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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.

28.04.2022

Gold

The recent sell-off in Gold has happened while Qi model value has continued to trend higher. That divergence has opened up a Fair Value Gap of almost -1 sigma or -3.3%.

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27.04.2022

USDJPY

Qi’s USDJPY model fell out of regime in November last year. Through the first 3mths of 2022 model confidence remained low but over the last month it has risen almost 30%.

26.04.2022

Demand destruction

For many investors, there will be a turning point when the market pivots from worrying about price inflation, to growth deflation.

In reality such pivots are a process rather than a single trading day, but yesterday’s China lockdown news felt like it had some of those characteristics.

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25.04.2022

This time is different

Friday’s sell-off took the S&P500 to 1.85 sigma (6.1%) cheap to Qi’s model fair value. The index has only been in regime & this cheap to macro 3x before. Back-tests show this is a highly significant discount. One that, since 2009, has provided attractive entry levels to buy the dip. It worked effectively just a month ago in early March.

22.04.2022

Struggling for trade ideas?

RETINA™ provides a pipeline of trade ideas on securities you care about pumped into your workflow. Think of it as Bloomberg IB but instead of chat & commentary, it’s a series of signals flagging when markets have diverged from macro fair value.

21.04.2022

Buyers' strike?

It is almost impossible to overstate the importance of Japan within international capital markets. A lack of domestic investment opportunities married to an ageing population with a strong savings ethic has made Japan a huge net exporter of capital.

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20.04.2022

Dollar strength & US equities

The US Dollar continues its relentless march higher. Perceived wisdom is that, at some point, that strength becomes a headwind to US equity performance.

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19.04.2022

Against all odds

There has been a steady stream of downgrades for US & global growth recently. Goldman Sachs, Larry Summers & the World Bank are just some of the blue chip names highlighting downside economic risks.

14.04.2022

Lift off

The airline industry is a useful barometer. Demand for flights reflects the re-opening of the global economy & discretionary spending. Staff shortages capture both labour market tightness & Covid-related losses.

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13.04.2022

Risk Appetite
- does this look right?

Yesterday’s equity down trade saw VIX spike but only modestly so, & it remains closer to 20 than the late Feb high of 37.80. Equity volatility is slightly elevated but not (yet) signalling fears of an imminent “risk off” event.

European equity volatility (using VDAX) looks similar. In absolute terms it has retraced crudely 50% of the 2022 spike. In z-score terms, both US & European equity vol are running only modestly above long term trend.

The blue line is the Cboe’s Emerging Market equity volatility index. In z-score terms it also spiked in Q1 but has now fallen slightly below trend.

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27.04.2022

USDJPY

Qi’s USDJPY model fell out of regime in November last year. Through the first 3mths of 2022 model confidence remained low but over the last month it has risen almost 30%.

Sharp falls in macro’s explanatory power often pre-empt bouts of higher volatility. The chart below shows Qi model confidence (blue) & 1mth implied USDJPY vol (red, inverted).

The aggressive fall in model RSq at the end of 2021 did lead USDJPY vol higher. There were tentative signs of increased model confidence in mid Feb before the RSq rolled over once again. And once again, it was followed by another increase in 1mth implied vol.

If a new regime reasserts itself, there are a few observations we can make.

Macro valuation signals once again carry more weight. Qi’s Historical Model Value chart show macro model value has consistently trended higher for USDJPY in 2022. The question is to what degree has the market front-run & overrun versus those improved fundamentals.

USDJPY is currently +1 sigma rich to model. Hypothetically, if model confidence was back above 65%, back-testing that FVG as a sell signal reveals a 78% hit rate & an average return of +1.0%.

Intuitively, volatility is lower when macro fundamentals drive the market rather than trend / flow / sentiment. The chart above is crude but does suggest long vol positions need to keep a close eye on Qi’s model confidence.

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25.04.2022

This time is different

‘This time is different’ are supposedly the four most expensive words in the English language. But the chart below shows why a discretionary client of Qi would not pull the trigger on the current signal.

It shows S&P500 macro-warranted fair value over a 4mth (blue) & 12mth (red) look-back period; i.e. given the growth/inflation mix, overall financial conditions & levels of risk appetite where 'should' SPX trade. Both ST & LT models show macro conditions are deteriorating.

Between them risk aversion & corporate credit spreads account for almost half of model value. Higher VIX & wider High Yield spreads are driving macro fair value lower.

Moreover, the picture is compounded when we run the same chart for US High Yield. Macro fair value for HYG is making fresh lows as it accelerates lower on both ST & LT models.

The only consolation for US equities is that the current FVG suggests it has discounted some of this bad news already. HYG is also cheap to model but ‘only’ 0.9 sigma (2.2%).

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22.04.2022

Struggling for trade ideas?

As well as choosing your assets & the Fair Value Gap trigger for trade entry, RETINA™ assigns a degree of confidence to each signal. Historical back-tests showing the efficacy of the signal, how macro model value is behaving & trend/momentum dynamics combine to assign conviction levels.

Four bar signals are our highest conviction ideas & here we look at their 2022 YTD performance in FX & macro equities (indices & index futures).

Using a 1 sigma threshold, RETINA™ generated 21 signals. That averages out to 1.3 high quality ideas per week.
The hit rate was 95% for an average return of +3.77%. On average the trades were open for just shy of 3 weeks (13 business days).
The asset class mix was 6 FX trades. The rest were equity indices – 7 of which were US, then 4 each for European & Asian indices.
For those with lower turnover, moving the FVG threshold out to 1.5 sigma reduces the number of trade signals to 9 – crudely one idea every second week.
A wider entry level produces even stronger results: 100% hit rate & average return of +5.76%.

RETINA is available to all Qi clients - speak to your sales contact - & is available via Symphony or Slack. In Symphony, for example, subscribers received a signal in early March when e-mini SPX futures produced a -1.3 sigma Qi Fair Value Gap & a bullish inflection signal. The signal appeared like this:

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19.04.2022

Against all odds

There has been a steady stream of downgrades for US & global growth recently. Goldman Sachs, Larry Summers & the World Bank are just some of the blue chip names highlighting downside economic risks.

Just before the long Easter weekend, two US reports posted material surprises to the upside relative to consensus. Between them, the University of Michigan Consumer Sentiment report & Empire State Manufacturing Survey added almost 80bp to tracking US growth.

Q2 US GDP growth was tracking at +0.6% QoQ last week on Now-Casting.com. It now stands at +1.5%, or 6% annualized. On Qi, US economic growth has spent much of early 2022 slightly below trend. These reports have pushed it well above recent trend.

This is unlikely to derail the strong narrative about economic pain ahead. Fiscal drag, Fed tightening, war in Ukraine & the impact on commodity markets, cost of living scares & demand destruction, lockdowns in China all make a powerful & toxic combination.

Moreover, the usual caveats apply. Two data points do not make a trend. Still, with mainstream financial media pushing an unambiguously negative newsflow, it is worth noting.

Ultimately, the recession script may still prove correct. However, the exact timing can deviate from previous cycles & from forecasts. Tracking real-time changes & knowing which assets are most sensitive to current growth rates should be a critical part of any investment framework.

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