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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.

15.06.2022

Fed day

Qi has no view on the likelihood or not of a 75bp hike today. Or what that WSJ ‘leak’ does for Fed credibility. We’re not in the prediction business. What the Qi framework does capture is the current relationship between any security & a wide range of macro factors.

One of the biggest moves in this recent re-pricing has been the spike in 10y US real yields. Up ~35bp this week alone.

A material tightening of financial conditions that presumably acts as a headwind to most equity markets. But which are most vulnerable? Are there any beneficiaries?

The chart below shows global equity index models that are in macro regimes, & overlays sensitivity to US real yields with Qi’s Fair Value Gap. Unsurprisingly, nearly all equity markets lie to the left hand side of the chart – they want lower real rates. ChiNext is particularly reliant on the risk free rate remaining low.

There is one outlier – MSCI Indonesia, EIDO – that is okay with higher real yields.

15.06.2022

XLE - buy the dip

Qi remains negative on risky assets. Macro-warranted model value continues to point lower for critical benchmarks like the S&P500 and US corporate credit.

In fact, both Investment Grade LQD & High Yield HYG US credit are lagging the deterioration in macro conditions & trade more than one sigma rich to model fair value.

Energy has already proven a star performer in 2022 but, on Qi, it’s outlook is improving again. The chart shows XLE falling in this recent risk off rout. But macro fair value has risen 16.3% over June. That divergence has opened up a 1.1 sigma (15.4%) Fair Value Gap &, on RETINA™, a bullish divergence pattern.

The improvement in macro model value reflects some of Energy’s defensive qualities. Unlike many of its peers, Energy benefits from rising real rates, wider credit spreads & tighter Dollar liquidity.

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14.06.2022

More to go

RETINA™ has a number of new bearish signals on speculative technology. Yes the sell-off has been brutal, but it has not kept pace with the deterioration in overall macro conditions.

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13.06.2022

Value vs. Growth
- a big macro shift

RETINA™ has a number of new signals with a very clear message for US equity allocations. Macro conditions support Value, are negative on Growth, both in outright terms & in terms of the RV between the two.

RETINA™ has a 3 bar bullish signal on US Value outright. The Fair Value Gap shows it as 1.1 sigma (6.1%) cheap to model. The chart shows a classic divergence signal – that FVG has arisen because spot has slipped while macro conditions have noticeably improved

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13.06.2022

Zone defence

Friday’s CPI report was unambiguously bad & prompted a significant re-pricing of Fed rate hikes.

It is tempting to view US equity market price action exclusively from an inflation perspective. While it is the dominant topic in financial markets today, inflation is not the only macro factor at play.

S&P500 model confidence is 80% & trending higher. Macro matters! Over the last month Qi model value has fallen 6.0%.

The single biggest driver of that downgrade was European peripheral spreads. It alone accounts for almost half of that deterioration in macro warranted fair value. And, as per the second chart, sensitivity is rising strongly.

10.06.2022

Hedging inflation

US CPI day. Until recently, the consensus was the May CPI report would support the idea we’d hit peak inflation. However, the relentless rally in crude oil has rekindled inflation fears.

“Nowhere to hide” showcased Qi’s best-in-class optimiser & its ability to produce out-of-sample baskets that didn’t rely on backfitting - it uses only the information available at the time, yet still produced great tracking.

That basket was a 50:50 long/short & client feedback queried whether we could produce such good results with a long only. The basket below is 100% long & total period correlation with inflation expectations (as measured by 5y USD inflation swaps) is 83%.

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09.06.2022

Threading the needle

ECB day & Qi’s analysis of European equity markets shows how tricky their job is.

The Euro Stoxx 600 is in a strong macro regime (80% model confidence) & sensitivity to both ECB rate expectations & QT expectations is positive. Hiking rates & reducing the size of the balance sheet are, on current patterns, beneficial for Stoxx.

But that observation comes with a big health warning. Stoxx also want lower real yields, tighter credit spreads & healthy risk appetite including well behaved peripheral EuroZone spreads.

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08.06.2022

Risk Appetite & Defensives

One of the more striking features of recent price action has been how comparatively muted VIX has been.

Qi de-trends & vol adjusts macro factors looking at them in z-score terms. Having spent most of 2022 above trend, the chart below shows VIX is close to reverting back to its long term average.

The chart also shows VIX can send sustained periods below trend – periods when vol targeting strategies could significantly ramp up risk & thereby provide sponsorship for equity markets.

07.06.2022

A turning point for Tech?

The noise around Chinese tech continues to grow. There are increasing hopes that the regulatory onslaught is ending & instead the focus will shift to technology as an engine for economic growth.

Given how brutal the sell-off has been since Nov’20 when Beijing first suspended Ant’s IPO, bottom-up analysis suggests valuations are cheap & there’s increased chat about a catch-up trade.

But these are macro markets so what’s the Qi perspective? The “Global Tech” watchlist below (click to enlarge) is not exhaustive but includes major technology companies from US, Europe & China plus some broader Chinese ETFs & indices.

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06.06.2022

Ground Zero

Which way next? Friday’s US Payrolls report offered enough strength to allay immediate recession fears, but equally keeps the Fed biased to tightening monetary policy.

In such an uncertain environment, it is worth re-visiting a core Qi chart. US High Yield credit spreads remain firmly in regime (84% model confidence) & a critical cog in the broader financial market landscape. Credit features as a top driver across asset classes.

Qi model value captures whether the overall macro environment is improving or deteriorating for any security. The 2022 trend is clear to see in the chart below. Macro conditions for HYG got materially worst throughout the year.

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15.06.2022

Fed day

Interestingly, ChiNext is rich to model value, Indonesia is cheap. That gives bears two possible trade ideas. A hawkish Fed that pushes real rates higher still would hurt ChiNext when it is already almost 2 sigma (27.1%) rich to model.

Prior to the US CPI shock, many investors were buying into the idea of a bounce in Chinese tech. That was predicated on the idea Beijing's regulatory onslaught is easing up. Be aware there is a macro dynamic at play too &, on that front, a fair degree of good news is already priced.

Indonesia’s sensitivity is significantly less but, at the margin, higher real yields help & it is two sigma (10%) cheap to macro.

Two ideas for global equity allocators to consider should real yields spike further.

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13.06.2022

Zone defence

Higher real rates are the next biggest contributor & the only other factor with a 1% plus impact on model value. This bear move is about tighter financial conditions, both at home & abroad.

A key premise of Qi is that to better predict future price levels, you need a robust understanding of what is driving price action today. For US equity managers that means focusing exclusively on inflation, as important as that is, risks taking too narrow a view.

In sporting terms, it’s the same as man-to-man marking leaving you vulnerable to not seeing the plays being run behind your back. Qi offers you the chance to play zone defence with one click of a button.

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08.06.2022

Risk Appetite & Defensives

However, for those who see VIX back near trend as a sign of complacency, this chart will prompt a search for defensive trades. To that end it is worth noting RETINA™ has just flashed a bullish signal on US Health Care.

The chart below shows US Health Care is now 1 sigma (3%) cheap to macro. That FVG has opened up because the recent fall in spot has occurred despite macro fair value moving sideways.

In RV space, XLV vs. SPY is not in regime & the Valuation Gap is ‘only’ 0.6 sigma (2.3%), but that is the first negative FVG in 2022. Won’t appeal to everyone, but food for thought for those with a defensive mindset.

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