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Low Vol plays are often seen as an integral part of a smart beta approach. The constituents of ETFs such as iShares’ USMV are typically cash flow positive, have healthy balance sheets & together they are seen as a defensive strategy that outperforms during drawdowns.

USMV’s profile is similar to several of Qi’s equity models. Recently back into regime (model confidence up 42% over the last month to 70% now) with a driver mix that shows a desire for reflation, low risk aversion, tight credit spreads & low real yields.

What is noticeable with US Min Vol though is the recent move lower has diverged from macro fair value – the red line above which is tracking sideways. That divergence has opened up a -0.75 sigma (-2.2%) Fair Value Gap.

That FVG, whilst not extreme, is getting towards the wide end of recent ranges. In fact, USMV has only been in regime & this cheap to model 13 times since January 2009. The hit rate on that as a buy signal is 84.6% for an average return of +2.4%.

History never repeats. But, aligned with Qi’s framework, it does generate interesting hedging ideas for the age old dilemma of how to find cheap downside protection for your asset allocation mix.

Relative to the broad macro environment, which commodity play is lagging the recent bull move? Which has already priced in a lot of the good news?

AUDUSD is 0.5 sigma (1.4%) below macro fair value. Not a huge valuation gap but unsurprisingly iron ore & copper rank amongst the top positive drivers. VIX & risk aversion is the other big driver so, for those who believe in commodity upside & “risk on”, Aussie offers a slightly cheap entry level.

Chilean miner Antofagasta has had its fair share of negative headlines of late - issues around water rights & pressure from environmental groups. Those idiosyncratic risks have resulted in the stock price lagging versus the macro environment. The stock is now one sigma (7.7%) cheap to model fair value.

Conversely, Copper & global copper miners COPX lie at the rich end of valuations. While they have moved ahead of fair value, model value is trending higher, it is simply that they have moved quicker than macro fundamentals. That suggests it is not yet a trade to fade; rather, from a macro view point, it is the least attractive to be chasing here, even for commodity bulls.

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.