HomeSolutionsInsightsNewsroomPeopleContactLogin

Acclaimed macro analytics
Portfolio Construction & Risk Management
Trading Solutions
Macro Models
Thematic equity baskets

Announcements
Press
Blog

The chart below can be found on the Qi home page. It shows the 10 biggest moves in macro factors over the last week. Today’s snapshot show six of last week’s top ten factor shifts originated in Europe.

All show European financial conditions moving tighter. All are at least one standard deviation moves, & in some cases significantly bigger.

The ECB council meeting opened the door to earlier rate hikes. That re-pricing of rate expectations moved real rates & the Euro higher, widened peripheral bond spreads & caused credit spreads to widen. The sharp flattening of the yield curve suggests market fears about policy tightening into a growth slowdown risks a hard landing.

Typically that would be perceived as negative for risky assets. The one, partial consolation is that, to a degree, that scenario has been priced.

The Euro Stoxx 600 is currently 0.8 sigma (2.4%) cheap to macro model value. Not a huge Fair Value Gap but towards the cheap end of recent ranges. Ditto the Euro. It is rich versus every other G10 currency on Qi. Modestly so on the whole – around one sigma.

Both Brazil & South Africa are rich to macro. The iShares ETF for MSCI Brazil EWZ is now 1.3 sigma (18.4%) rich; the equivalent ETF for South Africa EZA is 1.7 sigma (7.4%) above model.

The macro regimes are similar - a desire for global reflation, higher commodities & a weaker US Dollar. One distinction is that, on current patterns, Brazil is relatively indifferent to risk aversion metrics like VIX; whereas South Africa is reliant on the fear gauge behaving itself.

These are significant valuation levels. Back-testing today’s FVG as sell signals since 2009 reveals a 63% hit rate & +3.1% average return for EWZ; a 67% hit rate & +10.5% average return for EZA.

The other standout is Russia. While geopolitical risks clearly dominate it is worth noting the sharp rise in macro’s explanatory power recently. ERUS model confidence has risen 70% in 2mths; RSX confidence is up 66%. Both are now in strong macro regimes.

Both are close to fair value. Having been very cheap to model, the recent rally has taken Russian equities back in line with macro fundamentals. Armed conflict & sanctions pose a clear risk but the macro environment is also playing an increasingly assertive role.

If you fear tightening monetary policy into an economic slowdown means the Fed risk stalling growth & causing an even bigger shock for risky assets, then an inverted yield curve & widening in credit spreads are two of the key flash points for markets.

Qi has two models for US High Yield credit – CDX spreads & the tracking ETF HYG. Both screen as cheap to macro but the critical observation is that model value is deteriorating.

Both show US HY as 0.8 sigma below model. That’s a modest valuation gap in actual terms – HYG is 0.7% cheap, CDX spreads 13bp too wide.

More important is the red line in the chart below. Given where all the macro factors are, fair value for HYG (CDX spreads) continues to trend lower (wider). This will be a critical chart to track in 2022.

Moreover, Qi’s unique factor sensitivity analysis means you can also track where moves in US High Yield spreads will spill over into other asset classes.

For example, amongst global equities Brazil EWZ is the most reliant on tight credit spreads, while Indonesia EIDO offers a relative safe haven given current patterns show it’s okay with wider credit.

Note EWZ is 12.7% rich to macro; EIDO 4.2% cheap. For those nervous about US credit markets, re-allocating from Brazil to Indonesia warrants further investigation.