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The LT model is strong & stable - model confidence has been running at 80%+ since October - & the drivers reflect the importance of international trade. Stronger commodities & tracking GDP for Korea, China & the US feature prominently.

To that end note Now-Casting’s tracking GDP number for Korea has fallen from a run rate of almost 5% a month ago, to just under 3.5% today.

The desire for a weaker US Dollar is the other main driver & all of those macro dependencies explain why Qi’s model value is edging lower. Thus far, the KOSPI future has slightly lagged that downturn.

For those worried about the hit to global trade from the spread of Covid in China, it offers a potentially interesting trade expression.

The exception is Japan where Friday’s Economy Watchers Survey report produced a notable beat in the Current Conditions index. Usual health warnings given it is only one data point but it boosted Q2 tracking GDP growth by 71bp taking it from a small negative to +0.5% QoQ. On Qi, it is the only major economy posting above trend growth.

Stronger domestic growth features as a top 10 positive driver for both the Nikkei & TOPIX on Qi’s Long Term models. But only just. The LT relationships put more emphasis on healthy risk appetite & tight credit spreads.

VIX & credit dominate Qi’s Short Term models too but this time, at the individual factor level, Japanese GDP is the biggest single positive driver. The model also emphasises a weaker Yen.

As a rule, we default to our LT models for their more stable relationships but, in volatile markets, the ST models can be useful in picking up near term trends.

On this occasion, if the high frequency economic data can build some positive momentum then, all else equal, that would help macro model value turn higher. The Yen may have lost its safe haven status but could Japanese equities provide some respite from global recession fears?

*** RETINA™ subscribers can now receive real-time alerts when Now-Casting tracking GDP numbers experience a meaningful shift. ***

Only sectors / ETFs in regime (confidence > 65%) are shown. Models to the right of the zero vertical bound want a steeper yield curve; those to the left are comfortable with curve flattening.

The four most reliant on a steep yield curve (therefore most vulnerable to curve inversion) are all speculative technology names. Online Retail IBUY, ARG Genomic Revolution ARKG, e-commerce EBIZ & Social Media SOCL. ARKG also has the misfortune to post a slightly rich valuation versus macro fair value.

There is often a blanket assumption that technology wants lower long rates. While it is true lower discount rates help companies whose profits are typically further in the future, the current pattern appears to stress the growth part of the equation. A recession hurts profitability, & those with profits furthest away most of all.

It is also noticeable how all the traditional GICS Level 1 sectors in regime hover around the zero bound. Most had a positive relationship to the curve but sensitivity has slipped. This is true for both cyclicals (Energy, XLE) & defensives (Health Care, XLV). Is there a broader regime shift under way?

Possibly but it must be emphasised the chart above screens solely for sensitivity to the yield curve &, despite all the hype, it is not the dominant macro driver currently. All the speculative tech names want low risk aversion, tight credit, global growth & a weak Dollar more than they care about curve shape. XLE & XLV’s drivers differ but the yield curve doesn’t feature in the top 10 of either.

Mainstream research focuses on the yield curve as a predictor of recessions & asks whether there are valid technical reasons why it's different this time. The picture from Qi seems to be asking, on current patterns, do equity markets even care about the yield curve?

State Street’s tracking ETF for the MSCI European Consumer Discretionary sector STR is now 1.4 sigma (6.3%) cheap relative to the broader Euro Stoxx 600 (using tracking ETF MEUD).

Moreover, we now have a bullish inflection signal – after a period of divergence, over the last 3 days model & spot price have both turned higher.

The combination of historical back-tests, model value gradient & the trend / momentum picture all conspire to make this a 4-bar idea - the highest conviction signal on RETINA™.

Focusing just on back-tests, the STR / MEUD ratio has only been this cheap & in regime nine times since 2009. The hit rate on that as a buy-the-dip signal is 88.9% for an average return of +1.2%.

The drivers are highly intuitive. To outperform, Consumer Discretionary needs a Goldilocks environment – stronger global growth (Now-Casting tracking GDP plus higher commodities), healthy risk appetite (low VIX etc), easy financial conditions (especially tight credit spreads).

Such a position will only appeal to investors with a certain macro view - to those who have faith in the economic cycle &, by extension, probably believe (hope) the worst of the war in Ukraine is behind us.

But, as a relative value play that contains long one sector versus a short in the broader Stoxx 600, it does at least offer a comparatively protected upside trade expression.