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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

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11.04.2024

Qi MacroVantage

#1. Qi's US equity model momentum now fading, led by NASDAQ
#2. Under the hood, the US momentum trade was relying on a soft CPI print & supportive financial conditions - is the party over?
#3. Screening for sectors / ETFs most vulnerable to higher inflation expectations / higher rate vol
#4. USDJPY - fundamentals versus jawboning
#5. Heading into earnings season, the S&P500 macro beta impulse is rising - a big onus on earnings.
#6. Credit - this time it's different?
#7. L'Oreal - "because it's worth it", on macro

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04.04.2024

Qi MacroVantage

#1. GDX & Gold Over-Extended
#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything”
#3. FTSE 100 . From YtD laggard to tactically over-extended
#4. CHFJPY - New carry king?
#5. 10y US Treasury yields at 2024 highs on Qi

03.04.2024

Qi Market Spotlight: Gold is talking...What's it Saying?

Gold is pushing $2300 after Easter

There has been much commentary on the breakdown in the traditional relationships between Gold and Real Rates and the US Dollar

The significance of the Gold moves of the last couple of years is interpreted variously as a market verdict on the US debt/deficit, the credibility of the FED, US Fiscal Dominance and the general geopolitical environment driving decoupling

So what does Qi show as the key macro drivers around this…?
1. Qi confirms a significant lowering of Gold sensitivity to US$ real rates relative to the last 10yrs - particularly the “spiky” behaviour
2. Similarly, the US$ seems to have lost some of its signalling power over Gold recently

Qi shows that Gold does appear to be signalling concern in the US’s ability to run at this level of debt/deficits AND be the world’s reserve/trade cussrency AND have US$ real rates at 1.5-2%

With the traditional drivers of real yields and the dollar doing a poor job explaining Gold, the real answer may well be that real assets are a safer bet than US government debt. The diminishing sensitivity to real yields is particularly evident post Covid

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28.03.2024

Qi MacroVantage

#1 Commodity equities – From agriculture, to precious / base metals, to energy – all trading macro-rich
#2 US Value is no longer cheap to macro, in contrast to the beginning of March
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow

26.03.2024

Qi Scenario Spotlight: What if this is a Fed Error?

The debate has intensified on whether the Fed is making policy error. They are backing themselves into a corner. Is there a risk of disinflation now stalling?

Currently, there is a strong positive correlation between the dollar and inflation expectations. Warning signs would be flashing if we see this correlation sharply fall i.e. inflation expectations breaking out of their range alongside a weaker dollar.

We show the equity winners and losers from a scenario of higher inflation expectations and higher rate vol. Commodity-sensitive equities outperform – Energy, Materials, GDX. Financials, Real Estate, Technology underperform.

Qi’s signals on the three largest weights in the trade-weighted dollar suggest the risk-reward on the dollar is shifting with USD now looking expensive. The key driver is policy rate differentials => a major policy change/error would shift the low volatilty of the USD Fx crosses.

Qi's modern platform offers objective, quantified macro-on-market relationships that allow our clients to make purely evidence-based decisions.

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22.03.2024

MacroVantage

#1 Risk-Reward shifting on the Dollar - EURUSD
# 2 Risk-Reward shifting on the Dollar - USDJPY
#3 Qi Model Price Momentum for SPY - since 2009, only higher coming out of GFC & Covid
#4 Equity sensitivity to Financial Conditions - more value in Russell 2000 Growth than S&P500 Growth
#5 US Financials are not the best cyclical here
#6 What is most extended in Europe? European Insurers

17.03.2024

Qi Market Pulse – Choppy Seas Ahead

Goldilocks is being questioned – strong employment & inflation data

Sentiment is at optimistic extremes – AAII bulls - bears

Monetary Policy Risk – both FOMC and BOJ are meeting this week, more hawkishness?

Qi flagging some defensive warnings – we have been pointing out how both VIX and SPX are moving upwards which can be a sign of volatility ahead

14.03.2024

Qi MacroVantage

#1 European equities - momentum waning?
#2 AUDJPY - an efficient hawkish BoJ play
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights
#4 Software > Semiconductors
#5 Long Brazil - IBOV
#6 Long Brazil - Real

06.03.2024

Qi Market Pulse - Vol Check

Qi is capturing some clues suggesting equity markets could be on the cusp of a potential regime shift. Is complacency about to give way to risk aversion?

Clue 1: Qi’s Vol Indicator has jumped 20 points higher in the last month. 2023 was a tricky year for this alternative fear gauge but, over history, it has provided an early flag for several big "risk off" moves.

Clue 2: The acceleration in S&P 500 Qi sensitivity to risk aversion rose to multi-year highs into mid-February, as VIX descended below 13. This augurs caution.

Clue 3: Subsequently the S&P500 Qi sensitivity to risk aversion turned positive at the start of March. Again, this augurs caution.

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05.03.2024

Qi Market Pulse: Value in Value?

Despite US bond yields moving higher ytd, the S&P500 is making fresh highs – The Qi sensitivity of the S&P500 to financial conditions is tentatively fading, as consensus GDP forecasts have marched higher.

The strongest major index globally is not the Nasdaq, but the Nikkei 225 with Europe’s performance almost on par with the US. In the last month, the CSI 300 has rallied almost 10%. IF this is a sign of a better global growth backdrop, will broadening market breadth come with a Value tilt?

Where does Qi find a Value tilt? Despite the S&P500 at new highs, cyclicals relative to defensives are not screening as macro-rich in this backdrop. At the sector level, Healthcare, Utilities and Staples all trades as rich to macro warranted fair value. However, Banks and Energy trade at a discount.

Value vs. Growth itself is trading at a particularly large discount: Value trades 2 standard deviations cheap to Growth within the S&P500.

At the global level, the Nikkei and Euro Stoxx 50 are now trading rich to their Qi model fair value, but model price momentum has been strong. It is Brazil’s Ibovespa which screens as the cheapest index globally today.

04.04.2024

Qi MacroVantage

#1. GDX & Gold Over-Extended

Earlier this week, in the insight “Gold is talking…What’s it Saying?”, we highlighted that the diminishing negative sensitivity to real rates possibly reflected investor belief that real assets are a safer bet than US government debt. However, from a valuation perspective, both gold and gold miners are trading well above their Qi macro-warranted fair value.

Consider that GDX is trading +2.2 sigma (10.6% above its Qi model value), at its 100th percentile over the last 12mths, and Qi model value has flatlined over the last 3 weeks. See the first chart below overlaying GDX to its FVG. GDX is looking for a weaker dollar and lower real yields. However, against these two macro factors GDX is clearly over-extended – see the second chart.

#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything” rally

Consider that (1) DVY trades at +0.8 sigma (92nd percentile over last 12mths) (2) US Utilities at +1.4 sigma (100th percentile) (3) an equity basket of bond proxies (GSXUBOND) trades at +1.2 sigma (100th percentile). The message is that income yield plays look over-extended.

Qi has created an equity L/S basket tracking US 10yr yields (GSPQ10YR, available from Goldman Sachs). This tracking is shown below. The first observation is that the equity tracker has recently been outperforming the 10yr yield level itself, likely reflecting reflation optimism – see the first chart.

The second observation is that while the long leg of this basket has been performing strongly, the short leg has also shown strong performance since mid-February – see the second chart. This short leg is primarily bond proxies, which ordinarily would care more about the possibility of higher long end rates.

#3. FTSE 100. From YtD laggard to tactically over-extended

The fact that the FTSE 100 benefits from a weaker GBP and higher energy / metal prices is well known, given its constituent make-up. Qi shows similar drivers also. The FTSE 100 has been a laggard ytd but an outperformer over the last month as manufacturing / commodity optimism has risen, alongside a weaker pound.

However, today the FTSE stands at +1.9 sigma (97th percentile over the last 12mths) and has rarely traded much above 2 sigma. See the first chart below. Running a backtest selling when the FTSE 100 is above 1.5 sigma had resulted in an 86% Win Rate, albeit on only 7 trades – it is a rare event.

#4. CHFJPY - New carry king?

Qi's CHFJPY model confidence has risen 22% in the last 2 weeks and is back in regime for the first time in a year.

There's no valuation edge currently; spot is only slightly below our 168 fair value. The bigger standout is the sharp shift lower in macro momentum.

Macro-warranted model value has fallen 2.25% since March 19th & the BoJ rate hike. Two days later the SNB surprised with a rate cut. That policy divergence has FX investors pivoting to use the Franc as their preferred funding vehicle.

Qi shows interest rate differentials are the main driver of the cross accounting for around a quarter of model explanatory power. Otherwise it is worth noting that, on current patterns, higher crude oil and copper prices are consistent with Swiss Franc depreciation.

For a long time, the Yen has been the sole funding currency in G10 fx. Now, carry dynamics plus the commodity rally point to a new downtrend in macro momentum in CHFJPY.

#5. 10y US Treasury yields at 2024 highs on Qi

At the start of March Qi flagged that 10y UST yields were 35bp too low relative to macro-warranted fair value. Since then yields have backed up around 25bp, a move that has helped partially close Qi's Fair Value Gap.

But rising crude oil prices and higher inflation expectations have kept pushing model value higher at the same time. Currently, Qi says 10s should yield 4.48%.

That's the high for 2024. Any break higher would suggest renewed macro momentum in the reflation trade & ongoing pressure in the US bond market.

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28.03.2024

Qi MacroVantage

#1 Commodity equities – From agriculture, to precious / base metals, to energy – all trading macro-rich

Consider the following:
• DBA – Invesco DB Agriculture: +2.1 Sigma FVG
• SXEP – EU Energy: +1.5 Sigma FVG
• GDX – Gold Miners: +1.5 Sigma FVG
• S5ENRS – US Energy: +1.4 Sigma FVG
• COPX – Global Copper Miners: +0.9 Sigma FVG

While DBA’s fate seems dependent on the fortunes of cocoa, energy equities have been rallying ahead of crude itself. See the first chart. Both in the US and Europe, the FVG for the Energy sector is close to 12mth highs. While Qi’s analysis from earlier this week showed real asset exposure would outperform in the event of a perceived Fed error where inflation expectations harden, at this juncture commodity equities are at profit taking levels as opposed to long entry levels.

The second chart shows the GDX FVG vs. spot price. Qi shows an inverse relationship between GDX and the dollar – and currently there is a dislocation. See the third chart.

#2 US Value is no longer cheap to macro, in contrast to the beginning of March

At the start of March, we wrote a note “Value in Value”. We highlighted that US Banks and US Energy were among the cheapest sectors relative to the macro backdrop. Since then both of these typical value sectors have strongly outperformed. Today, they both trade macro-rich on Qi’s models.

This is perhaps best illustrated looking at RPV – the Invesco Pure Value ETF. The fair value gap is only +0.6 sigma but still large relative to recent history. See the chart below.

#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite

Periphery Eurozone bond spreads feature as a key driver across Qi’s equity models, globally. Given the prevalence in Qi’s models, we view this measure of Eurozone confidence as a key barometer of risk appetite. After all, European equities have outperformed the S&P500 ytd. The Sharpe of the rally of the last five months is a stand-out compared to the last few years.

With this in focus, we note that the sensitivity of European equities to this macro driver is at post Covid highs. See the first chart below. The second chart shows the z-score of the BTP-Bund spread – any loss of momentum would likely imply caution for risky assets. The sector flagbearer of Europe, EU Banks (SX7P) is already trading rich to macro at a FVG of +1.2 sigma.

#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts

The macro beta impulse shows how the sensitivity of the S&P 500 to macro drivers is changing, using our short term model. Sensitivities to macro have collapsed. Indeed, the sensitivity to real yields is almost positive. Similarly, the sensitivity to risk aversion has sharply diminished. Real yields were previously such a focal point (as a drag) from late last year into February – no longer.

The below chart shows the relationship between the macro beta impulse vs. the S&P500 deviation from its 50d MA – it is negative. Our hypothesis is that Mr. Market is a neurotic patient that would prefer a backdrop of macro factor stability / low beta to macro over a backdrop of increasing macro factor volatility / high beta to macro. Now that hasn’t been the case in recent months – the macro beta has been rising BUT in favour of the index.

We are at a point now where the beta impulse sits at multi-year lows. This indicator does not trend; rather, it mean-reverts. Mean-reversion from current levels would likely coincide with a more choppy market.

#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow

We have been highlighting the strong Qi model price momentum across developed market equities. See the charts below. Note that the 3mth change in the model price is close to the highs of their multi-year ranges. The outlier is EEM. Qi model price momentum has risen only 1% over the last 3mths. Further, relative to the S&P500, the divergence looks particularly wide relative to history. Under the assumption that the elastic is unlikely to stretch much further, EEM underperformance likely sees some respite from here.

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22.03.2024

MacroVantage

# 1 Risk-Reward shifting on the Dollar - EURUSD

For some investors Fed credibility is becoming an issue. This week's FOMC revised growth and inflation forecasts higher, yet they maintained the idea of three rate cuts this year.

If the Fed have deliberately placed themselves behind the inflation curve, the obvious trades include shorting the Dollar, short duration, long TIP break-evens. FX looks the most interesting on Qi right now.

On Qi, EURUSD now screens as 1.1 sigma (1.5%) cheap to model courtesy of a growing divergence between macro-warranted model value and spot FX. Qi model value has risen to almost 1.10; spot EURUSD has sold off.

Back-testing the efficacy of a -1.1 sigma FVG as a buy signal since 2009 & when Qi's model is in regime, produces mediocre results. A 56% hit rate suggests we're just on the right side of coin toss territory, but only modestly.

But, looking at the pattern between Fair Value Gap & spot EURUSD suggests more recently our FVG has done a decent job of capturing market turning points.

# 2 Risk-Reward shifting on the Dollar - USDJPY

Moreover, it is not just EURUSD. USDJPY sits 0.9 sigma (1.9%) rich to aggregate macro conditions on Qi.

The same divergence is pattern is evident - the recent Dollar rally has not been justified by macro fundamentals. Back-tests reveal similar results. Historically using this FVG as a sell signal has produced a 58% hit rate.

And the FVG versus spot chart again looks similar to EURUSD. Some false signals but more instances where Qi's Fair Value Gap has been an efficient way to signal local highs and lows.

Cable may be the most effective expression currently. It is 1 sigma (1.8%) cheap to macro. Using this FVG as a sell signal produces a 67% hit rate and a +0.56% average return.

#3 Qi Model Price Momentum for SPY - since 2009, only higher coming out of GFC & Covid

Qi’s macro-warranted model price for SPY has shown strong momentum since November.

Indeed, if we look at the 3mth change in Qi’s model price since 2009, we can see just how strong it has been – momentum has been higher only coming out of the GFC and Covid.

While cognisant of the dovish FOMC, this should point to a degree of tactical caution and the need for some consolidation. We hit similar levels in August 2023 which subsequently saw a market correction. The point is, momentum even at the Qi model value is becoming stretched.

#4 Equity sensitivity to Financial Conditions - more value in Russell 2000 Growth than S&P500 Growth

We screened for ETFs most sensitive to financial conditions. No surprise, there is a momentum / beta bias. The list includes Biotech, renewables, homebuilders, semis, regional banks, growth and small caps.

Notably, 12 out of the list of 20 still screen as macro-cheap to Qi model value. VMFO, the Vanguard Momentum ETF, is now trading below Qi model value.

Also notable is that at both ends of the spectrum Russell 2000 Growth is trading at -0.5 sigma but S&P 500 Growth (RPG) at +0.4 sigma; i.e. there is more value looking down the cap size. The Russell 2000 itself still trades at -0.3 sigma.

#5 US Financials are not the best cyclical here

Screening US sectors reveals Financials look rich relative to several peers. XLF looks over-extended versus Industrials, Metals & Mining and Real Estate.

XLF vs. IYR looks the most interesting right now. Financials are 1.4 sigma (6.1%) rich. Both sectors want lower inflation / interest rates but XLF has discounted more good news. Even if you favour immaculate disinflation and 3 rate cuts, IYR looks the better cyclical sector if you're seeking a broadening in the rally.

Finally, we note that RETINA has just flagged a bearish signal on KBE outright.

#6 What is most extended in Europe? European Insurers.

SXIP vs. SXXP trades at +2.0 sigma rich to Qi macro model value - the 100th percentile over the last 12 months. Model price momentum is also fading.

The first chart overlays spot price to model price; the second chart Qi FVG to spot price. This again highlights the risk of mean reversion.

European insurers have been amongst the best performing sector YtD in Europe. Qi shows one of the key drivers is EuroZone confidence (peripheral bond spreads). Insurers are trading rich to this driver.

17.03.2024

Qi Market Pulse – Choppy Seas Ahead

From the point of view of Goldilocks, recent macro data has been uneven – firmness in inflation data & jobless claims, but softness in retail sales. The Citi economic surprise indices have been edging lower both in the US and Europe.
At the same time, sentiment gauges are at range highs e.g. see the AAII bulls less bears retail sentiment at extended levels or merely look at Dogecoin for a sense of speculative fever. From a simple price action perspective, the S&P 500 is testing the 5mth rally trend-line with an RSI exhibiting negative divergence.

We enter a policy-centric week. 3mths ago the market was pricing 6 rate cuts in 2024. Are 3 cuts now looking optimistic? Couple the FOMC this week with speculation mounting on the BoJ exiting NIRP, and we potentially have reason to believe the sea will move from smooth sailing to choppy ahead.
This would be consistent from Qi’s perspective – in a recent note “Vol Check” we highlighted some early flags of caution (1) RSq on Qi’s short term models across major equity, bond and FX benchmarks have sharply collapsed and (2) S&P500 short term sensitivity to VIX turning positive. Triggers for our indicators were hit in early March.

This likely reflects recent relationships are being tested e.g. equities higher but real yields and VIX also both higher in recent weeks. If the current macro narrative can not be explained coupled with signs of speculative activity – that is a sign of more choppy seas ahead.
In a report last week “MacroVantage”, we note that 4 out of our 6 observations were all defensive in nature. Namely, selling European Autos vs. Utilities (an anti-momentum risk on / off barometer?), selling AUDJPY on a hawkish BoJ, buying Software over Semiconductors, and noting that our L/S equity tracker for HY credit spreads is pricing HY credit spreads back at its tights. See our baskets tracking credit spreads and GDP growth expectations below

Indeed, screening across equities most sensitive to financial conditions there is a momentum / beta bias. We list these below – which will not surprise – Biotech, renewables, homebuilders, semis, regional banks, growth, small caps would all be vulnerable areas.

Tactically, Qi shows the recent enthusiasm on Copper Miners may be short term vulnerable. Qi continues to see downside in the Invesco Pure Growth S&P 500 ETF (RPG) vs. equal-weighted ETF (RSP) . In Europe, we would also highlight European insurers screening as macro rich and vulnerable to more hawkish CB rhetoric. See the charts below where we overlay FVG vs. the spot price.

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14.03.2024

Qi MacroVantage

# 1 European equities - momentum waning?

Looking under the hood of European equity markets we note that Autos are 1.8 sigma rich to Utilities. This RV pair has been a reasonable barometer of risky asset sentiment.

Auto's outperformed in the 2020/21 post Covid rally, and again over the last few months since the Fed's policy pivot. A higher SXAP / SX6P ratio moved in lockstep with rallying Euro Stoxx 600. Until the end of last month.

If the early signs of Utilities outperforming gathers momentum, that could serve as an early warning sign for broader caution.

The chart above shows the high correlation between this RV pair's FVG and spot price relative. The table below shows the historical efficacy of using a +1.5 sigma FVG as a sell signal - an 87.5% hit rate.

#2 AUDJPY - an efficient hawkish BoJ play

Screening Yen G10 crosses in Qi reveals AUDJPY as the biggest outlier. It's in regime (69% model confidence) and is 0.8 sigma (1.26%) rich to macro-warranted fair value.

History shows the FVG can become very (3 sigma) extended. But, that said, right now it looks the most efficient way to express Yen upside if you believe next week's BoJ produces a hawkish surprise.

The AUDJPY fx cross is often viewed as a barometer for broader risk appetite - a high beta China play versus a safe haven asset.

How could lower AUDJPY influence equity markets? One impact could be an end to the Nikkei's spectacular run of outperformance.

#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights

Qi’s out of sample equity tracker for HY credit spreads is back at its 2021 lows.

This basket by construction has a strong defensives vs. cyclicals bias. This has aligned closely with HY credit spreads which can be seen as a good proxy for risky appetite.

With this basket pricing credit spreads at its tights, any vulnerability to the prevailing growth optimism would likely see this basket start to turn.

#4 Software > Semiconductors

A comparatively protected RV pair trade that speaks to the anti-momentum theme.

IGV, the iShares Expanded Tech Software ETF is 1.9 sigma cheap relative to SOXX, the iShares Semiconductor ETF.

#5 Long Brazil - IBOV

Last week's "Value in Value" insight flagged Brazil's Ibovespa as an efficient Value catch-up play.

Recent history shows a fairly tight relationship between Qi's FVG and the spot price. Conviction levels are aided by decent back test results.

#6 Long Brazil - Real

This week we also note that Qi has USDBRL as 1.4 std dev (2.4%) rich to macro conditions.

The pattern shows more of a "drift" than a sharp divergence. However, it is notable that Qi's macro-warranted model value is threatening to make new lows. A stronger Real would be supportive to Brazilian equities.

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05.03.2024

Qi Market Pulse: Value in Value?

A value tilt is emerging at the global index level: Equities have benefited from a backdrop of firm growth – reflected in the fact that as bond yields have moved higher so has the S&P500 ytd. This is true even if we exclude the Mag 7. It is notable that particularly over the last month, global growth optimism has risen. The best global indices over the last month in order are the CSI 300, Nikkei, Euro Stoxx 50, Nasdaq and then S&P500. Below we show the 4wk % change in the Qi model price across the major DM indices – the point is that this is not being led by the Nasdaq.

S&P500 sensitivity to financial conditions is fading: From Qi’s perspective, model price momentum for the index has remained strong. Secondly, the sensitivity of the S&P500 to financial conditions is tentatively fading, as economic data surprises and consensus GDP forecasts have marched higher. Below, we show the 4wk change in S&P500 financial condition sensitivity i.e. the beta impulse, rolling over during the last month.

Despite the overall market at highs, there is more value in select cyclicals than defensives: Among the more expensive sectors in the S&P500, relative to their Qi macro-warranted model, are Staples, Utilities and Healthcare. Staples and Utilities have also seen their Qi model value move lower over the last month. See the quadrant chart below where we compare the Qi FVG across the US sectors to model price momentum over the last month.

Staples, Utilities, Healthcare screen macro-rich, but Energy and Banks screen macro-cheap: Under the hood, Qi is saying that defensive sectors are expensive but there is emerging value in the value-orientated sectors of Energy and Banks. Within Energy, we show the FVG vs. spot price of OIH (Oil Services) below, trading at -1 sigma. Regional banks have been treading water of late relative to the broader market. We have persistently highlighted the regional banks as the MOST SENSITIVE to inflation expectations. Perhaps better to wait for the next CPI release, but if we get calmer prints it is perhaps THE biggest beneficiary

The Value style itself is trading at a particularly large discount to growth: Perhaps this is not surprising given the excitement and expected earnings growth from AI beneficiaries / tech. However, the Invesco S&P500 Pure Value ETF is trading at -2.1. sigma relative to the Invesco Pure Growth ETF. This discount is particularly large relative to recent history. The point is this, if you believe in better global cyclical news, more breadth beyond the mega-cap techs will more likely be seen in the value space.

At the global level, where is there value? Brazil: The IBOV screens as 1-sigma cheap to Qi macro-warranted value. While, EWZ vs. EEM screens at -1.4 sigma. Major drivers of the IBOV are higher commodity prices, higher inflation expectations, a stronger dollar and strength in global GDP. Both outright and RV vs. EEM look like interesting entry levels given the relationship between Qi fair value gap and the spot price in recent years.

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