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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.
Orion Nebula 11107 1920
14.03.2023
Defensive equity plays
Thus far, equity markets have taken the massive re-pricing of the bond market in its stride.

For some investors, Silvergate / Silicon Valley / Signature are idiosyncratic stories. Or, even if there are systemic risks, they believe the Fed will ride to the rescue.

But for others a recession has just become significantly more likely given the new banking landscape and the implications for the real economy.

Increased insurance contributions, competition for deposits, stricter lending standards all point to a material tightening in credit conditions.

For those investors, the critical question now is what are the best defensive bets?

A quick video.
See more
Brendan Church Pkef6Tt3C08 Unsplash
08.03.2023
Decoupling
In 2022, global central banks had a common enemy. Everyone was unified in raising interest rates to fight inflation.

But, in 2023, there are early signs there could be sharp divergences between central banks and their priorities.

This week, the Fed seemingly doubled down on its hawkish message. Down in Australia while the RBA hiked rates, their forward guidance was more dovish.

Shifts in different country's relative policy stance will have huge ramifications for investors. That's true across asset classes but arguably currencies are at the sharp end of this. Even if you don't trade FX, this is an important market to watch.

In FX, interest rate differentials are often decisive. But not always. In 2023, knowing which currency pairs are being driven by rate differentials is going to be critical.
See more
01.03.2023
Amber flag for risk appetite
The Qi Vol Indicator has risen to 15.3. Historically, a one month rise of 20 points plus has provided investors with an early warning that some kind of volatility shock may be imminent.

Increases in the mid teens are not enough for a signal. But they do put us on alert.

It has had some false dawns, but eye-balling the chart below you can see there have been several occasions when the blue line spiked in advance of VIX itself.
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Brian Matangelo W Lc86 Nvia Unsplash
28.02.2023
What next for the China re-opening trade?
February was the month where, from a Western perspective, strong economic data and sticky inflation prompted markets to re-price towards the Fed's higher-for-longer view of the world.

But it was also the month when the China re-opening story stalled. After a strong start to 2023, the idea of a strong bounce in Chinese economic activity lost momentum. Will March re-boot that narrative?

Tomorrow we get China's PMI data for manufacturing and services. On Friday the unofficial Caixin series give their own PMI update. The consensus looks for a bounce and, if that acts as a catalyst for renewed optimism, what is the most efficient China re-opening trade currently?

The Watchlist below is not exhaustive but shows a couple of potential trade expressions.
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Raychel Sanner 0Pswkddfxii Unsplash
24.02.2023
US Consumer Discretionary - how to find best trade expression
A quick 3 minute video demonstrating the power of the Qi portal.

Assume you are in the camp saying this is a bear squeeze, not a new bull market.

You believe Consumer Discretionary is a sector that is vulnerable to an impending recession.

In a few simple steps you can:

* check the macro DNA of Consumer Discretionary

* screen for valuation gaps

* identify the most efficient trade expression
See more
Hannah Busing 0V6Dmtujaik Unsplash
21.02.2023
Snapback
The chart shows Qi's Fed Quantitative Tightening expectations factor. Early in 2022 it moved aggressively above trend (above zero) reflecting the Fed's move to shrink its balance sheet.

But it subsequently fell back below trend and one was reason why we (like others) flagged that, despite Fed rhetoric and rate hikes, aggregate financial conditions has eased.

Now its turned higher once again.
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Zachary Keimig Jhu0W96Ikoy Unsplash
15.02.2023
Sticky CPI, higher rates, NASDAQ rallies?
Inflation data can always be spun multiple ways and different measures used to support a transitory or sticky point of view.

But if we ignore economists and focus on the bond market reaction, its difficult to surmise anything but the data disappointed. For the first time, the money markets are pricing a Fed Funds rate north of 5.0% at the end of 2023.

So why, if bond yields legged higher, did NASDAQ outperform other equity indices? Thus far in 2023 US technology has fared better than its peers despite the common narrative associating higher rates with pain for tech stocks.

The chart below shows macro warranted fair value for the NASDAQ (red) & spot NDX price (white).
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Weightless 60632
13.02.2023
How to play an upside surprise in US CPI
A quick video to show you how the Qi framework can be used to hedge specific event risk - in this case tomorrow's US CPI report.

US inflation swaps are an input for Qi's US equity models and they have re-priced higher over recent weeks.

If an equity manager wants to heed the warning from the inflation market, Qi's Optimise Trade Selection function provides a quick and easy way to identify how different sector ETFs will fare.
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07.02.2023
Creeping bears
* RETINA - Qi's trade idea generator - had a strong skew to being bullish US equities in January.

* at the margins, that's changing. There are still several bullish signals being generated. The new news is a growing number of bearish signals.

* most notably in Consumer Cyclicals, Communication Services and Financials.

The Qi treemap is a new feature available to clients upon request. Initially it is trained on US single stocks but, over time, this framework will be applied to European and Asian single stocks, currencies and more.

It captures all the signals from RETINA over a rolling one month period. Bullish signals are green, bearish signals in red. The deeper the red / green, the higher the conviction level in the signal using our 1-4 bar system of measuring signal strength.

The chart below shows the treemap from Jan 13th.
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Felix Mittermeier L4 16Dmz 1C Unsplash
06.02.2023
Watch Utilities
The strong start to equities in 2023 has seen most people focus on the bounce in technology. Understandable when something like ARKK is up almost 40% YtD

But it is equally worth focusing on the other end of the spectrum. What's the story on the more defensive side of the equity market?

Inelastic demand plus bond-like characteristics make Utilities a classic defensive play.

Qi's Long Term model for XLU is not in regime but Short Term model confidence is high (89%) and stable.

There is no real valuation edge. XLU is slightly cheap (0.3 standard deviations, 1.3%) but that simply reflects it is slightly lagging the deterioration in actual macro conditions. Qi model value is -3.1% thus far in 2023.

But looking at Utilities relative to its peers the moves are far more dramatic.

The chart below shows XLU versus SPY.
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Orion Nebula 11107 1920
14.03.2023
Defensive equity plays
Thus far, equity markets have taken the massive re-pricing of the bond market in its stride.

For some investors, Silvergate / Silicon Valley / Signature are idiosyncratic stories. Or, even if there are systemic risks, they believe the Fed will ride to the rescue.

But for others a recession has just become significantly more likely given the new banking landscape and the implications for the real economy.

Increased insurance contributions, competition for deposits, stricter lending standards all point to a material tightening in credit conditions.

For those investors, the critical question now is what are the best defensive bets?

A quick video.
See more
Brendan Church Pkef6Tt3C08 Unsplash
08.03.2023
Decoupling
In 2022, global central banks had a common enemy. Everyone was unified in raising interest rates to fight inflation.

But, in 2023, there are early signs there could be sharp divergences between central banks and their priorities.

This week, the Fed seemingly doubled down on its hawkish message. Down in Australia while the RBA hiked rates, their forward guidance was more dovish.

Shifts in different country's relative policy stance will have huge ramifications for investors. That's true across asset classes but arguably currencies are at the sharp end of this. Even if you don't trade FX, this is an important market to watch.

In FX, interest rate differentials are often decisive. But not always. In 2023, knowing which currency pairs are being driven by rate differentials is going to be critical.
See more
Image 1
The chart above looks across G10 fx pairs and ranks where rate differentials feature as a driver. The y-axis simply shows whether interest rate spreads screens as the top driver, or holds less sway within Qi's models.

This is the first step in the pre-trade process.
  • step one - know which fx crosses will react most as interest rate markets move to reflect shifts in different central banks' policy stance.
  • in this instance, Aussie and Canadian crosses stand out as ones where cross-market rate spreads really matter. Yes both are resource-rich countries and that may lead some to use them as China proxies. But right-here-right-now, it is the RBA's and BoC's policy stance that matters more.
  • for the US Dollar, if you have a strong view on the Fed (whether hawkish or dovish pivot), don't trade USDCHF. USDJPY and USDNOK will be more efficient.
  • for the Euro, EURNOK reflects the ECB / Norges Bank reaction function. EURUSD is not currently a nominal rate differential play. Real yields matter more; and global growth considerations and credit markets matter even more still.
  • step two - screen out the models that are not in regime (greyed out dots in the chart above) and focus on those where macro is the dominant narrative (red dots rather than grey).
  • step three - add in the Qi valuation overlay. For example, USDNOK and AUDUSD have the biggest Fair Value Gaps. Both show the USD as having done a fair amount of work discounting the idea of a more hawkish Fed. And, in the case of the Aussie, now a more dovish RBA.
Divergence is going to be a big theme in 2023. Think China versus the US. Not just the politics but the contrast between Fed tightening and potential PBoC easing over this year.

Understanding what is driving asset prices is a critical first step in any investment process. #measuringmacro
01.03.2023
Amber flag for risk appetite
The Qi Vol Indicator has risen to 15.3. Historically, a one month rise of 20 points plus has provided investors with an early warning that some kind of volatility shock may be imminent.

Increases in the mid teens are not enough for a signal. But they do put us on alert.

It has had some false dawns, but eye-balling the chart below you can see there have been several occasions when the blue line spiked in advance of VIX itself.
See more
Image
They include:
  • “Volmageddon” in early 2018 was pre-empted by several weeks.
  • The Powell policy error in late 2018 / early 2019 was again anticipated.
  • Covid & lockdowns. US equities were making new highs in Jan/Feb 2020 when Covid was perceived to be another Asian epidemic rather than a global pandemic. Qi was warning that macro fundamentals were not driving the rally & that risk levels should be adjusted.
  • 2022 bear market. Once again, the sharp loss of macro’s ability to explain price action pre-empted the move in equity markets.
This time is different. The four most dangerous words in investing.

However, it is worth noting that this time around the move in model confidence comes from a higher starting point. Most of the Short Term models that constitute the Vol Indicator were tracking at 90% plus over January and February.

That's why the blue line is so low in the most recent part of the chart above.

To that extent, it may suggest we need to see a more sustained move higher, i.e. the Vol Indicator needs to increase by 30 or 40 points over the month rather than the usual 20.

Remember the core hypothesis* underpinning the Vol Indicator is that macro is inherently a more stable regime for markets than periods when positioning, deleveraging, sentiment shifts or geopolitics are driving price action. While model confidence is over 65%, macro is still the prevailing regime.

Finally, it is worth noting which components are responsible for the latest increase in the Indicator. The two biggest moves come from:
  • ST Euro Stoxx 600 model confidence has fallen from 95% on Feb 1st to 66% today.
  • ST EURUSD model confidence has fallen from 95% to 73% over the same period.
The point being it looks like Europe is at the epicentre of this move. The European single currency and equity market is predominantly where the regime shift is taking place.

Given our observation that European equities and European High Yield credit (iTRAXX XOver) rank amongst the most vulnerable risky assets, this Vol Indicator is worth watching and would appear to have a strong EU flavour.

* the PDF download below has the White Paper which provides an initial introduction to our Vol Indicator.
Raychel Sanner 0Pswkddfxii Unsplash
24.02.2023
US Consumer Discretionary - how to find best trade expression
A quick 3 minute video demonstrating the power of the Qi portal.

Assume you are in the camp saying this is a bear squeeze, not a new bull market.

You believe Consumer Discretionary is a sector that is vulnerable to an impending recession.

In a few simple steps you can:

* check the macro DNA of Consumer Discretionary

* screen for valuation gaps

* identify the most efficient trade expression
See more
Hannah Busing 0V6Dmtujaik Unsplash
21.02.2023
Snapback
The chart shows Qi's Fed Quantitative Tightening expectations factor. Early in 2022 it moved aggressively above trend (above zero) reflecting the Fed's move to shrink its balance sheet.

But it subsequently fell back below trend and one was reason why we (like others) flagged that, despite Fed rhetoric and rate hikes, aggregate financial conditions has eased.

Now its turned higher once again.
See more
Screenshot 2023 02 21 094850
This is important because it reflects what the interest rate volatility market is discounting in terms of changes in the Fed's balance sheet.

Rate vol is still just below trend but it is bouncing; this suggests the recent 'mini and hidden' easing cycle is unwinding. The 'mini and hidden' easing cycle?

In recent weeks there has been a stream of articles recently pointing to the fact that, at the global level, Central Bank liquidity has been increasing.

Between TGA and Reverse Repos in the US, Yield Curve Control in Japan plus PBoC liquidity injections the net effect has been financial markets have actually benefitted from an easing of financial conditions.

Fed QT expectations are only one part of the overall liquidity picture but, given the role liquidity has played in justifying the recent rally in risky assets, this needs watching.

Consider the chart below for example:
Screenshot 2023 02 22 100922
It shows the breakdown of macro factors currently driving the S&P500 on Qi's Short Term models. Central Bank quantitative tightening expectations accounts for around a third of the model.

Both ST and LT models showed the S&P500 as rich in February. This week's sell off has closed the Valuation Gap. The critical issue now will be watching Qi model value to assess if we have a new bear trend.

QT for the ST model, economic growth and industrial metals for the LT model. Are these key drivers pointing to a new downleg in aggregate macro conditions; or are they being offset by others? Qi shows this in real-time.
Weightless 60632
13.02.2023
How to play an upside surprise in US CPI
A quick video to show you how the Qi framework can be used to hedge specific event risk - in this case tomorrow's US CPI report.

US inflation swaps are an input for Qi's US equity models and they have re-priced higher over recent weeks.

If an equity manager wants to heed the warning from the inflation market, Qi's Optimise Trade Selection function provides a quick and easy way to identify how different sector ETFs will fare.
See more
07.02.2023
Creeping bears
* RETINA - Qi's trade idea generator - had a strong skew to being bullish US equities in January.

* at the margins, that's changing. There are still several bullish signals being generated. The new news is a growing number of bearish signals.

* most notably in Consumer Cyclicals, Communication Services and Financials.

The Qi treemap is a new feature available to clients upon request. Initially it is trained on US single stocks but, over time, this framework will be applied to European and Asian single stocks, currencies and more.

It captures all the signals from RETINA over a rolling one month period. Bullish signals are green, bearish signals in red. The deeper the red / green, the higher the conviction level in the signal using our 1-4 bar system of measuring signal strength.

The chart below shows the treemap from Jan 13th.
See more
Newplot 13 1
And then this is the treemap for today. More red signifying a growing number of bearish signals.
Treemap2
The chart below shows the number of signals as a percentage of the S&P500. Remember only single stock in a macro regime (model confidence > 65%) warrant a signal.

So, looking across the entire S&P500 during the October / November rally, bearish signals flat-lined at low levels, while bullish signals got into double digit territory.

During the January rally bearish signals were negligible while bullish signals ran in a 5-10% range.

Now, in February there's been a notable spike in the number of bearish signals the machine is firing out.
Treemap3
Where are those bearish signals coming from?

February has seen the largest number of bearish signals in Consumer Cyclicals in a year:
Treemapcc
The machine has not been bearish on any Communications Services stocks since last summer. Until now.
Treemapcs
There were only bullish signals on Financials between early December and late January. The first red bar appeared in the third week of Jan and they've been moving higher since.
Treemap7
Further methodology detail available but, in brief:
  • Stocks are mapped to their GICS Level 1 sectors. The size of the sector within the overall treemap simply reflects the number of single stocks in that sector. This could shift from number of stocks (volume) to market cap (price) if feedback warrants it.
  • RETINA signals are assigned a conviction level ranging from 1 (good) to 4 (super signal). These are derived via a blend of backtests, macro momentum (direction of model fair value) and price momentum (price trend).
  • Aside from the colour of box, there is additional info provided on each signal. Including open date and price, and current return.
This is a beta test of this new product. Upgraded functionality and greater model coverage will all follow in due course.
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