HomeSolutionsInsightsNewsroomPeopleContactLogin

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

Announcements
Press
Blog

What is evident looking at the GBP fx watchlist below, is that GBP is generally cheap versus its peers relative to the macro environment. Looking at the key drivers on the right it is also evident that interest rates are a key driver of Sterling once again.

Several GBP fx crosses have experienced sharp falls in model confidence of late. EURGBP for example has fallen 18% in the last 2 weeks & now sits at 53%. The equivalent numbers for GBPAUD are -17% to 58% now.

Of those in regime, interest rate differentials are the key driver of GBPSEK & GBPJPY. All else equal, higher nominal UK yields versus Swedish & Japanese yields will be GBP positive. The latter though is close to fair value; it is GBPSEK which presents a valuation edge being 1.9 sigma (2.2%) cheap to model.

Moreover, BoE QT expectations is the biggest single driver of GBPSEK & the relationship is positive. Ending QE early (currently slated for December) could provide the cross with a significant boost. Combining a rate hike with early QT is a powerful combination for GBPSEK in particular.

The regime is different for cable – real yields matter more than nominal rates, but it also emphasises domestic GDP growth & commodity prices.

It is cheap (-0.7 sigma, -0.8%) but whereas Sterling bulls buy GBPSEK for a hawkish BoE policy response, they should buy cable if bullish on the UK economy. Put another way, a BoE policy error has the potential to hurt cable more.

More recently, a huge rally in US renewable energy company Enphase has added additional momentum. It rose 25% last week after strong earnings & new product innovation. ENPH is now almost 30% rich to macro fundamentals but model confidence has fallen sharply – the idiosyncratic news about their new solar microinverter trumps the influence of macro right now.

Enphase is a major holding for several thematic ETFs. It constitutes 12.4% of the Invesco Solar technologies ETF TAN & 8.7% of iShares Global Clean Energy ETF ICLN.

Both ETFs are approaching 2 sigma (~20%) rich to macro model value in outright terms. They are also outperforming their peers & the broader market. Both TAN vs. SPY and ICLN vs. XLE are almost 1.5 sigma rich to model. All four models are in regime & show fair value moving sideways. The latest rally has moved clean energy ahead of macro fundamentals.

Moreover, it is not just a US phenomenon. The outperformance of the FTSE Environment Opportunity Asia Pacific index versus the standard FTSE Asia index can be seen in the white line above. But macro-warranted model value (the red line) is deteriorating; hence a +1.8 sigma (+3.6%) Fair Value Gap on Qi.

COP26 could deliver a significant policy shift that fundamentally moves the goalposts for clean energy. Absent that, & from a tactical macro perspective at least, it seems late to be chasing the move here.

Qi includes a range of factors in our models that speak to the ease of obtaining credit, the availability of liquidity & overall financing levels. They include:

All are in z-score terms, showing how far each factor is from its long term trend. They are simply aggregated together & then the mean displayed here with a lower (higher) number pointing to tighter (easier) credit conditions.

In absolute terms, several of these indicators will have been significantly tighter in the past. However, in terms of the rate of change relative to trend, markets are experiencing a sharp squeeze in credit. Historically, such moves are not friendly for risky assets.

Do markets not believe the ECB’s dovish forward guidance? Or, do they believe it, but simply think it will be overwhelmed by supply bottlenecks & rising inflation?

If you believe Lagarde stresses the ECB’s dovish policy stance & bond markets react by continuing to push break-evens higher & real yields lower, then short EURUSD is the better trade. Real yield differentials remain the key driver of the cross according to Qi where model confidence is 82% & spot is modestly (0.3 sigma, 0.4%) rich to macro.

Meanwhile EURJPY is driven by a more nuanced combination of nominal rate differentials & risk appetite. A hawkish pivot by Lagarde that, relatively speaking, raises nominal European yields would, all else equal, drive EURJPY higher.

If that prompted a ‘risk off’ move, with VDAX a negative driver, rising risk aversion would negate that & depress model value. But, if equities interpret that as the ECB being pre-emptive & ahead of the curve, & Euro Stoxx rally / VDAX falls, then that’s a powerful combination for a long EURJPY position. Currently EURJPY is bang in line with model fair value.

By identifying the regime & specific drivers of different Euro crosses, Qi can provide a roadmap for the different scenarios investors are considering for today’s ECB meeting.

That’s a good starting point. However, given this is a macro argument, where possible it makes sense to complement analysis of company fundamentals with a macro perspective. This Qi Watchlist contains 25 global stocks whose earnings rely on macro conditions in China. Here we focus on the five with the richest valuations, i.e. those most vulnerable if the consensus about slower Chinese growth is correct.

Adidas & Infineon Technologies are both out of regime. Low model confidence means idiosyncratic risks are more important than macro factors currently. For these, bottom up analysis is sufficient.

Asian financials HSBC & Standard Chartered are both around 6.0% rich to macro. Both want healthy economic growth (China tracking GDP, higher commodity prices) & rising interest rates (both real rates outright & steeper yield curves). All intuitive but, at these Fair Value Gaps, both have discounted a fair amount of good news. For those bearish on Chinese economic growth, they look vulnerable.

Richemont is the world’s second largest luxury goods firm & an obvious victim of President Xi’s “common prosperity” push. Yet spot price has been rallying of late & has now moved back towards the highs seen prior to Beijing’s focus on greater social equality. That has left it 6.7% rich to macro on Qi. Another efficient vehicle for those worried about downside risks in China.