuberance
#5 Yen – more to come?
#2 Shanghai Composite : From > 1 sigma cheap to now at Qi fair value – focus on model momentum
#3 AUDUSD – an efficient way to fade the China hype
#4 URA – Qi says over-exuberance
#5 Yen – more to come?
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19.09.2024
Qi MacroVantage
#1 European Miners – one of the cheapest sectors in Europe
#2 Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
#3 US Rotation – Energy cheap to Consumer Discretionary
#4 Tech momentum into year-end
#5 EUR yield curve – a pause in the steepening?
#2 Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
#3 US Rotation – Energy cheap to Consumer Discretionary
#4 Tech momentum into year-end
#5 EUR yield curve – a pause in the steepening?
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11.09.2024
Qi MacroVantage
#1 The inflation battle is over . Disinflation is the new enemy?
#2 Recession? Buy bonds??
#3 Cheap inflation hedges
#4 Defensives vs. Commodity Equities – the book-end relative performance is becoming stretched
#5. XLF macro beta impulse to credit rising
Premium content, for a full analysis sign up to a month of insights#2 Recession? Buy bonds??
#3 Cheap inflation hedges
#4 Defensives vs. Commodity Equities – the book-end relative performance is becoming stretched
#5. XLF macro beta impulse to credit rising
10.09.2024
Qi Market Spotlight: XLF through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
US Financials are the poster child of the rotation trade. They have led the rally over the last month and sit close to ATHs. In many ways the sector is a litmus test for US equities more broadly – as recession risks rise, navigating the trade off’s between hard and soft landings whilst the Fed engineer easier financial conditions is critical.
The first step in that process is understanding what factors XLF is exposed to. Both macro versus idiosyncratic, & then within macro which factors matter most. Thereafter, only by decomposing risk and returns can we understand what role macro will play over company fundamentals. And, more specifically, which macro factors will dictate Financials performance into year-end.
Thus far, XLF has demonstrated confidence in the credit cycle – HY credit spreads are not back at their tights despite XLF at the highs. It is likely we remain a macro-dominant regime through to year end.
The first step in that process is understanding what factors XLF is exposed to. Both macro versus idiosyncratic, & then within macro which factors matter most. Thereafter, only by decomposing risk and returns can we understand what role macro will play over company fundamentals. And, more specifically, which macro factors will dictate Financials performance into year-end.
Thus far, XLF has demonstrated confidence in the credit cycle – HY credit spreads are not back at their tights despite XLF at the highs. It is likely we remain a macro-dominant regime through to year end.
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05.09.2024
Qi MacroVantage
#1 Sector sensitivities into payrolls – winners / losers?
#2 Back to school brings growth worries – XLF fragility
#3 Weak balance sheet stocks hit 2yr highs last week but HY credit spreads had not hit 2yr tights
#4 US vs. Europe - credit
#5. US vs. Europe – government bonds
#6. FXI – Sentiment is very bearish but waiting for a clearer upward trajectory on Qi model value
Premium content, for a full analysis sign up to a month of insights#2 Back to school brings growth worries – XLF fragility
#3 Weak balance sheet stocks hit 2yr highs last week but HY credit spreads had not hit 2yr tights
#4 US vs. Europe - credit
#5. US vs. Europe – government bonds
#6. FXI – Sentiment is very bearish but waiting for a clearer upward trajectory on Qi model value
29.08.2024
Qi MacroVantage
#1 Everyone hates China. Time for contrarians to let smart machines do their work.
#2 EURCHF – macro suggests decent upside
#3 Gold vs. Digital Gold
#4 Amazon - a cheap Mag7 stock
#2 EURCHF – macro suggests decent upside
#3 Gold vs. Digital Gold
#4 Amazon - a cheap Mag7 stock
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28.08.2024
Qi Market Spotlight: Market Spotlight: Anatomy of the Aug ‘flash crash’
Qi’s Macro Factor Equity Risk Model (MFREM) sheds light on the anatomy of equity returns and vol we have seen during the August ‘flash crash’
1. The pullback and subsequent rally can be explained almost entirely by macro
2. The SPY factor return actually peaked on 12th July, ahead of the actual index peak on 16th July – at turning points, macro can lead
3. The dominant factor drags from the 16th July peak to 5th August trough were risk-aversion related as opposed to overt fears on fundamentals
4. The subsequent rally reflected a reversal in these factors, with further weakness in the dollar also acting as a propeller
5. Where have macro factor returns recovered the most post the 16th July to 5th Aug drop? Quality & Value most; Growth least
6. There is a hierarchy across styles as to which factors matter most – For Momentum it is FCIs; for Value it is 5s30s and the USD; for Growth it is risk aversion and inflation expectations
7. In conclusion – Aside from a sudden geopolitical vol shock, higher factor return momentum is highly dependent on the fate of the dollar and 10yr yields. With ~200bps of cuts already priced within the next year, a slowdown in factor returns would suggest more two-way price action in risky assets
1. The pullback and subsequent rally can be explained almost entirely by macro
2. The SPY factor return actually peaked on 12th July, ahead of the actual index peak on 16th July – at turning points, macro can lead
3. The dominant factor drags from the 16th July peak to 5th August trough were risk-aversion related as opposed to overt fears on fundamentals
4. The subsequent rally reflected a reversal in these factors, with further weakness in the dollar also acting as a propeller
5. Where have macro factor returns recovered the most post the 16th July to 5th Aug drop? Quality & Value most; Growth least
6. There is a hierarchy across styles as to which factors matter most – For Momentum it is FCIs; for Value it is 5s30s and the USD; for Growth it is risk aversion and inflation expectations
7. In conclusion – Aside from a sudden geopolitical vol shock, higher factor return momentum is highly dependent on the fate of the dollar and 10yr yields. With ~200bps of cuts already priced within the next year, a slowdown in factor returns would suggest more two-way price action in risky assets
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09.10.2024
Qi MacroVantage
1. Re-pricing inflation risks
2. A US sector cheat-sheet for CPI
3. Qi bearish divergence signals across US cyclicals
4. Canada’s TSX – short term over-optimism?
5. French downgrade – EURUSD vs. EURCHF
2. A US sector cheat-sheet for CPI
3. Qi bearish divergence signals across US cyclicals
4. Canada’s TSX – short term over-optimism?
5. French downgrade – EURUSD vs. EURCHF
See more
1. Re-pricing inflation risks
Ahead of US CPI today it is worth noting the significant re-pricing of inflation expectations seen since the Fed’s 50bp rate cut. Recession fears over the summer pushed 5y inflation expectations 3 standard deviations below their 1y trend.
Since the rate cut, expectations have bounced sharply. 10y TIP break-evens are 30bp wider. In Qi’s z-score terms, inflation expectations have risen back above trend. A beat today could push this further of course, but it is worth noting a fair degree of re-rating has already occurred.
Ahead of US CPI today it is worth noting the significant re-pricing of inflation expectations seen since the Fed’s 50bp rate cut. Recession fears over the summer pushed 5y inflation expectations 3 standard deviations below their 1y trend.
Since the rate cut, expectations have bounced sharply. 10y TIP break-evens are 30bp wider. In Qi’s z-score terms, inflation expectations have risen back above trend. A beat today could push this further of course, but it is worth noting a fair degree of re-rating has already occurred.
That is also evident in 10y US Treasury yields. Post FOMC, 10y UST yields hit a local low of 3.59%. That was 1 sigma (26bp) too low relative to aggregate macro conditions.
Inflation expectations are the biggest driver of our 10y UST model accounting for 24% of explanatory power. And the re-rating of inflation meant Qi’s macro warranted model value never fell below 3.80% post Fed, and have since moved up to 3.97%. 10y yields have subsequently caught back-up to macro conditions.
Inflation expectations are the biggest driver of our 10y UST model accounting for 24% of explanatory power. And the re-rating of inflation meant Qi’s macro warranted model value never fell below 3.80% post Fed, and have since moved up to 3.97%. 10y yields have subsequently caught back-up to macro conditions.
2. A US sector cheat-sheet for CPI
The chart overlays the sensitivity of US sectors to US inflation expectations, with their Qi Fair Value Gaps.
The chart overlays the sensitivity of US sectors to US inflation expectations, with their Qi Fair Value Gaps.
Unsurprisingly, Energy is the biggest beneficiary if inflation expectations move higher. XLE sits at Qi model value so there is no valuation edge.
Utilities also benefit which suggests, on current patterns, the sector is less a bond proxy and more a reflation (AI data centre) play. XLU is 0.4 sigma (3.2%) cheap to macro so looks the most efficient trade expression for a CPI beat.
Most US sectors are negatively sensitive, i.e. want lower inflation (Fed rate cuts). XLI and XLY stand out as two of the more expensive in pure FVG terms. But Real Estate is by some margin the sector with the greatest sensitivity. IYR benefits from a miss but is the most vulnerable to a strong report today.
Utilities also benefit which suggests, on current patterns, the sector is less a bond proxy and more a reflation (AI data centre) play. XLU is 0.4 sigma (3.2%) cheap to macro so looks the most efficient trade expression for a CPI beat.
Most US sectors are negatively sensitive, i.e. want lower inflation (Fed rate cuts). XLI and XLY stand out as two of the more expensive in pure FVG terms. But Real Estate is by some margin the sector with the greatest sensitivity. IYR benefits from a miss but is the most vulnerable to a strong report today.
3. Qi bearish divergence signals across US cyclicals (XLF, XLI, ITB)
We noted in “Macro Hub” earlier this week that the S&P500 macro beta impulse was tentatively stabilizing around multi-year lows, i.e. have the diminishing sensitivities to macro reached a floor? Qi’s models suggests bull curve steepening, lower inflation expectations, a weaker dollar and 10yr rates stabilisation are still important for stocks. Aside from being on inflation watch, we have the start of earnings season beginning with the banks. Does election uncertainty lead to conservative guidance for Q4? What about the geopolitical uncertainty? Bottom-line, the path up for stocks may be getting narrower.
Qi’s valuations models are now highlighting bearish divergence signals across a range of US cyclicals, i.e. where the spot price has rallied over the last week but, in contrast, the Qi model price has fallen. See below snapshots of XLF (+0.8 sigma) and XLI (1.2 sigma). Has cyclical optimism over-extended in the near term?
We noted in “Macro Hub” earlier this week that the S&P500 macro beta impulse was tentatively stabilizing around multi-year lows, i.e. have the diminishing sensitivities to macro reached a floor? Qi’s models suggests bull curve steepening, lower inflation expectations, a weaker dollar and 10yr rates stabilisation are still important for stocks. Aside from being on inflation watch, we have the start of earnings season beginning with the banks. Does election uncertainty lead to conservative guidance for Q4? What about the geopolitical uncertainty? Bottom-line, the path up for stocks may be getting narrower.
Qi’s valuations models are now highlighting bearish divergence signals across a range of US cyclicals, i.e. where the spot price has rallied over the last week but, in contrast, the Qi model price has fallen. See below snapshots of XLF (+0.8 sigma) and XLI (1.2 sigma). Has cyclical optimism over-extended in the near term?
We would also highlight the risks around the ITB ETF. Homebuilders have delivered among the strongest returns over the last year of any US industry. Qi’s models show the macro backdrop has now become a drag to performance. At the heart is whether FCIs have now seen their floor – thus far, ITB has been a beneficiary of a weaker dollar, lower real rates, tighter HY corporate credit and bull-curve steepening.
4. Canada’s TSX – short term over-optimism?
A new bearish divergence signal on the Canadian SPTSX. Tighter FCIs (wider credit spreads, higher real rates) plus VIX back > 20 have pushed Qi model value 3% lower since late September. Thus far, the market has ignored this deterioration in macro conditions leaving Canadian equities 1.1 sigma (3.8%) rich to macro.
Copper is also a notable positive driver for Canadian equities, alongside global GDP. However, copper has fallen ~5% over the last week. Again, we ask has cyclical optimism gone too far?
A new bearish divergence signal on the Canadian SPTSX. Tighter FCIs (wider credit spreads, higher real rates) plus VIX back > 20 have pushed Qi model value 3% lower since late September. Thus far, the market has ignored this deterioration in macro conditions leaving Canadian equities 1.1 sigma (3.8%) rich to macro.
Copper is also a notable positive driver for Canadian equities, alongside global GDP. However, copper has fallen ~5% over the last week. Again, we ask has cyclical optimism gone too far?
5. French downgrade? EURUSD vs. EURCHF
The French budget is back in the headlines. Key will be the reaction of the rating agencies, all three of whom deliver their verdict over the next few weeks – Fitch on October 11th, Moody’s on the 25th and finally S&P on the 29th.
Fears of a possible downgrade will prompt many to consider short EURO fx positions. But while many will instinctively look to EURUSD downside, Qi’s unique sensitivity analysis suggests the most efficient trade expression is more nuanced than that.
The chart below shows the sensitivity of EURUSD and EURCHF to Qi’s Eurozone Sovereign Confidence factor.
The French budget is back in the headlines. Key will be the reaction of the rating agencies, all three of whom deliver their verdict over the next few weeks – Fitch on October 11th, Moody’s on the 25th and finally S&P on the 29th.
Fears of a possible downgrade will prompt many to consider short EURO fx positions. But while many will instinctively look to EURUSD downside, Qi’s unique sensitivity analysis suggests the most efficient trade expression is more nuanced than that.
The chart below shows the sensitivity of EURUSD and EURCHF to Qi’s Eurozone Sovereign Confidence factor.
EURCHF sensitivity is high and rising. This factor is the biggest single driver of our model which currently has a R-Squared of 82%. In sharp contrast, EURUSD sensitivity has fallen to zero. Instead, interest rate differentials dominate explaining 38% of the variance in EURUSD.
EURUSD downside only makes sense if you believe a French downgrade prompts the ECB into being more dovish relative to the Fed. A French downgrade that doesn’t result in a policy response, will have a far greater drag on EURCHF.
EURUSD downside only makes sense if you believe a French downgrade prompts the ECB into being more dovish relative to the Fed. A French downgrade that doesn’t result in a policy response, will have a far greater drag on EURCHF.
08.10.2024
Qi Sector Spotlight: ITB through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
Homebuilders have delivered among the strongest returns over the last year of any US industry. Qi’s MFERM reveals the macro anatomy of the ITB Home Construction ETF and concludes the macro backdrop has now become a drag to performance. At the heart is whether FCIs have now seen their floor – thus far, ITB has been a beneficiary of a weaker dollar, lower real rates, tighter HY corporate credit and bull-curve steepening.
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1. If FCIs have seen their floor ITB is at risk of rolling over. Over the last 1yr, the ITB Home Construction ETF has delivered a 61% return – among the best across all US industry groups.
2. Macro matters for ITB – There is 62% correlation (39% RSq) between daily ITB returns and macro factor driven daily returns over the last year.
3. Over the last week, the drag from macro factors has been particularly large. Qi’s MFERM model dissects the return of ITB into its macro factor & idiosyncratic / specific return components. Note the recent divergence between the spot return and factor return in the chart below.
4. Where does this recent factor drag stem from? FCIs. USD TWI, forward growth expectations (5s30s), rates, HY corporate credit and CB QT expectations have all been drags for ITB over the last week.
5. From propellers to drags: Indeed, for rates, 5s30s and USD TWI the factor returns have switched from propellers to drags over the last 1mth
6. So what is ITB most exposed to today? HY Credit, the dollar, real rates and it would prefer bull curve steepening.
7. Across industry groups ITB is among the most sensitive to real rates, DM FX and corporate credit: Notable, as wait for inflation numbers this week - a beat would be troublesome.
26.09.2024
Qi MacroVantage
#1 Time for a high beta breather
#2 Shanghai Composite : From > 1 sigma cheap to now at Qi fair value – focus on model momentum
#3 AUDUSD – an efficient way to fade the China hype
#4 URA – Qi says over-exuberance
#5 Yen – more to come?
#2 Shanghai Composite : From > 1 sigma cheap to now at Qi fair value – focus on model momentum
#3 AUDUSD – an efficient way to fade the China hype
#4 URA – Qi says over-exuberance
#5 Yen – more to come?
See more
#1. Time for a high beta breather
Weakness in the dollar combined with recent higher US rates speaks to higher inflation expectations. However, on Tuesday the Conference Board’s measure of US consumer confidence unexpectedly sank from 105.5 in August to 98.7 in September - the bottom of its range over the past two years. Rates ended that session lower, while equities have so far determined that the data isn’t a problem (NVDA caught a bid).
Further, we note the majority of companies remain in the corporate blackout periods for buybacks. That window will only end in a month, as we get even closer to the election. Seasonally, earnings revisions also start to slow down as we approach the end of the full year, with lack of guidance as yet on next year.
What does Qi say: SPY is +0.6 sigma above Qi model fair value; IWM +0.9 sigma and Dow +0.8 sigma. SPHB (the S&P500 high beta ETF) is +1.8 sigma on the ST model and +1.3 sigma on the LT model!
Further, the size of the S&P 500’s sensitivities to financial condition factors i.e. credit spreads, real dates, dollar etc. is diminishing – a sign, markets are less afraid of macro vol shaking them off course.
So would we be bullish here? No, Qi would say US risk is showing some signs of ST complacency and due a breather.
Further, we note the majority of companies remain in the corporate blackout periods for buybacks. That window will only end in a month, as we get even closer to the election. Seasonally, earnings revisions also start to slow down as we approach the end of the full year, with lack of guidance as yet on next year.
What does Qi say: SPY is +0.6 sigma above Qi model fair value; IWM +0.9 sigma and Dow +0.8 sigma. SPHB (the S&P500 high beta ETF) is +1.8 sigma on the ST model and +1.3 sigma on the LT model!
Further, the size of the S&P 500’s sensitivities to financial condition factors i.e. credit spreads, real dates, dollar etc. is diminishing – a sign, markets are less afraid of macro vol shaking them off course.
So would we be bullish here? No, Qi would say US risk is showing some signs of ST complacency and due a breather.
#2. Shanghai Composite: From > 1 sigma cheap to now at Qi fair value – focus on model momentum
The policy put has been struck again. Qi’s macro-warranted model price for the Shanghai Composite has actually been rising over the last 3wks. Only post the FOMC did the spot price of the index follow suit. See the chart above. By Monday’s close the spot price was 1.2 sigma below the Qi model price. As at time of writing, this gap has now been closed. Therefore, from here it is all about wheThe policy put has been struck again. Qi’s macro-warranted model price for the Shanghai Composite has actually been rising over the last 3wks. Only post the FOMC did the spot price of the index follow suit. See the chart above. By Monday’s close the spot price was 1.2 sigma below the Qi model price. As at time of writing, this gap has now been closed. Therefore, from here it is all about whether Qi model price momentum can be sustained.ther Qi model price momentum can be sustained.
Note how through this period macro explanatory power of the index has remained high and steady – macro matters - and no surprise to learn that US inflation expectations, copper and global GDP growth are among the top 3 drivers of the index. Empirically, you can see this above.
Above, we look at the rolling 3mth % change in the Qi modal price i.e. model momentum. Since Jan-18, model momentum measured in this way has spent more time negative than positive (55% of time). However, momentum has turned from the lower end of the range. Given the implicit policy put, it would be seen as a failure if this “trade” did not support momentum to the upper end of the range over the next few months
#3. AUDUSD – an efficient way to fade the China hype
After this week’s news about the stimulus package, all the classic China plays rallied hard including AUDUSD FX. But Qi’s macro-warranted model value barely budged.
The rally in copper & other China proxy factors were positives for model value. But Aussie is also sensitive to European factors which have been an offsetting drag.
AUDUSD is negatively sensitive to credit spreads and while US High Yield sits near the tights, European credit (both Itraxx XOver & FinSub) have widened notably this week.
Similarly, the cross is sensitive to European sovereign spreads which have taken fright from the move in OATs. In short, fears around French politics and the budget situation have worked to negate this week’s optimism around China.
The rally in copper & other China proxy factors were positives for model value. But Aussie is also sensitive to European factors which have been an offsetting drag.
AUDUSD is negatively sensitive to credit spreads and while US High Yield sits near the tights, European credit (both Itraxx XOver & FinSub) have widened notably this week.
Similarly, the cross is sensitive to European sovereign spreads which have taken fright from the move in OATs. In short, fears around French politics and the budget situation have worked to negate this week’s optimism around China.
Back tests show using the current +1.2 sigma rich FVG as a bearish signal has a 64% hit rate. The other way to test whether the Fair Value Gap mean reverts the correct way is to check the 1y correlation between FVG and spot price. The chart above shows a strong correlation with rich FVGs doing a job of marking local highs in AUDUSD.
For many there’s a tradeable bounce to play for in China. On Qi, SHCOMP offers a more efficient vehicle for that. At these levels, risk-reward suggests AUDUSD is a better trade for the Chinese sceptics looking for a way to fade the rally.
For many there’s a tradeable bounce to play for in China. On Qi, SHCOMP offers a more efficient vehicle for that. At these levels, risk-reward suggests AUDUSD is a better trade for the Chinese sceptics looking for a way to fade the rally.
#4. URA – Qi says over-exuberance
Over the last two weeks, URA (ETF tracking performance of companies involved in uranium mining/ production of nuclear components) has rallied over 20%. Helping drive that rally has been two-fold 1/ news of AI datacentres being powered by nuclear 2/ the announcement by a consortium of banks at NYC climate weeks in support of the goal of tripling nuclear power by 2050.
The rally has led to URA being +1.95 sigma rich to Qi’s model value, among the highest dislocations in recent years – model value has simply not kept up pace with the rally. See the chart above – the last few times we have seen such as extension, it was time to tactically fade.
Since 2009, there are have been only 5 times where URA has been at +1.9 sigma rich to Qi’s model value. Going short on 4 out of those 5 events delivered a positive return. See above.
#5. Yen – more to come?
Qi’s Fair Value Gap for EURJPY hit a low of almost 2 sigma on Friday 13th September. Spot EURJPY bottomed the next business day, Monday 16th.
Since then the cross has rallied over 3%. That move has narrowed Qi’s FVG to -0.9 sigma; but that still means EURJPY sits 2.6% below where macro conditions say it “should” trade.
Moreover, this was not an isolated story. The Yen was uniformly rich versus all its G10 peers on Qi’s models at that time. The Watchlist on the left shows how all Yen crosses were between one and two standard deviations cheap to model two weeks ago.
Since then the cross has rallied over 3%. That move has narrowed Qi’s FVG to -0.9 sigma; but that still means EURJPY sits 2.6% below where macro conditions say it “should” trade.
Moreover, this was not an isolated story. The Yen was uniformly rich versus all its G10 peers on Qi’s models at that time. The Watchlist on the left shows how all Yen crosses were between one and two standard deviations cheap to model two weeks ago.
Today, the profile is the same but the Watchlist on the right shows how FVGs have compressed. AUDJPY for example, is back at model value. CADJPY was the cheapest cross at 2 sigma cheap to macro; today the FVG sits at -0.9 sigma.
There is major political risk coming up in the shape of tomorrow’s LDP election result. A hawkish pick of leader (and future Prime Minister) would be a potential catalyst for a Yen rally. But, from a purely macro perspective, two weeks ago the message was the Yen looked rich relative to prevailing macro conditions. The FVGs are less extreme but it’s the same conclusion today.
There is major political risk coming up in the shape of tomorrow’s LDP election result. A hawkish pick of leader (and future Prime Minister) would be a potential catalyst for a Yen rally. But, from a purely macro perspective, two weeks ago the message was the Yen looked rich relative to prevailing macro conditions. The FVGs are less extreme but it’s the same conclusion today.
19.09.2024
Qi MacroVantage
#1 European Miners – one of the cheapest sectors in Europe
#2 Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
#3 US Rotation – Energy cheap to Consumer Discretionary
#4 Tech momentum into year-end
#5 EUR yield curve – a pause in the steepening?
#2 Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
#3 US Rotation – Energy cheap to Consumer Discretionary
#4 Tech momentum into year-end
#5 EUR yield curve – a pause in the steepening?
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#1. European Miners – one of the cheapest sectors in Europe
Crude may be close to 3yr lows but other commodities have been holding up better. Copper has risen ~8% from its August lows. Data at the end of last week showed copper inventories on the Shanghai Futures Exchange fall 14% on the week - the largest weekly decline this year – and the LME spot price may have now turned the corner after sinking 20% from a high in May. Today SXPP, the EU Basic Resources sector, is still close to its lowest level since late 2020. See the chart above.
Earlier this week, we note in our MacroHub publication, how depressed sentiment was in Europe (a quarter of the Dax stocks are trading below book value). On Qi’s model, the sector is trading -0.8 sigma (~5%) below Qi model value, hovering close to the 1yr range lows. It is one of the cheapest of the Stoxx sectors in Europe.
Global GDP growth is one of the top macro drivers of the sector. Since July, that sensitivity has accelerated higher firmly into positive territory. If there is belief in a soft landing any sign of a pick up in global growth confidence, owing upside in this space make sense given how depressed sentiment is.
#2. Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
Whatever the extent of the Fed rate cutting cycle, ultimately it is all about soft landing for the economy. The below chart shows the GS Qi long / short basket pair tracking US GDP growth. The dark blue line shows the deviation of that basket from its 200d MA i.e. the deviation from trend as measure of optimism / pessimism. Indeed, shown in this way, there is good relationship with the Citi US economic surprise index. Cyclical re-acceleration may well be a pain trade
Defensives have been among the best performing sectors recently and relative to their sector peers are more expensive on Qi’s macro fair value models.
#3. Tech momentum into year-end
Tech has been a laggard in the recent SPX rally. Positioning is now also cleaner in the space. Further, we know the strength of Q4 seasonality. SOXX is one of the cheapest sector ETFs at -1.3 sigma. The technology sector in general is a beneficiary of loose financial conditions. See the chart above highlighting the sector ETF sensitivities to FCIs (HY Credit spreads, USD TWI, real rates) vs. sensitivities to GDP. SOXX, COPX, XME, XRT, XLB, IWM, SLF, XLB are all sectors which relatively benefit from loose FCIs alongside trading below.
Above we show the Mag7 12mth fwd PE vs. Qi’s model FVG of the PE. On this basis, the 12mth fwd PE of the Mag7 stands ~1 sigma cheap to model value. That is close to the lower end of the valuation range of the last 1yr. A return to Mag7 leadership into year-end is a possibility if we see re-risking into YE.
#4. US Rotation – Energy cheap to Consumer Discretionary
Thus far, the recent rotation trade has favoured defensives and certain cyclicals, but not all. Energy has missed out because of the drag from crude oil prices.
But now we note US Energy XLE sits as 0.8 sigma (4.6%) cheap to Consumer Discretionary. Qi’s macro-warranted model value for the RV pair has been flat-lining since mid-August. Put another way, XLE has overshot to the downside relative to broad macro conditions.
Over the last year extremes in Qi’s Fair Value Gap has done a good job of marking local lows and highs in the actual XLE / XLY RV pair trade. If a 50bp rate cut from the Fed helps negate recession fears, maybe its time to be looking for cheap cyclicals that have lagged.
But now we note US Energy XLE sits as 0.8 sigma (4.6%) cheap to Consumer Discretionary. Qi’s macro-warranted model value for the RV pair has been flat-lining since mid-August. Put another way, XLE has overshot to the downside relative to broad macro conditions.
Over the last year extremes in Qi’s Fair Value Gap has done a good job of marking local lows and highs in the actual XLE / XLY RV pair trade. If a 50bp rate cut from the Fed helps negate recession fears, maybe its time to be looking for cheap cyclicals that have lagged.
#5. EUR yield curve – a pause in the steepening?
The European 2s10s yield curve was almost 60bp inverted as recently as May. Today it is almost back to flat.
There remain good reasons to think the risk-reward favours further curve steepening over the medium to long term. A hard landing means more rate cuts and a bull steepening; cutting when an economy is slowing but growing risks re-awakening the bond vigilantes who will bear steepen the curve.
But Qi’s model which has a high (72%) and stable R-Squared is suggesting this move may have too-far-too-fast. Relative to aggregate macro conditions, the curve sits 1.6 sigma (21bp) too steep.
The chart below shows there are times when the FVG becomes even more extended - last October around the Fed pivot, the gap reached 3 sigma. Even so we’re getting into thin air. Some consolidation could be healthy and offer better re-entry levels to re-set steepeners.
There remain good reasons to think the risk-reward favours further curve steepening over the medium to long term. A hard landing means more rate cuts and a bull steepening; cutting when an economy is slowing but growing risks re-awakening the bond vigilantes who will bear steepen the curve.
But Qi’s model which has a high (72%) and stable R-Squared is suggesting this move may have too-far-too-fast. Relative to aggregate macro conditions, the curve sits 1.6 sigma (21bp) too steep.
The chart below shows there are times when the FVG becomes even more extended - last October around the Fed pivot, the gap reached 3 sigma. Even so we’re getting into thin air. Some consolidation could be healthy and offer better re-entry levels to re-set steepeners.
10.09.2024
Qi Market Spotlight: XLF through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
US Financials are the poster child of the rotation trade. They have led the rally over the last month and sit close to ATHs. In many ways the sector is a litmus test for US equities more broadly – as recession risks rise, navigating the trade off’s between hard and soft landings whilst the Fed engineer easier financial conditions is critical.
The first step in that process is understanding what factors XLF is exposed to. Both macro versus idiosyncratic, & then within macro which factors matter most. Thereafter, only by decomposing risk and returns can we understand what role macro will play over company fundamentals. And, more specifically, which macro factors will dictate Financials performance into year-end.
Thus far, XLF has demonstrated confidence in the credit cycle – HY credit spreads are not back at their tights despite XLF at the highs. It is likely we remain a macro-dominant regime through to year end.
The first step in that process is understanding what factors XLF is exposed to. Both macro versus idiosyncratic, & then within macro which factors matter most. Thereafter, only by decomposing risk and returns can we understand what role macro will play over company fundamentals. And, more specifically, which macro factors will dictate Financials performance into year-end.
Thus far, XLF has demonstrated confidence in the credit cycle – HY credit spreads are not back at their tights despite XLF at the highs. It is likely we remain a macro-dominant regime through to year end.
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What have been the major XLF macro exposures ytd?
• Through 2024, XLF has benefited from a weaker dollar, falling 10yr yields and, since the Spring, falling energy prices and a steeper 5s30s curve; i.e. the focus ytd has been the easing in financial conditions.
• Through 2024, XLF has benefited from a weaker dollar, falling 10yr yields and, since the Spring, falling energy prices and a steeper 5s30s curve; i.e. the focus ytd has been the easing in financial conditions.
• This has also occurred in a backdrop where there is confidence in the credit cycle – the XLF factor exposure to risk aversion and HY credit spreads have dissipated to cycle tights.
If the balance of risks shifts towards recession, what changes should we look out for?
With the balance of risks shifting towards to recession risks, we would expect to see in that backdrop:
1. the exposure to 10yr yields moving towards positive territory; i.e. higher yields / higher XLF
2. the positive exposure to a steeper 5s30s curve continue to rise; i.e. pressure remains high on the Fed to cut
3. the negative exposure to corporate credit and risk aversion to not be so sanguine but rather increase; i.e. credit cycle fears rise
This would also manifest itself back to a regime where macro dominates XLF predicted risk. Early July reflected complacency. Today, we may have returned back to a macro dominant regime to understand risk.
With the balance of risks shifting towards to recession risks, we would expect to see in that backdrop:
1. the exposure to 10yr yields moving towards positive territory; i.e. higher yields / higher XLF
2. the positive exposure to a steeper 5s30s curve continue to rise; i.e. pressure remains high on the Fed to cut
3. the negative exposure to corporate credit and risk aversion to not be so sanguine but rather increase; i.e. credit cycle fears rise
This would also manifest itself back to a regime where macro dominates XLF predicted risk. Early July reflected complacency. Today, we may have returned back to a macro dominant regime to understand risk.
Macro has dominated both XLF returns and risk since early July
• Macro has also the dominant driver of returns since early July. See the chart below, showcasing the close relationship of XLF to the attributable factor return over the last month (reflecting XLF’s exposures to those factors and the underlying moves in the factors themselves). Like we have seen before, the XLF factor return seems to have peaked a few days before the actual ETF peak. If we suspect macro is to remain dominant, bulls want to see the XLF attributable factor return component trough and move higher.
• Macro has also the dominant driver of returns since early July. See the chart below, showcasing the close relationship of XLF to the attributable factor return over the last month (reflecting XLF’s exposures to those factors and the underlying moves in the factors themselves). Like we have seen before, the XLF factor return seems to have peaked a few days before the actual ETF peak. If we suspect macro is to remain dominant, bulls want to see the XLF attributable factor return component trough and move higher.
• What explains the descent in the XLF factor return from its peak on 27th August? The table below showcase the attributable return by individual macro factor. Reflecting slowdown fears - the jump in credit spreads and risk aversion, alongside dollar strength and the large drop in inflation expectations capture the bulk of the decline.
Watch the exposure and risk attributable to HY credit spreads – that may well tilt the scales
• Looking ahead, the Fed has never started an easing campaign with 50 basis points when credit spreads were this tight and unemployment this low. There is plenty of uncertainty: This point in the calendar is hard for risky asset assets – Will the Fed begin the rate cut cycle aggressively from the get go? Will we see a proper rise in the UE rate? Who will win the US election? There are 7 long weeks between Sep FOMC and Nov FOMC.
• Looking ahead, the Fed has never started an easing campaign with 50 basis points when credit spreads were this tight and unemployment this low. There is plenty of uncertainty: This point in the calendar is hard for risky asset assets – Will the Fed begin the rate cut cycle aggressively from the get go? Will we see a proper rise in the UE rate? Who will win the US election? There are 7 long weeks between Sep FOMC and Nov FOMC.
We would say watch financial conditions – that will tilt the scales:
• Watch if the XLF negative exposure to credit spreads becomes larger
• Watch if the XLF predicted vol attributable to macro continues to rise and if HY credit spreads can explain a larger proportion of the risk. Currently, the factor vol attributable to HY credit spreads is in-line with its long run average contribution i.e. the market is still comfortable with the state of the credit cycle. We should stay alert if we see this start to lurch higher
• Watch if the XLF negative exposure to credit spreads becomes larger
• Watch if the XLF predicted vol attributable to macro continues to rise and if HY credit spreads can explain a larger proportion of the risk. Currently, the factor vol attributable to HY credit spreads is in-line with its long run average contribution i.e. the market is still comfortable with the state of the credit cycle. We should stay alert if we see this start to lurch higher
This is a case study showcasing the power of Qi’s Macro Factor Equity Risk Model. Qi clients can train any single security or portfolio of assets on the same framework. Thereby identifying their macro factor exposures, and decomposing both their risks & returns into macro versus idiosyncratic. Finally by revealing which specific macro risks they are running, clients are in a position to consider which hedging strategies may be required.
29.08.2024
Qi MacroVantage
#1 Everyone hates China. Time for contrarians to let smart machines do their work.
#2 EURCHF – macro suggests decent upside
#3 Gold vs. Digital Gold
#4 Amazon - a cheap Mag7 stock
#2 EURCHF – macro suggests decent upside
#3 Gold vs. Digital Gold
#4 Amazon - a cheap Mag7 stock
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#1 Everyone hates China. Time for contrarians to let smart machines do their work.
Qi recently launched the Qi China Alpha Index (KCAIQI on Bloomberg). This index seeks to outperform the CSI 300 Index by applying a systematic approach. Qi applies a proprietary, machine learning-led investment process which (i.e. systematically) identifying the appropriate combination of stocks and their weights to meet the investment objective.
Qi’s optimisation process screens all the possible combinations of stocks and weights to seek the most appropriate ~35-50 stocks that minimise tracking error in sample AND minimise over-fitting out of sample. No single constituent security can have more than a 5% weight. This process is repeated monthly.
The table below shows that the index has outperformed the CSI 300 in 7 out of 9 years between 2015 – 2023, with the lowest underperformance -3% and largest outperformance +65%.
Qi recently launched the Qi China Alpha Index (KCAIQI on Bloomberg). This index seeks to outperform the CSI 300 Index by applying a systematic approach. Qi applies a proprietary, machine learning-led investment process which (i.e. systematically) identifying the appropriate combination of stocks and their weights to meet the investment objective.
Qi’s optimisation process screens all the possible combinations of stocks and weights to seek the most appropriate ~35-50 stocks that minimise tracking error in sample AND minimise over-fitting out of sample. No single constituent security can have more than a 5% weight. This process is repeated monthly.
The table below shows that the index has outperformed the CSI 300 in 7 out of 9 years between 2015 – 2023, with the lowest underperformance -3% and largest outperformance +65%.
Active funds are a small but fast-growing area within the ETF market. There is increasing appetite to take advantage of the ETF structure but use active strategies to generate alpha instead of relying on passive funds which simply track a target index or theme.
This week KraneShares have launched an ETF to track the Qi China Alpha Index.
This week KraneShares have launched an ETF to track the Qi China Alpha Index.
#2. EURCHF – macro suggests decent upside
Two weeks ago, Qi flagged the Swiss Franc as looking expensive relative to macro conditions. The two crosses we highlighted (AUDCHF, GBPCHF) have bounced but only slightly (~0.3%) and both still show the Franc as rich.
Now we have a bullish signal on EURCHF which screens as 1 sigma (1.8%) cheap on Qi.
The bullish divergence has arisen because spot EURCHF has fallen back towards the early August lows, while Qi’s macro-warranted value has risen 1.6% since the Aug 5th ‘flash crash’ Monday.
Forward growth and interest rate differentials are key drivers but the factors themselves haven’t moved hugely in August. Rather, the bigger move has come via risk appetite channels – the fall in risk aversion (VIX < 20) and gains in EuroZone Sovereign Confidence (narrower BTP spreads) have driven the 1.6% gain in macro-warranted model value over the last 3 weeks.
In short, the Swiss Franc has ignored the recovery in risk appetite since Aug 5th.
A -1 sigma Fair Value Gap has a strong (71%) hit rate as a buy-the-dip signal. While over the last year the correlation between Qi’s FVG and spot EURCHF suggests the mean reversion has occurred via the market correcting back towards macro fundamentals.
Two weeks ago, Qi flagged the Swiss Franc as looking expensive relative to macro conditions. The two crosses we highlighted (AUDCHF, GBPCHF) have bounced but only slightly (~0.3%) and both still show the Franc as rich.
Now we have a bullish signal on EURCHF which screens as 1 sigma (1.8%) cheap on Qi.
The bullish divergence has arisen because spot EURCHF has fallen back towards the early August lows, while Qi’s macro-warranted value has risen 1.6% since the Aug 5th ‘flash crash’ Monday.
Forward growth and interest rate differentials are key drivers but the factors themselves haven’t moved hugely in August. Rather, the bigger move has come via risk appetite channels – the fall in risk aversion (VIX < 20) and gains in EuroZone Sovereign Confidence (narrower BTP spreads) have driven the 1.6% gain in macro-warranted model value over the last 3 weeks.
In short, the Swiss Franc has ignored the recovery in risk appetite since Aug 5th.
A -1 sigma Fair Value Gap has a strong (71%) hit rate as a buy-the-dip signal. While over the last year the correlation between Qi’s FVG and spot EURCHF suggests the mean reversion has occurred via the market correcting back towards macro fundamentals.
#3. Gold vs. Digital Gold
For much of 2024 Bitcoin and Gold have traded in tandem. Until the August flash crash. Bitcoin has yet to fully recover from the hit to risk appetite, while Gold has benefitted from the uncertainty.
On Qi, the Relative Value model between the two shows Bitcoin as 1.7 sigma (26.5%) cheap relative to Gold. Such an extended Fair Value Gap is rare; it has only been seen 4x since 2009.
There’s a health warning. Model confidence of 50% means our macro factors can only explain half the variance in this pair currently. Other, non-macro factors (such as crypto entering a period of poor seasonals) are as important right now.
Still, it is interesting to note the tight correlation between Qi’s FVG & the spot price of the Bitcoin/Gold ratio. That doesn’t tell you whether this marks a buying opportunity in crypto, or a sign the air is looking pretty thin for gold. But it does suggest the elastic is stretched and some kind of mean reversion is pending.
For much of 2024 Bitcoin and Gold have traded in tandem. Until the August flash crash. Bitcoin has yet to fully recover from the hit to risk appetite, while Gold has benefitted from the uncertainty.
On Qi, the Relative Value model between the two shows Bitcoin as 1.7 sigma (26.5%) cheap relative to Gold. Such an extended Fair Value Gap is rare; it has only been seen 4x since 2009.
There’s a health warning. Model confidence of 50% means our macro factors can only explain half the variance in this pair currently. Other, non-macro factors (such as crypto entering a period of poor seasonals) are as important right now.
Still, it is interesting to note the tight correlation between Qi’s FVG & the spot price of the Bitcoin/Gold ratio. That doesn’t tell you whether this marks a buying opportunity in crypto, or a sign the air is looking pretty thin for gold. But it does suggest the elastic is stretched and some kind of mean reversion is pending.
#4. Amazon - a cheap Mag7 stock
Amazon is back in a macro regime for the first time in 2024. Its macro-DNA is pure Goldilocks: reflation (rising economic growth & inflation expectations), easy financial conditions (tight credit spreads) and healthy risk appetite (low VIX).
The latter has been instrumental in a ~20% rise in model value since August 5th & the flash crash low. And Amazon has lagged in this V-shaped recovery. It is now 1.1 sigma (9.1%) cheap to aggregate macro conditions.
Amazon is back in a macro regime for the first time in 2024. Its macro-DNA is pure Goldilocks: reflation (rising economic growth & inflation expectations), easy financial conditions (tight credit spreads) and healthy risk appetite (low VIX).
The latter has been instrumental in a ~20% rise in model value since August 5th & the flash crash low. And Amazon has lagged in this V-shaped recovery. It is now 1.1 sigma (9.1%) cheap to aggregate macro conditions.
There are other drivers to consider.
Amazon has yet to convince that they can compete in the AI arms race. Their Bedrock tool giving ASW customers access to third party AI models like Anthropic and Meta may turn the tide but, to date, they have lagged OpenAI, Microsoft and Google.
The charts remain damaged – technical analysis suggests the stock needs to close the gap around $180 which was the breakdown point after disappointing earnings at the start of August.
But, from Qi’s perspective, the stock is cheap to its macro environment and history shows these are significant levels.
Amazon has yet to convince that they can compete in the AI arms race. Their Bedrock tool giving ASW customers access to third party AI models like Anthropic and Meta may turn the tide but, to date, they have lagged OpenAI, Microsoft and Google.
The charts remain damaged – technical analysis suggests the stock needs to close the gap around $180 which was the breakdown point after disappointing earnings at the start of August.
But, from Qi’s perspective, the stock is cheap to its macro environment and history shows these are significant levels.
28.08.2024
Qi Market Spotlight: Market Spotlight: Anatomy of the Aug ‘flash crash’
Qi’s Macro Factor Equity Risk Model (MFREM) sheds light on the anatomy of equity returns and vol we have seen during the August ‘flash crash’
1. The pullback and subsequent rally can be explained almost entirely by macro
2. The SPY factor return actually peaked on 12th July, ahead of the actual index peak on 16th July – at turning points, macro can lead
3. The dominant factor drags from the 16th July peak to 5th August trough were risk-aversion related as opposed to overt fears on fundamentals
4. The subsequent rally reflected a reversal in these factors, with further weakness in the dollar also acting as a propeller
5. Where have macro factor returns recovered the most post the 16th July to 5th Aug drop? Quality & Value most; Growth least
6. There is a hierarchy across styles as to which factors matter most – For Momentum it is FCIs; for Value it is 5s30s and the USD; for Growth it is risk aversion and inflation expectations
7. In conclusion – Aside from a sudden geopolitical vol shock, higher factor return momentum is highly dependent on the fate of the dollar and 10yr yields. With ~200bps of cuts already priced within the next year, a slowdown in factor returns would suggest more two-way price action in risky assets
1. The pullback and subsequent rally can be explained almost entirely by macro
2. The SPY factor return actually peaked on 12th July, ahead of the actual index peak on 16th July – at turning points, macro can lead
3. The dominant factor drags from the 16th July peak to 5th August trough were risk-aversion related as opposed to overt fears on fundamentals
4. The subsequent rally reflected a reversal in these factors, with further weakness in the dollar also acting as a propeller
5. Where have macro factor returns recovered the most post the 16th July to 5th Aug drop? Quality & Value most; Growth least
6. There is a hierarchy across styles as to which factors matter most – For Momentum it is FCIs; for Value it is 5s30s and the USD; for Growth it is risk aversion and inflation expectations
7. In conclusion – Aside from a sudden geopolitical vol shock, higher factor return momentum is highly dependent on the fate of the dollar and 10yr yields. With ~200bps of cuts already priced within the next year, a slowdown in factor returns would suggest more two-way price action in risky assets
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Qi’s Macro Factor Equity Risk Model sheds light on the anatomy of equity returns and vol we have seen during the pullback and the subsequent rally
1/ The pullback and subsequent rally can be explained almost entirely by macro: We have decomposed the SPY total return from 1st July into factor (Qi’s macro factors) and specific (i.e. the idiosyncratic residual). From the 16th July peak through to last Friday, factors returns (red) best explain the index price action (blue). No surprise – macro dominates at turning points/
1/ The pullback and subsequent rally can be explained almost entirely by macro: We have decomposed the SPY total return from 1st July into factor (Qi’s macro factors) and specific (i.e. the idiosyncratic residual). From the 16th July peak through to last Friday, factors returns (red) best explain the index price action (blue). No surprise – macro dominates at turning points/
2/ Further, reflecting the dominance of macro, the recent correlation of SPY factor returns to SPY actual returns is at the upper end of this cycle’s range.
The RSq of SPY daily factor returns to SPY daily actual returns has been 77% over the last 4yrs. However, this relationship is changing over time with the factor return beta rising / falling over different periods.
Unlike style factors which represents a portfolio of stocks (i.e. risky assets which trend in the long run), macro factors do not always trend – across a large macro factor information set, some factors can be propellers and others drags, depending on the asset’s exposures.
Over long periods of time this can get lost in the aggregated, cumulative factor return of an asset. What we want to pay attention to is the rolling correlation of the factor return to the asset i.e. when high, macro is dominant
The RSq of SPY daily factor returns to SPY daily actual returns has been 77% over the last 4yrs. However, this relationship is changing over time with the factor return beta rising / falling over different periods.
Unlike style factors which represents a portfolio of stocks (i.e. risky assets which trend in the long run), macro factors do not always trend – across a large macro factor information set, some factors can be propellers and others drags, depending on the asset’s exposures.
Over long periods of time this can get lost in the aggregated, cumulative factor return of an asset. What we want to pay attention to is the rolling correlation of the factor return to the asset i.e. when high, macro is dominant
The second chart shows that on a 3mth rolling basis, the correlation is at the upper end of the range seen post Covid.
3/ The SPY factor return actually peaked on 12th July, ahead of the actual index peak on 16th July. Again, like we have shown above, we believe that at market turning points macro matters most, and factor returns can lead the actual market move.
4/ The dominant factor drags from the 16th July peak to 5th August trough were risk-aversion related as opposed to overt fears on fundamentals - credit spreads and risk aversion lurched higher more than offsetting the accustomed benefit from a drop in the dollar, 10yr yields and inflation expectations over this period.
5/ The subsequent rally reflected a reversal in these factors, with further weakness in the dollar also acting as a propeller.
to fade. See the chart below – a simple fear-gauge proxy
6/ The changes in factor exposures through this episode are telling – revealing just how sensitive risky assets have become to FCIs, with increasing prominence of the dollar.
But while VIX & credit spreads posted the biggest factor moves in August, under the hood the make-up of SPY’s key drivers are shifting. Lower inflation, bond yields and Dollar are becoming bigger factor exposures than corporate credit spreads. SPY’s exposures suggest equities see rate cuts as healthy, pre-emptive “risk management” from the Fed as inflation returns towards target; not because of fears about an impaired credit cycle.
But while VIX & credit spreads posted the biggest factor moves in August, under the hood the make-up of SPY’s key drivers are shifting. Lower inflation, bond yields and Dollar are becoming bigger factor exposures than corporate credit spreads. SPY’s exposures suggest equities see rate cuts as healthy, pre-emptive “risk management” from the Fed as inflation returns towards target; not because of fears about an impaired credit cycle.
7/ Where have macro factor returns recovered the most post the 16th July to 5th Aug drop? Quality & Value most; Growth least.
In order – Quality, Momentum, Value, SPY, Growth, QQQ. That QQQ macro factor returns have not kept up pace relative to say Value may well be indicative of the sector rotations we are seeing.
In order – Quality, Momentum, Value, SPY, Growth, QQQ. That QQQ macro factor returns have not kept up pace relative to say Value may well be indicative of the sector rotations we are seeing.
8/ There is a hierarchy across styles as to which factors matter most.
Momentum is most geared to FCIs, having the highest negative exposure to HY credit spreads and the dollar. Similar to SPY, we also note the sensitivity to higher inflation expectations and 10yr yields has also lurched more negative.
Value cares most vs. its peers on forward growth expectations (steeper 5s30s) but dollar weakness also matters – financials, homebuilders, consumer etc. all want lower FCIs.
Growth cares most vs. its peers on risk aversion and inflation expectations – presumably reflecting the cost of capital ramifications.
Momentum is most geared to FCIs, having the highest negative exposure to HY credit spreads and the dollar. Similar to SPY, we also note the sensitivity to higher inflation expectations and 10yr yields has also lurched more negative.
Value cares most vs. its peers on forward growth expectations (steeper 5s30s) but dollar weakness also matters – financials, homebuilders, consumer etc. all want lower FCIs.
Growth cares most vs. its peers on risk aversion and inflation expectations – presumably reflecting the cost of capital ramifications.
In conclusion – Aside from a sudden geopolitical vol shock, higher factor return momentum is highly dependent on the fate of the dollar and 10yr yields. Typically, we need a sharp decline in factor return momentum to signal a sell-off. However, a sudden, about-turn seems unlikely. Rather, a slowdown in factor return momentum would imply a more range-bound trading environment.