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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.
Daoudi Aissa Pe1Ol9Olc4O Unsplash
17.11.2022
Updated observations on China re-opening
Last week our Sales exposure to China note demonstrated how Qi can help investors measure the impact of a potential China re-opening trade.

The Watchlist below is a curated list of Western companies across sectors who derive a large percentage of their revenue from sales to China.

We update now because the change since last Tuesday is notable. Then the picture was mixed - there was almost a 50:50 split between stocks that were cheap to macro versus that were rich to model.

Now valuations are skewed rich. Semiconductors (Qualcomm, Lam Research, AMT, Broadcom) remain the laggards &, for the bulls, offer the most efficient upside. The rest have all discounted a fair degree of good news on the macro front.
See more
Casey Horner Rmowqdcqn2E Unsplash
15.11.2022
US equities - a shift in factor leadership?
While the market’s attention has been focused on the inverse relationship between equities and bond yields, we should start paying much more attention to credit spreads from here – currently the largest driver of Qi’s S&P500 model value.

The price return of a stock over any period can be decomposed into:
See more
Simone Mascellari Xnn42Lsnv28 Unsplash Copy
10.11.2022
How to trade the CPI undershoot
Softer than expected US CPI data has rekindled hopes of a dovish Fed pivot. If an equity manager believes in a year-end squeeze scenario, where can they get the most bang for their buck?

Qi's S&P500 model shows that as important as inflation is as a catalyst, it is the Fed's reaction function that is key for equity markets.

The Fed's tightening of financial conditions has driven the 2022 bear market; in particular, higher real yields & wider credit spreads have been instrumental in driving macro model value lower.

As such, for those feeling bullish, the key question now is which area of the market is most exposed to these two drivers.

Qi's Optimise Trade Selection answers this question in a few simple clicks.

The short video below shows how you can train Qi on the universe of your choice - single stocks, sectors, ETFs - & very quickly identify:
See more
08.11.2022
USD - G10 fx: spot the odd one out
The eye inevitably gets drawn to the Fair Value Gap - the difference between spot price & Qi's model value. It immediately highlights any divergence between macro conditions & where an asset is trading. It is a huge time-saving tool, a way to quickly identify dislocations.

But that's the first step. The FVG needs to be broken down into the constituent parts.

An asset may be rich to its macro environment but, if model value is trending higher, then the market is simply moving quicker than fundamentals. That may be a reason not to chase the trade right-here-right-now. But it is not a reason to fade the directional move.

Qi portal users can see macro fair value versus the spot price on each model page via the "Historical Model Value" chart.

Qi API users may want to build a dashboard along these lines. A snapshot of Dollar G10 fx crosses as seen purely from a Qi model value perspective.

Spot the odd one out.
Premium content, for a full analysis sign up to a month of insights
Joshua Sortino Lqkhndzsf 8 Unsplash
07.11.2022
Sales exposure to China
The Watchlist below is not exhaustive but it shows a number of blue chip stocks that generate a high percentage of their revenue from sales to China. From different countries & sectors, they represent classic China plays for Western investors.

Qi Watchlists provide an instant snapshot. Which of these names are in macro regimes, versus those that are driven by idiosyncratic factors. And then which are rich or cheap versus prevailing macro conditions.

Semiconductor companies – Qualcomm, Broadcom, STMicroelectronics, Lam Research - dominate the cheap end of the range. Yes politics plays a big part here but even with Biden’s restrictions several of these companies are in macro regimes &, on Qi, have discounted a fair degree of bad news.

The rich end of the range is more of a mix. Advertiser JCDecaux, Swatch watches, while Glencore & Umicore capture the commodity/industrial complex.

Macro model confidence is less at this end of the spectrum but note, for example, Glencore is 6.0% rich to macro while its peer Fortescue sits at fair value.
See more
James Sullivan Eszrbtkq F8 Unsplash
04.11.2022
How to play any China bounce
Even if you are sceptical, the price action in China this week has issued a stark warning: with valuations this cheap & positioning so defensive, any policy pivot from Beijing could spark a strong market reaction.

Investors need to be on watch for any changes in Beijing's stance on the economy, on Zero Covid & a potential re-opening scenario. One way to do that is to employ / follow a China expert who will work through the long & dry Chinese Communist Party's dictums.

Another is to use the Qi framework to see how various Chinese assets are trading relative to overall macro conditions.

Here we present a short 5minute video showing how Qi Watchlists can help any investment process & can be especially useful when looking at specific themes.
See more
Raychel Sanner 0Pswkddfxii Unsplash
01.11.2022
Dovish pivot?
Its already happened
All eyes on tomorrow’s Fed meeting with risky assets hoping for signs of a dovish pivot. But, to a large degree, the dovish pivot has already happened.

The chart below refreshes the Qi credit impulse which we introduced last October. That note details our methodology but, in short, Qi models include a range of macro factors that speak to the ease of obtaining credit, the availability of liquidity & overall financing levels.

All are in z-score terms looking at the rate of change (not absolute level) relative to trend. A lower (higher) number points to tighter (easier) credit conditions.

The initial Covid lockdowns produced a sharp contraction in credit impulse, but then Central Banks threw the kitchen sink at it & conditions eased back equally quickly.

The 2022 monetary policy tightening is also evident. Both the Fed & ECB took overall credit conditions 2 standard deviations below trend.

More recently though expectations for future rate cuts, lower real yields, narrower credit spreads, easier US Dollar liquidity & others have all contributed to the credit impulse easing back. In fact, in Europe we are back at trend. The US is slightly behind but there too financial markets have already done a fair amount of work removing the effects of policy tightening.
See more
Felix Mittermeier L4 16Dmz 1C Unsplash
25.10.2022
EURO fx & the ECB
The ECB meet on Thursday. A 75bp rate hike is priced. That leaves the market watching hints about the potential terminal rate, language around reinvestment policy & TLTRO tweaks.

How is an FX investor supposed to monitor all these different moving parts? The WatchList below shows EUR – DM fx crosses on Qi’s Short Term models.
See more
17.10.2022
How to measure Dollar strength
& its impact on US earnings season
Aside from headline beats or misses, arguably the biggest topic of this earnings season will be how the strength of the Dollar has impacted companies. The traditional approach is to employ bottom up analysis of individual firms to gauge the degree to which they rely on overseas revenue.

Qi offers an alternative perspective; one that could complement the traditional way of doing things.

This short video shows how using both the Qi portal &/or the API allows equity investors to look at both the sector or single stock level, & quickly ascertain:
See more
Aaron Burden Nxt5Prob 7U Unsplash
11.10.2022
Earnings Season - the macro view
In case anyone needed reminding, Friday's Payrolls report emphasised the role of labour markets / inflation / Fed policy in shaping price action in equity markets.

But for the next few weeks company fundamentals will also return to centre stage. The top down / bottom up dichotomy remains.

Crudely, top down analysis still tends to err towards equities being complacent, not pricing in a hard landing scenario. Meanwhile, bottom up earnings forecasts have been reduced, & may present a lower bar to beat & hence generate some upside surprises.

Qi's point remains the same. The first step - even (especially) during earnings season - is to identify the stocks that are trading on company fundamentals versus those that are macro plays.

This chart (click to enlarge) should be the first thing all equity managers check. It shows this week's reporters. All the stocks on the left are about idiosyncratic risks - the alpha comes from stock picking skills.

But three names - Blackrock, First Republic Bank & Fastenal - are in macro regimes.
See more
Close
Daoudi Aissa Pe1Ol9Olc4O Unsplash
17.11.2022
Updated observations on China re-opening
Last week our Sales exposure to China note demonstrated how Qi can help investors measure the impact of a potential China re-opening trade.

The Watchlist below is a curated list of Western companies across sectors who derive a large percentage of their revenue from sales to China.

We update now because the change since last Tuesday is notable. Then the picture was mixed - there was almost a 50:50 split between stocks that were cheap to macro versus that were rich to model.

Now valuations are skewed rich. Semiconductors (Qualcomm, Lam Research, AMT, Broadcom) remain the laggards &, for the bulls, offer the most efficient upside. The rest have all discounted a fair degree of good news on the macro front.
See more
Screenshot 2022 11 17 At 112919
Of the five with the richest valuations on Qi, three are mining stocks. None are in regime so there's an immediate health warning.

But it does prompt the question - is there a message from the commodity sector about the China re-opening trade?

It doesn't matter if we look at spot commodities, tracking ETFs or mining / resource stocks, the answer is the same. The sector is rich to macro.

This time everything is in regime & we can see:
* Both spot copper & the JJC ETF are around 16% rich to model.

* The nickel ETF JJN is 23% above model.

* Copper miners ETF COPX is 24% rich to macro & back-tests best (73% hit rate, +6.8% average return)
Each time the valuation gap has arisen because model fair value is moving sideways - the recent moves higher have not been supported by macro fundamentals.
Screenshot 2022 11 17 At 115410
There are slight differences between assets & their key drivers. Some emphasise inflation, others the policy stance of Central Banks.

However, a consistent theme throughout is all these models show USDCNH as the biggest negative driver. They all want a stronger Yuan - a reflection of a stronger Chinese economy.

USDCNH has now retraced around half of the fall seen thus far in November. If the Dollar bounces more, these China re-opening plays could be vulnerable.

Qi has no insight on whether Beijing will ease its Zero Covid policy. China watchers are your best bet there.

But we can provide a framework to help investors identify any laggards for China bulls, & the markets that have potentially overshot & look vulnerable if this story loses momentum.
Casey Horner Rmowqdcqn2E Unsplash
15.11.2022
US equities - a shift in factor leadership?
While the market’s attention has been focused on the inverse relationship between equities and bond yields, we should start paying much more attention to credit spreads from here – currently the largest driver of Qi’s S&P500 model value.

The price return of a stock over any period can be decomposed into:
See more
  • the change in the earnings multiple the market is prepared to pay for that stock
  • the change in the earnings forecast of that stock
History shows the former is the most significant driver of returns. This year is no exception – the S&P500 has fallen 17.5% YTD: The PE ratio has contracted 21% while 12mth fwd earnings have risen 3.5%. The tables likely will turn next year.

Now in simple terms, think of the PE ratio currently as a confidence barometer on growth vs. inflation. The sweet spot of course for stocks is when consensus GDP growth expectations are rising faster than inflation – earnings prospects are improving relative to the cost of capital.

This year has seen the reverse - a deteriorating growth / inflation trade-off. Indeed, in Qi’s language, the largest driver for the decline in the S&P500 this year has been rising real yields (click on the chart below to expand - it shows YTD attribution for S&P500 model value).
2022 11 15 10 08 15
Now the big concern in 2022 has been on rising inflation; the big concern in 2023 will be the lagged impact of tighter monetary policy on growth.

Are the tables turned next year where earnings forecasts are cut aggressively with growth expectations are falling even though inflation is falling also? The risk is then that PE multiple expansion will be put on hold until investors have more clarity on the outlook.

On cue, a bigger driver than real yields has come to the fore in Qi’s S&P 500 model value – credit spreads.

Credit spreads have a history of leading equities at turning points, especially when we nearing the start or end of a business cycle.

Note HY credit spreads saw their YTD wides on 27th September; the S&P500 saw its low 2wks later on 12th October – this was part of the reason why Qi’s model value for the S&P500 began rising faster than the index price itself in early October (the chart shows attribution of Qi model value since that Oct 12th low).
2022 11 15 10 15 04
So maybe 2023 is a year where good economic news is good news for the market and vice versa.

In 2022 bad economic news has been welcomed by the market allowing the Fed to take the foot off the tightening pedal. This regime change is not going to happen overnight – the battle with inflation is not over.

However, Qi will likely show any such change by the negative market sensitivity to real yields falling relative to the market’s sensitivity to credit spreads.
Simone Mascellari Xnn42Lsnv28 Unsplash Copy
10.11.2022
How to trade the CPI undershoot
Softer than expected US CPI data has rekindled hopes of a dovish Fed pivot. If an equity manager believes in a year-end squeeze scenario, where can they get the most bang for their buck?

Qi's S&P500 model shows that as important as inflation is as a catalyst, it is the Fed's reaction function that is key for equity markets.

The Fed's tightening of financial conditions has driven the 2022 bear market; in particular, higher real yields & wider credit spreads have been instrumental in driving macro model value lower.

As such, for those feeling bullish, the key question now is which area of the market is most exposed to these two drivers.

Qi's Optimise Trade Selection answers this question in a few simple clicks.

The short video below shows how you can train Qi on the universe of your choice - single stocks, sectors, ETFs - & very quickly identify:
See more
  • which models are most sensitive to our chosen factors
  • which models also offer a valuation edge; in this instance are cheap to macro-warranted fair value.
Running these scenarios is entirely customisable.

Train the search on a different universe. Choose a different macro factor - the Dollar rather than real yields or credit. Take the other side & look for the best trade to fade this move if you feel bearish.

Qi empowers you to run your own macro scenario & find the most efficient trade expression.
Joshua Sortino Lqkhndzsf 8 Unsplash
07.11.2022
Sales exposure to China
The Watchlist below is not exhaustive but it shows a number of blue chip stocks that generate a high percentage of their revenue from sales to China. From different countries & sectors, they represent classic China plays for Western investors.

Qi Watchlists provide an instant snapshot. Which of these names are in macro regimes, versus those that are driven by idiosyncratic factors. And then which are rich or cheap versus prevailing macro conditions.

Semiconductor companies – Qualcomm, Broadcom, STMicroelectronics, Lam Research - dominate the cheap end of the range. Yes politics plays a big part here but even with Biden’s restrictions several of these companies are in macro regimes &, on Qi, have discounted a fair degree of bad news.

The rich end of the range is more of a mix. Advertiser JCDecaux, Swatch watches, while Glencore & Umicore capture the commodity/industrial complex.

Macro model confidence is less at this end of the spectrum but note, for example, Glencore is 6.0% rich to macro while its peer Fortescue sits at fair value.
See more
Screenshot 2022 11 07 At 103553
This Watchlist is available upon request. Build your own lists to customise your Qi experience.
James Sullivan Eszrbtkq F8 Unsplash
04.11.2022
How to play any China bounce
Even if you are sceptical, the price action in China this week has issued a stark warning: with valuations this cheap & positioning so defensive, any policy pivot from Beijing could spark a strong market reaction.

Investors need to be on watch for any changes in Beijing's stance on the economy, on Zero Covid & a potential re-opening scenario. One way to do that is to employ / follow a China expert who will work through the long & dry Chinese Communist Party's dictums.

Another is to use the Qi framework to see how various Chinese assets are trading relative to overall macro conditions.

Here we present a short 5minute video showing how Qi Watchlists can help any investment process & can be especially useful when looking at specific themes.
See more
Raychel Sanner 0Pswkddfxii Unsplash
01.11.2022
Dovish pivot?
Its already happened
All eyes on tomorrow’s Fed meeting with risky assets hoping for signs of a dovish pivot. But, to a large degree, the dovish pivot has already happened.

The chart below refreshes the Qi credit impulse which we introduced last October. That note details our methodology but, in short, Qi models include a range of macro factors that speak to the ease of obtaining credit, the availability of liquidity & overall financing levels.

All are in z-score terms looking at the rate of change (not absolute level) relative to trend. A lower (higher) number points to tighter (easier) credit conditions.

The initial Covid lockdowns produced a sharp contraction in credit impulse, but then Central Banks threw the kitchen sink at it & conditions eased back equally quickly.

The 2022 monetary policy tightening is also evident. Both the Fed & ECB took overall credit conditions 2 standard deviations below trend.

More recently though expectations for future rate cuts, lower real yields, narrower credit spreads, easier US Dollar liquidity & others have all contributed to the credit impulse easing back. In fact, in Europe we are back at trend. The US is slightly behind but there too financial markets have already done a fair amount of work removing the effects of policy tightening.
See more
Image 70
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.
Felix Mittermeier L4 16Dmz 1C Unsplash
25.10.2022
EURO fx & the ECB
The ECB meet on Thursday. A 75bp rate hike is priced. That leaves the market watching hints about the potential terminal rate, language around reinvestment policy & TLTRO tweaks.

How is an FX investor supposed to monitor all these different moving parts? The WatchList below shows EUR – DM fx crosses on Qi’s Short Term models.
See more
Screenshot 2022 10 25 At 084149
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.
17.10.2022
How to measure Dollar strength
& its impact on US earnings season
Aside from headline beats or misses, arguably the biggest topic of this earnings season will be how the strength of the Dollar has impacted companies. The traditional approach is to employ bottom up analysis of individual firms to gauge the degree to which they rely on overseas revenue.

Qi offers an alternative perspective; one that could complement the traditional way of doing things.

This short video shows how using both the Qi portal &/or the API allows equity investors to look at both the sector or single stock level, & quickly ascertain:
See more
  • on current patterns, which areas of the market are most vulnerable to Dollar strength.
  • which sectors or stocks are running rich or cheap relative to aggregate macro conditions.
Aaron Burden Nxt5Prob 7U Unsplash
11.10.2022
Earnings Season - the macro view
In case anyone needed reminding, Friday's Payrolls report emphasised the role of labour markets / inflation / Fed policy in shaping price action in equity markets.

But for the next few weeks company fundamentals will also return to centre stage. The top down / bottom up dichotomy remains.

Crudely, top down analysis still tends to err towards equities being complacent, not pricing in a hard landing scenario. Meanwhile, bottom up earnings forecasts have been reduced, & may present a lower bar to beat & hence generate some upside surprises.

Qi's point remains the same. The first step - even (especially) during earnings season - is to identify the stocks that are trading on company fundamentals versus those that are macro plays.

This chart (click to enlarge) should be the first thing all equity managers check. It shows this week's reporters. All the stocks on the left are about idiosyncratic risks - the alpha comes from stock picking skills.

But three names - Blackrock, First Republic Bank & Fastenal - are in macro regimes.
See more
Image
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.
Newplot 5
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?
Newplot 6
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.
Newplot 7
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.
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