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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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Threading The Needle
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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Risk Appetite Defensives
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.
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Joshua Sortino Lqkhndzsf 8 Unsplash
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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Adam Birkett 77Hmm5Tg N4 Unsplash
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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Reid Zura Rijrunzf8Nc Unsplash
01.06.2022
Fade the relief rally?
The Qi insight of May 23rd - “Signs of relief?” - flagged two trades for any contrarians thinking risky assets could rally into month-end.

AUDJPY is up 3.3% since then; it remains cheap but the Fair Value Gap has halved in size.

The other call was the KOSPI which was cheap to macro for the first time in 4 months & where macro model value was improving.

The KOSPI has rallied 1% since then but Qi’s fair value has increased by twice as much leaving it modestly cheap to model.

One of the main reasons for model value moving higher was improving domestic economic growth. Which makes this morning’s flag from RETINA™ all the more notable – weak trade data has prompted a 1% fall in South Korean growth taking tracking GDP to a 2022 low.
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Nasa Rtzw4F02Zy8 Unsplash
31.05.2022
Value vs. Growth
The asset allocation decision between Value & Growth is potentially shifting. It’s tentative but macro conditions which have supported Value’s outperformance through 2022 may have turned.
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30.05.2022
AUDJPY
AUDJPY is 4.0% cheap versus Qi’s macro-warranted model value.

A bullish signal was flashed on RETINA™ early last week (ref 89.97) & the Aussie Dollar has gained around 1.7% since trade inception.

But model value continues to move higher. The red line in the chart below shows where AUDJPY fair value is given prevailing macro conditions. It has risen ~5% over May, driven by improving risk appetite, metal prices & their impact on Aussie inflation expectations.
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Orion Nebula 11107 1920
26.05.2022
Nowhere to hide
A common problem for US equity managers is where to hide in a bear market? The hit to Walmart & Target makes that job harder as traditional defensives like staples are proving just as susceptible to supple chain bottlenecks, inventory dilemmas & margin compression.
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25.05.2022
Recession > Inflation?
Last week’s “This is important” insight noted a material shift in interest rate markets with regards to pricing of Fed rate hikes. The removal of future hikes suggested an increased focus on recession risks over inflation worries.
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Risk Appetite Defensives
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.
See more
Vix
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.
Us Health Care
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.
Nasa Rtzw4F02Zy8 Unsplash
31.05.2022
Value vs. Growth
The asset allocation decision between Value & Growth is potentially shifting. It’s tentative but macro conditions which have supported Value’s outperformance through 2022 may have turned.
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US equity managers should be aware that their allocations between Value & Growth are not simply a risk premia decision. Macro factors are equally important. Qi’s Growth vs. Value model has been in a strong & highly stable regime for a year now.

And currently the Value vs. Growth ratio (using the Vanguard tracking ETFs VTV vs. VUG) is behaving in line with macro fundamentals. There is no valuation edge.

But there is a potential top in macro-warranted model value. The strong uptrend in the red line over 2022 suggested macro conditions favoured Value over Growth. That trend may now be over.

Qi model value peaked on May 24th & has fallen 3.5% since then. All driven by falling inflation expectations & easier financial conditions (credit spreads, real rates & EuroZone spreads).
Vtv Vs Vug
And that’s the paradox facing investors. If the Fed feel still tighter financial conditions are needed in the fight against inflation, these macro factor moves won’t last. This is a bear market rally & Growth plays can underperform once again.

The view on whether this is bear market noise or a more fundamental regime shift is yours. But the Qi framework can help identify which parts of the market have become divorced from macro.

For example, if you believe there is a meaningful rotation brewing, is there a valuation edge anywhere? XOP vs. XLC is now 14% rich to macro.

That’s because of the divergence between spot (near recent highs) & Qi model value which has fallen almost 5.5% over the last 3 weeks.

Not for tech bears (especially Facebook & Google given they account for almost half of the Communication Services sector) but an example of how to quickly spot potential trade opportunities.
Xop Vs Xlc
30.05.2022
AUDJPY
AUDJPY is 4.0% cheap versus Qi’s macro-warranted model value.

A bullish signal was flashed on RETINA™ early last week (ref 89.97) & the Aussie Dollar has gained around 1.7% since trade inception.

But model value continues to move higher. The red line in the chart below shows where AUDJPY fair value is given prevailing macro conditions. It has risen ~5% over May, driven by improving risk appetite, metal prices & their impact on Aussie inflation expectations.
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Audjpy
The result is that, even with spot moving higher, the market remains cheap versus Qi model value.

Those key drivers – healthy risk appetite, rising metal prices / Australian inflation – are highly intuitive given this cross is often viewed as a barometer for the global business cycle.

Most financial commentary is focusing on downside risks & a likely recession. A scenario that is not consistent with AUDJPY upside.

Qi model confidence is strong & the signal remains valid while macro fair value continues to appreciate. Economic bears will almost certainly pass on this one. But, for those looking for last week’s rally in risky assets to continue, or those thinking recession talk is overdone, AUDJPY looks an interesting play.
Orion Nebula 11107 1920
26.05.2022
Nowhere to hide
A common problem for US equity managers is where to hide in a bear market? The hit to Walmart & Target makes that job harder as traditional defensives like staples are proving just as susceptible to supple chain bottlenecks, inventory dilemmas & margin compression.
See more
If traditional sector allocations aren’t working, how about a smart beta approach. Fearful of a recession? Surely if bond yields are rolling over, Growth is recovering versus Value? Once again there is a divorce between market narrative & reality – Value has yet to give up any of its 2022 outperformance versus Growth.

Maybe a new perspective is required. Qi’s unique optimiser employs best-in-class, out-of-sample tracking. It finds the combination (names & weights) of liquid single stocks that most efficiently track a target variable.

The example below is Qi’s US inflation basket. A 50:50 Long / Short basket of US blue chips that, since Jan 2019, has produced a 92.3% correlation with US inflation expectations as measured by 5y USD inflation swaps
Newplot 87
The optimizer can be trained on any target variable. Ones that best capture your main macro scenario; or the biggest risk exposure you need to hedge.

It will provide a list of liquid stocks that closely correlate to the target, & is highly customizable: exclude individual names, skew sector allocations, cap single stock exposure to your chosen level of diversification, set a minimum liquidity constraint etc etc

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Quant Insight’s Macro Analytics
on Goldman Sachs Marquee
Goldman Sachs is embedding Qi’s data-science-driven
macro factor risk data into Marquee to offer risk
management capabilities that help provide clarity to your
investment analysis as you navigate your portfolio exposures,
asset by asset, through dynamic market conditions.
Goldman Sachs is embedding Qi’s data-science-driven macro factor risk data into Marquee to offer risk management capabilities that help provide clarity to your investment analysis as you navigate your portfolio exposures, asset by asset, through dynamic market conditions.