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#1. US Curve Steepeners: too far, too fast?

Bond bulls & bears can agree on one thing. Between Fed rate cuts & deficit concerns, the risk-reward favours a steeper yield curve from here. In the last week alone, weak economic data & the post-debate bump in Trump’s polling odds have given curve steepening fresh momentum.

For one section of the yield curve, however, there are signs the move has moved too-far-too-fast in the near term. Qi now shows 5s30s as 1 sigma (almost 10bp) too steep relative to prevailing macro conditions.

That’s the most extended our Fair Value Gap has been in 3mths. In fact, 5s30s has only been in regime & 1 sigma rich to model 19x since 2009, so this is a comparatively rare occurrence.

Finally, note a strong correlation between spot 5s30s & Qi’s FVG over the past 2 years. This suggests the mean reversion has tended to happen the “right” way, i.e. the market correcting back to macro fundamentals.

#2. US Yield Curve II – the Trump effect

The flexibility of the Qi framework means we can add additional variables into our models to stress test certain hypothesis.

As mentioned above, tax cuts, tariffs & possible threats to Fed independence mean many see a Trump win in November as inflationary & therefore a curve steepening trade.

Therefore we introduced the Real Clear Politics Trump less Biden betting odds as a new factor in our 5s30s US yield curve model. It is the biggest positive driver of our ST model, i.e. a Trump win does indeed imply a steeper yield curve.

Statement of the obvious? Intuitively, yes. But there is clear value in having the ability to quantifiably demonstrate the fact; the ability to measure the size of the political impact; a means to see how important the factor is over time. Custom models like these will be increasingly important as move closer to the election.

#3. EU High Short Interest names are 1 sigma cheap to Qi model value – vulnerable to a squeeze?

Like in the US, economic data surprises in Europe have fallen into negative territory, GDP Nowcasts have faded and policy uncertainty has been rising. Notably, the Euro Stoxx 50 is down over the last 3mths in sharp contrast with the US i.e. sentiment for the region has sharply deteriorated since Q1.

With that said, we note that Qi FVG of the GS EU High Short Interest basket stands at almost -1 sigma. This is at the low end of the FVG range since January 2023. See the first chart below. This is an interesting observation given it may well reflect sentiment for the region i.e. when the high SI basket is deemed cheap to macro, has sentiment become too bearish and a short squeeze is possible, or vice versa?

The following chart compares the Qi FVG for this basket to the broader Euro Stoxx market itself. The last few occasions where the FVG was heading towards -1 sigma, it was better tactically to be buying market dips as opposed to fading rallies.

#4. No room for disappointment this earnings season, especially for mega cap Tech; The most expensive stock in the S&P500 based on Qi’s model – no surprise, Tesla:

We are approaching the 6 week window where we will see 90% of major global companies report, with the last 2 weeks of July being the focal points with around 30% of S&P500 companies reporting each week. Consensus is expecting ~9% y/y growth for the S&P500, which would be the strongest quarter since 4Q 2021. The biggest six tech companies (AMZN, AAPL, GOOGL, META, MSFT, and NVDA) are expected to see earnings grow 30% y/y, compared with 5% for the rest of the market.

6 of the Mag7 stocks are trading above Qi’s macro-warranted fair value, albeit macro explanatory power (Model RSq) averages only 54% across the names. We highlight the table below – Tesla is trading at its 100th 1yr percentile on Qi FVG; Apple at its 73rd percentile; NVDA at its 71st. Indeed, across the whole index, no surprise that Tesla has the highest FVG – the stock has rallied almost 40% in the last 2 weeks. See the over-extension in the second chart below.

While we have no edge on earnings, the above table would imply a lot has been priced in - any disappointments are likely to be heavily punished. NDX is trading 0.6 sigma above Qi model value; SPY is 0.3 sigma above Qi model value.

#5. Nikkei 225 – Overexcitement over the last month relative to growth expectations?

The Nikkei has hit an all time high. Indeed over the last month, the index has been among the strongest major indices globally (in local currency terms). Even in dollar terms, it has been outperforming the S&P500 over the last 3 weeks. Strength over the last month has been led by Topix Banks and Insurers, alongside higher domestic bond yields. Yet over the last month, Nikkei’s Qi model value has seen a sharp drop!

According to Qi’s machine, the largest macro driver of the Nikkei is not the level of JPY or bond yields, but rather global economic growth. See the first chart below.

Our "Economic Growth" driver accounts for nearly 30% of explanatory power in our Nikkei model. Over half the recent fall in macro-warranted model value comes from the downward re-rating in Now-Casting's tracking GDP estimates.

The Nikkei is today trading at +1 sigma above Qi macro-warranted fair value. While Qi’s model value has started to move higher, the dislocation to spot price is large – see the chart below. We wonder if the recent excitement has gotten ahead of itself, if especially investors are concerned on economic growth slowdown into Q3.

#1. SPY Qi ST model sensitivity to credit spreads turns positive – a sign of complacency?

Last week’s MacroVantage made 2 key observations:

1/ There is no SPY valuation edge: On April 19th, at the trough of the last SPY pullback, the index traded 0.74 sigma below its Qi macro warranted fair value. Today, that valuation gap has fully closed.

2/ Yields across the curve are too low: At the heart of the SPX rally has been the roll-over in US inflation expectations and US real yields. In other words, not only is there no valuation gap, Qi is showing concern for one the most important macro drivers

We can add a third key observation:

3/ The SPY sensitivity to CDX HY credit spreads has turned positive (ST model). Consider that the index has risen 3.6% MTD but CDX HY credit spreads have been gradually widening since mid-May. SPY positive sensitivity to HY spreads is a rare event.

The hypothesis that this reflects complacency is borne out below. We note the strong relationship between SPY sensitivity to HY spreads vs. the AAII Bulls less Bear sentiment index, a proxy of investor sentiment, since 2018.

In other words, sensitivity to HY spreads can be seen as a proxy for risk sentiment. When the sensitivity is deeply negative, fear is high. Equities subsequently “climb” the wall of worry and once in positive territory is arguably complacent.

Note we have seen the sensitivity to HY spreads has turned positive only a handful of times – so we should be careful to jump to conclusions. However, we can couple this with the other observations: companies are going into buyback blackout period ahead of Q2 earnings and the upside surprise in Australia & Canada inflation (see below) – a reminder that this is the challenging part of the current rate cycle – a premature easing ahead of a pickup in inflation is the last thing needed.

#2. AUDCAD FX to catch possible RBA – BoC policy divergence

This week has seen inflation in both Australia & Canda surprise to the upside. On paper that should dent hopes of rate cuts from both the RBA & BoC, but there are nuances.

The RBA told investors they discussed rate hikes at last week’s meeting &, after the CPI beat, markets have discounted around a 40% chance of an increase in the Cash Target Rate in August. The BoC have already delivered one rate cut & markets still perceive them as being in policy easing mode; the question is more whether stubborn inflation delays further cuts. For example, after this week’s inflation print expectations for another 25bp reduction at the July 24th meeting fell almost in half (from ~60% to ~35%) but it is still a rate cut that is being discussed.

On Qi, the Aussie Dollar screens as modestly rich to its G7 peers. Of the Aussie crosses that are in regime, AUDCAD has the smallest Fair Value Gap. Aussie is ‘just’ 0.3 sigma (0.44%) rich to aggregate macro conditions. That suggests AUDCAD could be the pair with the biggest potential upside if you fear the RBA become a hawkish outlier.

That is also borne out when we drill down to inspect AUD crosses sensitivity to both nominal & real interest rate differentials.

• AUDCAD has the biggest negative sensitivity to Inflation Differentials, i.e. amongst all G7 pairs, higher Aussie real yields benefit AUDCAD the most.
• AUDCAD has the biggest positive sensitivity to Rate Differentials, i.e. a hawkish RBA that lifts Aussie nominal yields relative to other G7 yields, & its AUDCAD again that rallies the most.

Two final observations. Macro momentum for AUDCAD is trending firmly higher. Macro-warranted fair value is now 0.9090, the highest since mid-December. Only AUDJPY has seen model value improve more dramatically over Q2. Which makes sense from a RBA-BoJ policy stance perspective, but long AUDJPY positions face the issue of MoF intervention risk.

Aside from the false call in October last year, Qi’s valuation gaps have done a decent job of marking local turning points.

#3. Ahead of the first debate, risky assets are not yet making thematic bets on a Trump presidency; only conclusion for now is that Trump remains a positive for risk:

We have created custom Qi models for major indices, sector and now S&P500 stocks which include the difference in Real Clear Politics Betting Odds for Trump winning vs. Biden winning.

At the S&P500 index level, we have already noted that rising Trump odds are a supportive upside driver of the index. At the sector level, XLK is the standout. It is the most sensitive sector and sensitivity to Trump-Biden betting odds is the #1 +ve driver for the model on our short term horizon.

We subsequently screened at the stock level to compare the performance of the top 30 stocks benefiting most from a Trump win vs. the bottom 30. This revealed the relative performance shown below:

The full list of names is available on request. Interestingly, the longs are Technology, Healthcare and Consumer Discretionary. The shorts are dominated by Energy & Materials.

At first glance, this would seem count-intuitive given Trump’s tariff policies, in particular a 60% tariff on China imports. The tech sector, in particular hardware, has high supplier exposure to China. However, such distinctions do not appear to be made currently.

The only firm conclusion we can make currently based on the current data, is that the market appears comfortable with a Trump presidency. This will almost certainly evolve as we approach the elections and Qi will update its analysis accordingly.

#4. Sector rotation continues under hood – what is still rich? Staples & Biotech

The sector rotation under the hood of the index over the last week has seen Energy and Financials outperforms, Technology underperform (see last week’s MacroVantage where we highlighted the dislocation). However, selectivity if also required to discriminate between defensive sectors.

US Staples today has the highest fair value gap between Qi macro-warranted fair value and the spot price (+0.9 sigma), relative to any other major sector. The divergence between the Qi model price and the spot price over the last 10 days is notable. See the first chart below.

The falling Qi model value has been a function of VIX, rate vol and credit spreads drifting higher and Eurozone confidence and metals drifting lower.

Our back-testing shows a 71% win rate going short Staples at the current level of FVG and holding until withing 0.25 sigma of fair value (since 2010). Similarly, IBB is trading at +1.3 sigma – a 75% win rate going short at these levels.

#5. AT&T

AT&T is now almost 2.5 sigma rich to its Qi macro modelled fair value.

This makes it almost 15% rich and the stock is at its 100th percentile in terms of valuation over the last year.

The AT&T share price is at 52 week highs having almost closed the gap from its drop in Apr 2023

The high dividend yield combined with lower 10y yields has clearly supported the stock.

Further upside is now dependent on continued easing in financial conditions with the stock positively sensitive to:
• Lower real rates
• Less QT
• Higher liquidity

Somewhat anomalously, AT&T also wants a higher gold/silver ratio

1. SPY has now converged to Qi model value - sector rotation is order of the day

QQQ is now trading at the top of its Qi FVG range at +1.35 sigma on Qi’s ST model. The freight train that is mega-cap Tech has been carrying this market over the last month. Within Tech, following excitement from its WDC event, Apple is the valuation standout now trading at +2.98 sigma above its LT macro-warranted fair value – the highest in recent history and most overbought since 2021.

However, the last month has revealed greater uneasiness under the hood: Cyclical sectors have underperformed defensives; the equal-weighted S&P 500 actually saw its ATH at the end of Q1; crowded themes have been attacked (power / Utilities, Copper) and previously winning factors have been more range-bound (momentum). Couple that with the surge in meme stock trading that may be suggesting froth.

It strikes us that for the first time this quarter SPY has finally converged to Qi model value – see the chart below. At this point, there is a bigger FVG discount in equal-weighted S&P 500 (-0.6 sigma) than the headline S&P 500 index. Until yesterday’s CPI release, Qi model price momentum had been treading water over the last month.

2. Thankfully the CPI miss should support market breadth with value emerging in cyclicals – this was key because FCIs / disinflation remain the arbiter of stocks

The most important macro upside drivers for QQQ & SPY? Tighter credit spreads, weaker dollar, lower real rates, lower inflation expectations i.e. FCIs remain key for the macro narrative to keep supporting Qi’s model value.

In this regard, the CPI miss was welcomed. As a reminder, the below table shows the relative winners / losers from the dovish CPI print. Winners are both tech orientated but also value / domestic cyclicals – financials and homebuilders. Into the summer, there may well be scope to rotate into these laggards.

XLF relative performance should see respite – Qi’s LT model for XLF vs. SPY RV is high and stable. FVG has hit -2.8 sigma – the widest valuation gap in recent history. Other large valuation gaps are notable in XLI vs. SPY (-2.7 sigma) and IGV vs. SPY (-1.6 sigma)

3. What next for OAT yields?

After hitting 3.32% in the initial aftermath of the shock election announcement, 10y OAT yields have fallen around 15bp. That reflects international rather than domestic events. This week US Treasuries have benefitted from a strong auction, soft CPI & an unchanged Fed. Lower US yields have been the catalyst for the move in global bond markets.

It is noticeable though that Qi’s model shows 10y OAT yields now sit at macro-warranted fair value. The election spike took yields 0.6 sigma (15bp) above our fair value metric; but that move that has now retraced. What next?

Clearly politics is going to be critical in the weeks ahead. But model confidence of 87% says macro is key too. Qi model value is marching higher. Back in mid-May, aggregate macro conditions ‘justified’ yields just under 3.00%. Today, model value is some 20bp higher.

4. French large caps vs midcaps - a more targeted approach to capturing the Gallic risk premium?

We wrote an insight earlier this week - “Pricing the Gallic Risk Premium”. Here we screened Eurozone equities and EUR FX crosses to highlight the vulnerabilities. We noted (1) SX5E sensitivity to our Eurozone confidence measure was close to long term range highs (2) Qi’s model price for Eurozone equities had already been falling (impacted by falling copper prices / waning China optimism) (3) Screening for most sensitive single stocks, the impact is broader than just the banks.

We also note here that the CAC 40 index itself is not the best proxy for domestic activity given its international exposure. The French Midcap index SBF250 should be a better bearish hedge. We created a Qi model for the CAC 40 / SBF 250 relative value pair. The ST Qi model RSq is 84% and FVG is -1.0 sigma. On the LT model, the RSq is lower but the FVG is -0.9 sigma. See the first chart below. The top driver are lower Eurozone confidence and a higher gold / silver ratio. In other words, this RV pair may offer a more discriminate defensive bet than merely shorting French large caps outright. The second chart shows the close relationship of the pair to the OAT / Bund yield spread.

5. Mexico - VaR shock or carry opportunity?

Hello summer carry? The election-driven sell-off has driven the Mexbol index right to the bottom of its Qi fair value gap. Confidence in our Qi model of the index has been stable for the last 12mths. Investors will be hoping that the market reaction acts as a warning shot deterring any unsettling action from the Sheinbaum administration.

EWW, the iShares MSCI Mexico ETF is -2.4sd cheap to Qi model value. Since 2009, it has never been in macro regime (i.e. model confidence > 65%) and this cheap to model value. See the charts below – Extremes in the Qi fair value gap have been a good gauge for price moves in recent years.

Similarly, Qi’s models for USDMXN have a current fair value of ~17 vs. 18.8 spot price.

In Qi’s framework, Eurozone risk premium is best captured by Eurozone sovereign confidence: We measure this using Eurozone government bonds asset swap spreads. Wider spreads are a good proxy of rising risk premia in the region. The overwhelming majority of Eurozone stocks exhibit a persistently positively sensitivity to Eurozone confidence i.e. they want to see tightening yield spreads.

Today, Euro Stoxx 50 sensitivity to yield spreads is high relative to its long term history. Outside of Covid and the 2011-12 Eurozone crisis, sensitivity is close to the highs of its range. In other words, this macro factor is key in dictating risk appetite. See the chart below.

After yesterday, the Euro Stoxx 50 is trading 0.4 sigma cheap to Qi’s macro warranted fair value BUT Qi’s model price is falling: Macro explanatory power is stable and high at 83% on Qi’s LT model. The FVG that opened up over May between spot price and a higher Qi model value is now closing as a result of fading Qi model momentum.

The CAC 40 is trading at -0.7 sigma BUT again the political uncertainty is likely to persist at least several weeks into the elections. Together with the historical importance of Eurozone Confidence for Qi’s European models, it is likely too early to buy the dip.

It is not just the banks but also bellwethers that have high sensitivity to Eurozone confidence: The table shows the top 20 liquid Eurozone stocks with highest sensitivity to this macro factor – where sensitivity is both high in absolute terms but also high relative to other macro factors influencing the stock. The average Qi FVG across these names is only -0.14 sigma – again, not cheap enough to buy the dip.

The second chart shows the strong, inverse relationship between equal-weighted performance of these names and BTP-Bund yield spreads.

So, in G10 fx, the two safe haven currencies stand out as the best Euro crosses to focus on. But is one a better bet that in the other in this instance?

Next, we screen to see which pair is most vulnerable to intra-European bond spreads blowing out.

Currently, it is EURCHF (red line below) which displays the greatest sensitivity. It will rise (fall) the most when peripheral spreads narrow (widen).

So, at the margin, EURCHF looks the better play when looking specifically at the Eurozone confidence factor. But what about from a broader macro perspective?

The charts below show model confidence & model value for both EURCHF & EURJPY. Both are in macro regimes, but the picture on macro momentum is very different.

EURJPY model value continues to trend higher suggesting the broad macro environment still favours Euro appreciation.

EURCHF model value is flat-lining at best; & may even be showing signs of breaking down.

So, while it isn’t rich, EURCHF offers one of the best entry points from a valuation perspective; it is the cross which will move the most on any return to spread widening in the European government bond market; & it is the pair where macro conditions in aggregate appear to be deteriorating.

To repeat, there is no valuation edge right now - it is more that EURCHF is closer to model value than most other EUR-DM crosses. But the correlation between spot & Qi FVG also suggests recently the model has done a decent job of catching local highs & lows.

1. The “bad news is good news” tightrope – lower bond yields but slowdown evident leading to waning market breadth

Qi’s SPY short term model has exhibited a high and stable macro explanatory power over the last 2 months at ~77%. The most important upside macro drivers are in order: trade weighted dollar (weaker); real rates (lower); credit spreads (tighter); inflation expectations (lower). See the chart below over the last month.

However, SPY model value momentum has stalled over the last 3 weeks. This period has coincided with the fall in copper, Atlanta GDP Nowcast and a pick up in risk aversion, rate vol and inflation expectations. Qi’s model recognizes these drags to the model value over this period – see the chart below. Softer growth has been one of the largest drags to model value.

Under the hood of the index, a “slowdown” rotation is more evident. We have seen a dislocation emerge through May where the index level has held up but Qi’s L/S US growth tracking basket has not. See the chart below. Over the last month, secular AI / electricity demand themes have propelled Tech and Utilities. This leave us nervous as the % of S&P500 stocks now above their 50d MA had hit a high of 85% at the start of the quarter but now only 48%

2. Screening Qi for stocks most / least exposed to a US slowdown

Qi’s framework allows us to quickly screen for stocks most / least exposed to a US slowdown. We screened for the top 20 most / least sensitive US and European names. See the two charts below showing equal-weighted performance of these names.

The longs in the US reflect high exposure to Financials. The short reflect names more sensitive to financial conditions than directly US growth. For both regions, we show the names selected by Qi below.

3. Crude vs. Inflation. Hard vs. Soft data.

In bonds, the fall in US Treasury yields over Monday & Tuesday was the biggest 2 day drop in 2024. The main drivers of the slowdown story are weak survey data & falling commodity prices, especially crude oil.

The chart shows US inflation expectations (using CPI swaps) & energy (WTI) in z-score terms. The latest sell off in crude markets has taken WTI 1.2 sigma below trend. Inflation expectations have sold off but not to the same degree; they remain slightly above trend.

Such disconnects are rare, which begs an important question.

Is the sell-off in crude a function of aggressive CTA selling rather than reflecting weak global demand? Or are inflation expectations simply lagging, & break-evens / nominal yields will ‘catch down’.

Put another way, WTI reflects the soft survey data once again sparking fears of an economy coming in to land. The correction in inflation expectations is consistent with the hard economic data, which is softening but yet to panic.
Cue Payrolls.

4. India or China?

For some, the Indian election result doesn't change anything. The long-term structural bull case remains intact.

It just requires a rotation at the sector level - away from infrastructure or renewable energy plays, & more towards consumer staples as realpolitik dictates Modi focuses more on rural, low income cohorts. But for others, there may be a broader, country level asset allocation decision. There is no doubt that, amongst global allocators, China's loss has been India's gain.

India's star has risen not just because of the domestic story, but because capital had fled Chinese equities during the Covid lockdown hangover.

Quant Insight's model of Chinese versus Indian equities (using the ratio of FXI / INDA ETFs), shows that overall macro conditions supported Indian outperformance over the last 4yrs.

Until now.

It may yet be a simple pause that refreshes, but the blue line below is showing signs of potentially carving out a bottom.

That means the entire macro complex - economic fundamentals, financial conditions, risk appetite - have moved from supporting INDA to becoming more two way.

If the blue line starts making new highs, the macro environment will start to become a tailwind for FXI outperformance instead.

We're not there yet. But, given the recent momentum in China & the Indian election result, it's worth monitoring closely.

5. NOK & the perils of two-factor correlation

Last week Qi flagged EURNOK looked oversold relative to prevailing macro conditions. The cross has rallied around 1.0% since then, & Qi’s FVG has narrowed from -1.3 sigma to -0.5. This week USDNOK looks interesting.

More specifically, how does this petro-currency pair trade with crude oil? Recent patterns show the Dollar is the bigger beneficiary from rising energy prices so this latest fall in crude will have many looking at simplistic WTI/USDNOK overlay charts & thinking about potential downside for the $.

Qi looks at the entire macro complex & while lower WTI prices are a drag, there are offsets (low risk aversion, tight credit spreads, falling UST yields) keeping model value flat-lining. Right now Qi says USDNOK “should” trade at 10.75 given the overall macro picture. That leaves spot 0.6 sigma (1.5%) cheap to model.

Our model is not in regime, but confidence is 60% & rising. Furthermore, our FVG has done a good job of marking recent highs & lows in spot USDNOK. Ignore the siren calls of chart crime. Absent an even bigger puke in crude plus broad “risk off” and a back-up in UST yields, the risk-reward does not look good here for USDNOK shorts.

6. FOX

FOX Corp is trading at 2.3 standard deviations rich to Qi macro warranted fair value, which is the 100th percentile over the last year

The stock has been driven up partly by good news on its new streaming service Tubi.

Qi drivers for FOX are inflation (positive to higher inflation), risk aversion (negative to increasing risk) and GDP (negative to higher GDP)

1. A fragile equilibrium for risky assets?

Falling Risk Aversion and tighter HY credit spreads have been at the epicentre of higher Qi model values for risky assets over the last month. This rally has not been about economic growth expectations - see the first chart showing the 1mth drivers of SPY model value. Further, Risk Aversion and HY credit spreads are the largest SPY macro exposures.

3 Qi observations to show why this is a fragile equilibrium:

1. The ST model Qi FVG for the ETF UVXY (ProShares Ultra VIX Future) i.e. Risk Aversion itself is almost 1 sigma cheap, which is at the bottom of its 12mth range. Nov'23 was a poor signal for vol as Rsq fell sharply in the aftermath of the Fed Pivot and QRA announcement. This time around ST model RSq has been rising.

2. The ST model Qi FVG for CDX HY credit spreads is also at the bottom of its 12mth range. Qi shows the biggest widening driver of credit spreads are higher vol, higher real yields, a stronger dollar and higher rate vol. Below see the FVG vs. spot price of CDX HY spreads - again the same point that there is not much risk premia to harvest.

3. Tech has been the sector leader of the rally over the last month. Qi shows the QQQ as cheap to model value in mid-April BUT today it is rich at the upper end of its historical range. The burden is high on NVDA.

2. AI Party in the most boring sector – Utilities – very rarely has the sector been richer on Qi

US Utilities have been among the best performing sectors over the last month, last 3mths and YTD! The sector’s relationship with bond yields has completely broken down. The first chart below shows the sector’s Qi sensitivity to US 10yr real yields – the most positive it has been since 2009. The second chart shows Qi’s FVG – we hit the second highest FVG since we have data from 2009.

The narrative shift on electricity producers is based on AI data centre power demand. Some discernment is necessary though on the sector which is showing signs of exuberance. As consumer facing businesses, many utilities typically received regulated returns on regulated assets (outside of independent power producers). Many also are faced with ageing assets just as the cost of capital is rising.

Are Utilities really AI stocks?

3. Trump not seen as a risk for stocks – indeed, the Qi sensitivity to a Trump Win is positive

Qi’s macro factor models are customisable. With this in mind, we created 2 variations of our Qi model for SPY. The first including the daily time series of Real Clear Politics betting odds for a Trump win. The second for a Biden Win.

The first takeaway is that rising Trump odds is seen as a positive for risky assets. Empirically, see below simply overlaying Trump betting odds vs. the S&P 500 index. Secondly, that sensitivity has been rising since February. Over the second half of 2023, rising Trump winning odds was seen predominantly as a negative driver and it switched early this year. See the second chart. An SPY model including Biden Betting odds, reveal it as not a driver at all currently for stocks. See the third chart. Also of note is that we included Trump odds in a Qi model for EURUSD - a Trump Win is seen as USD negative.

Arguably, this reflects the market’s belief on Trump pursuing again expansionary policies and being pro tax cuts (despite the size of the fiscal deficit and follow-on risk to inflation). After all, we have already seen Trump take credit for 2023 market gains, saying “This is the Trump Stock Market…investors are projecting that I will win, and that I will drive the market up.”

4. Re-rating FX

Qi flagged bullish signals on EURAUD & GBPAUD at the end of April. In both instances, model value was flat-lining while Aussie strength saw the crosses sell-off further than aggregate macro conditions warranted.

Yesterday’s sticky core & services CPI print in the UK was the catalyst for a catch-up. From 2% cheap to model a few weeks ago, GBPAUD is now ‘just’ 0.5% cheap.

The mileage for a further correction sits in EURAUD at these levels. It still sits 1.4% cheap to the broad macro environment.

In terms of new signals, note USDCHF now screens as 1.2 sigma (2.6%) rich to macro conditions.

The cross can be thought of as a battle between two safe haven currencies. And, on current patterns, higher risk aversion benefits the Dollar over the Swiss Franc.

And it is because VIX is sub 12 that Qi model value has declined and spot has ignored that move lower. Hence the Fair Value Gap.
Historically, there have been 29 instances when USDCHF has been in regime (RSq > 65%) & this rich in FVG terms. So crudely we get this signal twice a year.
And the signal has a 66% hit rate & posts an average return of +0.77%.

5. United Health Group (UNH) – looks rich to macro valuation after positive earnings

• UNH has moved up strongly after modestly positive earnings
• However, the macro valuation has declined consistently over the last 10 weeks from $525 to $462
• This makes UNH 9.4% rich or 2sigma rich to Qi fair value (chart below). This FVG has done an effective job of catching local highs & lows.
• UNH is sensitive to stronger GDP and steeper curve but wants lower inflation; it is also defensive in the face of volatility and QT
• The share price is still trending strongly upwards but is now dangerously ahead of the fair value.

#1. Good news is still bad news – Qi sensitivity of S&P500 to US GDP growth is negative

Through April, Qi has shown the rising sensitivity of risky assets to financial conditions (rather than growth expectations). The S&P 500 Macro Beta Impulse has been rising. Last week also showed that the enemy (unemployment) of my enemy (inflation) is my friend and FCIs subsequently eased.

The bigger question going forward may well be when do growth concerns replace the soft landing / rate re-pricing narrative? We are not there yet – indeed, there is no straight path from no landing to recession concerns. Consider that as the Citi US economic surprise index has fallen below zero, stocks have rallied and VIX is at13. Economic growth expectations is a small share of the SPY macro sensitivity pie currently.

Through the Qi lens, a few observations (1) the majority of US GICS level 1 sectors want lower GDP not higher (2) SPY sensitivity to GDP growth is close to long term range lows (3) currently the top driver for the Qi short term model of UVXY ETF (VIX) is higher US GDP growth!

#2. Rate cuts today versus economic growth tomorrow – FX implications

The same question can be asked in FX markets. For a long time now the only game-in-town has been comparing the different reaction function amongst Central Banks - which Western Central Bank cuts rate first? Which cuts rates the furthest?

Relative interest rates will always be critical for currencies but, as above, investors need to be on guard for when the narrative shifts to forward growth prospects. Put another way, is there a point where FX markets move away from exclusively focusing on respective interest rate levels; & possibly towards rewarding currencies with improved growth projections?



The chart below takes EUR-DM crosses & looks at the spread between Qi’s “Interest Rate Differentials” factor (1y1y, 2y2y & 5y5y x-mkt yield spreads) & Qi’s “Growth Expectations Differential” (the shape of the 5s30s yield curve in each currency) factor.

As you’d expect most of the time that spread is positive – the default pattern is currencies trade off interest rate differentials. And the majority of crosses still show that default pattern today.

But EURSEK is a clear standout. The move deep into negative territory suggests the cross has become more sensitive to the relative economic fortunes of the EuroZone versus Sweden.

Maybe the Krona’s weakness reflects Sweden’s position as one of the G10 countries with the largest private sector debt levels & therefore most vulnerable to a housing shock.

Does it matter?

If more FX crosses start to see a shift in emphasis, investors need to re-think their approach. Fortunately, Qi captures these sensitivities every day & can alert you to such a regime change

#3. Dollar dictating risk assets – regional banks & EEM caution – they want a weaker dollar but also trading macro-rich

In an earlier note (“The Dollar Juggernaut”, 24th April), Qi stated the importance of the Dollar was increasing for risky assets – the negative sensitivity of the Dollar to SPY is high relative to history and high relative to the importance of other macro factors. See the first chart below showing the inverse relationship between SPY and the dollar over the last month. Tactically, note that dollar has yet to breach 3rd May lows while risky assets have made headway since – orange signal?

We highlighted in that note the winners & losers from the scenario of a stronger dollar. If the dollar remains on the backfoot, the winners would be Asia Pac, Growth (Tech / BioTech) and domestic-geared sectors (retail, real estate, banks).

However, we would highlight KRE and EEM as two weaker Dollar beneficiaries that are trading rich to the Qi model at 0.75 sigma and 0.93 sigma, respectively. Optimism looks over-extended. Below see EEM – the FVG is in fact the highest since Jan-23. Since 2009, selling EEM at +0.9 sigma has yielded a 65% win rate across 20 trades.

#4. Macro + Politics. USDZAR

If the strong Dollar is to prompt a pause in recent Emerging Market outperformance, is there an FX angle?

The cheapest Dollar-EM cross on Qi is USDZAR. It is 1.6 sigma or 2.3% cheap versus macro-warranted fair value. The caveat is model confidence is only 25% but, as the chart below shows, Qi’s FVG has done an effective job recently at calling local turning points.

Moreover, one potential explanation for low model confidence is the upcoming South African election. A case of politics outweighing macro conditions.

If true, then at these levels the onus is on a decisive & market-friendly result from the general election. Absent that, the risk-reward for the Rand is not great in either political or macro terms.

#5. Trading inflation tails ahead of CPI

With market focus on FCIs as opposed to growth expectations, next week’s CPI print will likely be pivotal to determine near-term market direction. With this in mind, we show the winners vs. losers on a hotter or softer than expected reading.

We have screened on the basis of both sensitivity to inflation expectations and Qi fair value gap. On a soft print, the winners would be speculative tech, SPY vs. FXI. Likely also domestic interest rate sensitive sectors e.g. KRE, S5REAL, as well in part bond proxies like Utilities. On a hot print, winners would be commodity equities and fuelling China's equity strength.