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Moreover, you could argue this snapshot under-represents the move in overall financial conditions. Qi does not include equity markets in our credit impulse measure, so there is no impact from any potential wealth effect accrued from October’s bounce in equities.

For policy hawks this creates a paradox. Dovish language tomorrow further removes the tightening of financial conditions needed to combat inflation.

The two majors – EURUSD & EURJPY – remain out of regime. But the rest all have high model confidence numbers – macro has strong explanatory power.

EURNZD & EURNOK offer decent entry levels for Euro upside for ECB hawks & ‘risk off’ proponents. Wider interest rate differentials, wider credit spreads & spikes in risk aversion (VIX) dominate both models & are consistent with EUR appreciation.

At the other end of the spectrum are EURAUD, EURCAD & EURCHF. EURAUD shares the same defensive characteristics as the two above but this time it is 0.6 std dev (1.2%) rich to model.

EURCAD looks similar in terms of valuation (+0.7, +1.0% rich to model), although credit spreads play a less prominent role.

The EURCHF model emphasises rate differentials again but also economic growth. With a FVG of +1.1 std dev (+2.4%), the EUR has discounted a fair degree of support from any relative strength in EuroZone GDP & a tighter ECB policy stance.

On back-tests, EURCHF is in coin toss territory with a hit rate around 50% but selling this FVG on EURAUD & EURCAD elicits a 70% & 66% hit rate respectively. These two crosses look the most efficient plays should Thursday's ECB meeting underwhelm.

The next question might be, inflation is the dominant macro theme currently, so which of those 3 names is most sensitive to inflation expectations? The two financials have a very small negative sensitivity. Higher inflation is a modest headwind.

Meanwhile industrial name Fastenal is a beneficiary from rising inflation.

Looking at the S&P500 level the dominant macro narrative is the Fed's tightening of financial conditions, especially via the channel of higher real yields & wider credit spreads. How do these reporting stocks look relative to those factors?

All our macro names share a fairly common profile when it comes to sensitivity to real yields. The march higher in real rates in 2022 has been a big negative for all of three.

There is, however, a fair degree of dispersion when it comes to the role of credit spreads. Blackrock is the standout with a strong reliance on credit spreads not blowing wider.

Which may help explain why BLK screens as the cheapest in macro valuation terms. It is now 0.8 std dev (11.1%) cheap to macro-warranted model fair value.

The key takeaway though is that because Qi delivers the independent relationship between a stock & all the key macro factors, we can use these as building blocks.

What's the key macro topic you wish to investigate? Qi can isolate the topics top of mind for you, identify sensitivity & add a valuation overlay. All on the stocks you care about.

Qi looks at all macro factors in z-score terms. The chart shows US inflation expectations are now 2.3 standard deviations below long term trend. EuroZone inflation expectations have lagged the move lower, but they too are now below trend (0.6 std dev).

Portal users can plot such charts using the Top 10 Macro Driver Shifts function on the home page.

The advantage of the API is a longer history. The chart above shows current levels are rare: China’s 2015 devaluation, the 2018 Powell ‘autopilot’ policy error, the first Covid lockdowns in 2020.

Expectations can clearly decline further but it is worth observing how far into a deflationary mindset markets have already fallen.

From a Qi perspective the sell-off in equity markets is actually an orderly event.

Model confidence across most global equity indices is high & stable.

S&P500 model confidence is 84% currently; the NASDAQ 83%, Nikkei 78% & Euro Stoxx 600 is 77%.

Our model confidence is a simple R-Squared statistic, capturing goodness of fit. So high numbers simply reflect macro currently has strong explanatory power across international equity markets.

The next question is what is macro fair value doing? The lines below show Qi’s macro-warranted model fair value for the S&P500 over both our Short (4mths) & Long (12mths) Term lookback periods.

The trend is clearly lower. Aggregate macro conditions continue to deteriorate.

On Qi, capitulation can be measured in two ways.

When model confidence is high & an asset is in regime, use the Fair Value Gap for a valuation signal.

Historically, one standard deviation below model has proved a good entry level to buy the dip in US equity indices. Currently S&P500 sits 0.4 std dev cheap to model.

Alternatively, when model confidence falls sharply, it is flagging that macro factors are no longer driving that asset price. Markets are experiencing a regime shift; one where macro's explanatory power diminishes, & other (often more transient) factors like positioning & sentiment come into play.

These are often more volatile trading conditions & the Qi Vol indicator shows these are periods when capitulation becomes evident.

For now, there are no signs of the latter. That leaves the valuation approach as the best roadmap.

Tactically, S&P500 is slightly cheap to model & potentially due some temporary relief. But the ingredients for a meaningful buying opportunity - cheaper valuation & a turn higher in model value - are still missing

All European sectors are in macro regimes currently &, while all are cheap, Real Estate is amongst the closest to macro-warranted fair value. Any escalation in Italian political risk & current patterns point to Real Estate as the most efficient trade from the short side.

This exercise can be repeated across different asset classes. Amongst Euro Stoxx 600 single stocks for example, Swedish equipment maker NIBE Industries is amongst the stocks most reliant on BTP spreads not blowing wider.

Most of the sensitive names are already cheap to model value. NIBE is in regime (84% model confidence) & is 0.7 std dev (9.7%) rich to model. It stands out as being particularly vulnerable to increased Italian political risk.

Which US stock is most reliant on the BTP market? Netflix

Choose your asset class.

Choose the scenario you are most focused on.

Allow Qi to find the optimal trade to capture your core view / or the hedge that negates your main tail risk.

Look at the cluster of green dots on the far left of the chart. These are the stocks with the greatest negative sensitivity - they are the most reliant on credit spreads staying tight.

Chipmakers Nvidia NVDA & Applied Materials AMAT, software firms Adobe ADBE & Salesforce CRM, but also First Republic Bank FRC, cosmetic giant Estee Lauder EL & Domino’s Pizza DPZ screen as those names most vulnerable should credit spreads re-visit the wides.

Which names lie at the other end of the spectrum? Activision Blizzard is an outlier – it has positive sensitivity to US High Yield.

Most of the focus on ATVI is on regulatory risk & its pending merger with Microsoft. But, from a macro perspective, it has the unique characteristic of being fine with wider credit spreads.

There are a handful of names – Marathon Oil MRO, T Mobile
TMUS, AT&T T, Loews L, Chubb CB – where the stock is comparatively indifferent to moves in the credit market.

Once a month screen your portfolio for sensitivity to US credit.

Then, shift allocations away from the names with the greatest credit exposure, to those with the least.

Adding in macro valuation could provide further value. Chipotle Mexican Grill CMG has the distinction of being vulnerable to wider credit spreads & it is 0.9 standard deviations (7.9%) rich to overall macro conditions.