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Reading down each column shows a US sector versus its peers. Each cell shows Qi’s Fair Value Gap with heat map colouring – the darker the red (green) the richer (cheaper) the FVG is. Greyed out text means the FVG comes with a health warning as that model is not in a macro regime.

There is a fair degree of grey indicating several sector RV pairs are not currently driven by macro factors. However, that said, there is a distinct skew suggesting defensives are rich to the macro environment, while cyclicals are cheap.

The Utilities (XLU), Consumer Staples (XLP), Health Care (XLV) & Technology (XLK) columns are all predominantly red. Meanwhile cyclical plays like Financials (XLF), Energy (XLE & XOP) & Industrials (XLI) screen as cheap.

Retail is consistently cheap. There may be good reasons for that. XRT includes some low quality, high beta & relatively small cap names. Those fearful of a slowing economy & tighter Fed policy stance, may want to avoid such exposure. But be aware, at these levels, XRT is already pricing a fair degree of bad macro news.

Most FVGs are modest but the split on Metals & Mining (XME) is interesting – crudely, cheap versus defensives, rich versus other cyclicals. Is the market buying into a long China, short domestic US play as Beijing eases while the Fed tighten & Biden’s Build Back Better fails?

USDCAD is now 1.4 sigma (2.3%) rich to model in Qi FVG terms. That’s toward the top end of recent ranges.

The dominant drivers are highly intuitive. CAD bulls need stronger commodities, a “risk on” environment (low VIX, tight credit spreads) & for the BoC to hike rates quicker than the Fed.

So, given the renewed sell-off in equity & energy markets, USDCAD should be rallying right? Looking at the independent pattern between the entire macro environment & USDCAD actually shows fair value is essentially flat-lining.

Spot has overshot relative to the aggregated macro backdrop. It needs still lower crude / higher VIX to justify current levels.

Back-testing the efficacy of a +1.4 sigma FVG as a sell signal since 2009 reveals a 70% hit rate & +1.01% average return. The sample size is small – only 10 instances when USDCAD is in regime – & an average trade duration of 9 business days makes it more tactical than strategic.

Still, a reminder that simplistic assumptions about macro relationships come with a health warning. Qi gives a holistic, empirical snapshot of macro fair value in real time.

The speed of Quantitative Tightening is important because it is seen as the starting point for any Fed rate hike cycle. Even if Powell tries again to decouple the tapering timetable from rate hikes, the reality is markets perceive the end of asset purchases as giving the Fed the option to hike. And, if inflation sticks around, that option will be exercised.

Looking at US sectors relative to the S&P500 we capture sensitivity to both Fed QT expectations and Fed rate expectations. Models to the right of the vertical line are comfortable with the Fed tightening both aspects of monetary policy.

It is notable how the models furthest to the right are cyclical names. Energy (XLE, XOP), Financials (XLF, KBE), Industrials (XLI) & Transport (IYT) all have positive sensitivity. The current pattern shows they benefit from a tighter policy stance.

Apart from Home Builders & Construction, all are cheap to model fair value; KBE with the biggest Fair Value Gap at -0.8 sigma (-4.7%).

The models to the left have a skew towards technology. The IT sector (XLK) itself, Communication Services (XLC), Solar (TAN), Online Retail (IBUY). In essence, nothing has changed from Q1’s taper tantrum - higher rate volatility & bond yields are a drag for tech.

What’s the quantitative macro perspective? Qi’s China Multi-Asset Watchlist offers some pointers.

Of those in regime, the FTSE China A50 future & Asian High Yield ETF AHYG are both above macro fair value already. Looking instead for laggards note the iShares MSCI China Small Cap ETF ECNS is slightly cheap to model. Potentially a more efficient vehicle for those convinced in a meaningful policy shift.

Chinese tech may attract some interest. KWEB is modestly above macro fair value in outright terms, but is cheap versus US peers. At the index level ChiNext & Hang Seng Tech are both slightly cheap. All though remain out of a macro regime suggesting regulatory forces (as well as monetary policy) remain a key driver.

Finally REMX, the VanEck Rare Earth ETF, is slightly cheap to macro. A long term, secular play for those who believe a substantial part of any stimulus plan will have a strong sustainability angle.

Two drivers dominate the new regime. European equity bulls want low risk aversion (VIX, VDAX etc) & tight credit spreads. In fact, between them, those two factors account for almost 60% of the variance in Euro Stoxx 600.

The latest recovery in global equities has pushed the Stoxx 600 0.5 sigma (1.9%) above macro model value. That is not a big FVG in absolute terms, but the model has a tight distribution & this is towards the rich end of more recent ranges.

Risk appetite is skittish. For those inclined to fade the rally, the new macro environment suggests European equities have, to a degree, discounted the retracement in equity vol & credit spread widening. Put another way, while Europe was lagging before Omicron, it may now be a bit late to chase it as the best catch-up, risk on play.

It’s also worth updating European Travel & Leisure which has been a lead indicator. October's “The European re-opening trade” flagged the sector looked rich & vulnerable.

After a brutal sell-off that saw Qi FVG hit -3.9 sigma (-18.3%) at the end of November, the FVG is now 1.3 sigma (8.3%). SXTP vs. SXXP shows a similar profile. The sector is still cheap to macro & RETINA has a bullish inflection signal but it has already travelled a long way off recent lows.