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Macro Markets Insights
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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.
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
24.10.2024
Qi MacroVantage
1. The juxtaposition of Qi’s ST & LT models - Trump growth optimism vs. tighter FCIs
2. US Treasuries I: time for a pause in the bond sell-off?
3. US Treasuries II: inflation > growth
4. SOXX & XOP not afraid of Dollar strength & trading at a macro discount on both ST & LT models
5. USDJPY – extreme move, but justified
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
17.10.2024
Qi MacroVantage
1. Macro + Politics – Qi’s Trump models
2. Trump is a bond trade first-&-foremost
3. Will Donnie unleash Tech & Crypto?
4. Qi stock sensitivities to Trump – today, 2020 & 2016
5. Equities – regime change with valuations stretched
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
09.10.2024
Qi MacroVantage
1. Re-pricing inflation risks
2. A US sector cheat-sheet for CPI
3. Qi bearish divergence signals across US cyclicals
4. Canada’s TSX – short term over-optimism?
5. French downgrade – EURUSD vs. EURCHF
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08.10.2024
Qi Sector Spotlight: ITB through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
Homebuilders have delivered among the strongest returns over the last year of any US industry. Qi’s MFERM reveals the macro anatomy of the ITB Home Construction ETF and concludes the macro backdrop has now become a drag to performance. At the heart is whether FCIs have now seen their floor – thus far, ITB has been a beneficiary of a weaker dollar, lower real rates, tighter HY corporate credit and bull-curve steepening.
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
03.10.2024
Qi MacroVantage
1. S&P500 Macro Beta Impulse close to multi-year lows. A sign of complacency
2. Despite the rally, SPY Qi model price momentum has been fading over the last month
3. Amber warning in credit
4. Amber warning in Asia
5. A Trump surge is underpriced by equities
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
26.09.2024
Qi MacroVantage
#1 Time for a high beta breather
#2 Shanghai Composite : From > 1 sigma cheap to now at Qi fair value – focus on model momentum
#3 AUDUSD – an efficient way to fade the China hype
#4 URA – Qi says over-exuberance
#5 Yen – more to come?
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
19.09.2024
Qi MacroVantage
#1 European Miners – one of the cheapest sectors in Europe
#2 Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
#3 US Rotation – Energy cheap to Consumer Discretionary
#4 Tech momentum into year-end
#5 EUR yield curve – a pause in the steepening?
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
11.09.2024
Qi MacroVantage
#1 The inflation battle is over . Disinflation is the new enemy?
#2 Recession? Buy bonds??
#3 Cheap inflation hedges
#4 Defensives vs. Commodity Equities – the book-end relative performance is becoming stretched
#5. XLF macro beta impulse to credit rising
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10.09.2024
Qi Market Spotlight: XLF through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
US Financials are the poster child of the rotation trade. They have led the rally over the last month and sit close to ATHs. In many ways the sector is a litmus test for US equities more broadly – as recession risks rise, navigating the trade off’s between hard and soft landings whilst the Fed engineer easier financial conditions is critical.

The first step in that process is understanding what factors XLF is exposed to. Both macro versus idiosyncratic, & then within macro which factors matter most. Thereafter, only by decomposing risk and returns can we understand what role macro will play over company fundamentals. And, more specifically, which macro factors will dictate Financials performance into year-end.

Thus far, XLF has demonstrated confidence in the credit cycle – HY credit spreads are not back at their tights despite XLF at the highs. It is likely we remain a macro-dominant regime through to year end.
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Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
05.09.2024
Qi MacroVantage
#1 Sector sensitivities into payrolls – winners / losers?
#2 Back to school brings growth worries – XLF fragility
#3 Weak balance sheet stocks hit 2yr highs last week but HY credit spreads had not hit 2yr tights
#4 US vs. Europe - credit
#5. US vs. Europe – government bonds
#6. FXI – Sentiment is very bearish but waiting for a clearer upward trajectory on Qi model value
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08.10.2024
Qi Sector Spotlight: ITB through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
Homebuilders have delivered among the strongest returns over the last year of any US industry. Qi’s MFERM reveals the macro anatomy of the ITB Home Construction ETF and concludes the macro backdrop has now become a drag to performance. At the heart is whether FCIs have now seen their floor – thus far, ITB has been a beneficiary of a weaker dollar, lower real rates, tighter HY corporate credit and bull-curve steepening.
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1. If FCIs have seen their floor ITB is at risk of rolling over. Over the last 1yr, the ITB Home Construction ETF has delivered a 61% return – among the best across all US industry groups.
Picture1
2. Macro matters for ITB – There is 62% correlation (39% RSq) between daily ITB returns and macro factor driven daily returns over the last year.
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3. Over the last week, the drag from macro factors has been particularly large. Qi’s MFERM model dissects the return of ITB into its macro factor & idiosyncratic / specific return components. Note the recent divergence between the spot return and factor return in the chart below.
Picture3Picture4
4. Where does this recent factor drag stem from? FCIs. USD TWI, forward growth expectations (5s30s), rates, HY corporate credit and CB QT expectations have all been drags for ITB over the last week.
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5. From propellers to drags: Indeed, for rates, 5s30s and USD TWI the factor returns have switched from propellers to drags over the last 1mth
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6. So what is ITB most exposed to today? HY Credit, the dollar, real rates and it would prefer bull curve steepening.
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7. Across industry groups ITB is among the most sensitive to real rates, DM FX and corporate credit: Notable, as wait for inflation numbers this week - a beat would be troublesome.
Picture8
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
03.10.2024
Qi MacroVantage
1. S&P500 Macro Beta Impulse close to multi-year lows. A sign of complacency
2. Despite the rally, SPY Qi model price momentum has been fading over the last month
3. Amber warning in credit
4. Amber warning in Asia
5. A Trump surge is underpriced by equities
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1. S&P500 Macro Beta Impulse close to multi-year lows. A sign of complacency
Picture1
By the end of last week, the S&P500 had rallied 6 of the last 7 week and sitting 4% above its 50d MA - the world’s most important central bank is easing, and the world’s most important government is stimulating! No surprise therefore to see this rally coincide with a sharp decline in the S&P500 macro beta impulse i.e. falling macro sensitivities. Recall, 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. Therefore, when macro betas are low it is a reflection of low fear on macro. The S&P macro beta impulse has hit the low end of its range post Covid. See the chart above.
Picture2
In similar vein, we show the S&P500 Qi sensitivity to the average of VIX and HY credit spreads (ST model) as a fear gauge proxy. We are clearly in period of lower macro fear, relative to the last few years.
2. Despite the rally, SPY Qi model price momentum has been fading over the last month
Consider also that SPY model price momentum has been fading over the last month. HY credit spreads are little changed while inflation expectations have been rising.

Looking ahead, if the market is increasingly comfortable on the data, we need to look to inflation expectations. This would have an upward impetus on a Trump surge, China stimulus and falling jobless claims.
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3. Amber warning in credit
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While SPY’s sensitivity to High Yield spreads is towards the low end of the ranges, it remains a critical factor. Credit spreads account for 22% of model explanatory power so equity investors need to be aware of some early warning signs that credit is looking extended from a macro perspective.

LQDH is the ETF that provides exposure to US Investment Grade credit with the duration element hedged away, i.e. it is a “purer” credit play. A bearish divergence pattern is developing with the recent rally occurring despite macro conditions starting to deteriorate. If Qi model value falls below the early September low of 91.73, we would start to worry macro momentum is potentially turning.

The same bearish divergence formation is evident elsewhere too. Still in the US, the ANGL ETF captures firms that were rated investment grade at the point of issuance, but have since been downgraded to High Yield. It sits 1.4 sigma rich to macro with Qi model value approaching the September lows.

EMHY (JP Morgan’s EM High Yield ETF) and EMB (hard currency EM sovereign bonds) are over 1 sigma rich in FVG terms with model value rolling over.
Picture5
The local currency Emerging Market bond ETF LEMB is also rich but there at least macro momentum is still trending higher. Ideally, a retracement would offer a better entry level, but soft currency EM bonds look the best bet to global asset allocators on our models.
4. Amber warning in Asia
Picture6
Qi is firing warning signals on several China related plays. AIA (iShares Asia 50; 40% China weighting), AAXJ (iShares All Country Asia ex Japan; 29% China weighting) and VWO (Vanguard FTSE Emerging Markets; 23% China weighting) are all over 1 sigma rich to macro-warranted model value.

Copper is now 1.6 sigma rich to macro. LUXU (the Amundi Luxury ETF with Hermes, CIE Richemont and LVMH Moet Hennessy Louis Vuitton as the top 3 holdings) is 1.5 sigma above model value.

Yes there’s a large element of a positioning squeeze driving current price action. But, from a macro perspective, the tradeable bounce has already happened to a fair degree. The risk-reward suggests these are not great levels to chase.
5. A Trump surge is underpriced by equities
Betting odds show that the Trump/Harris gap is narrowing at 50% probability for a Trump win and 48% for Harris. However, according to Qi, at least at the equity market level, a sudden Trump surge is clearly not priced. If all Trump’s policies were effected, it would be expected to lead to larger inflationary than growth impulse. Yet Qi shows the sensitivity of the S&P500 to Trump betting odds has falling to zero. See the chart below.
Picture7
In contrast, the sensitivity to 10yr Treasury yields is deemed much higher. Higher Trump betting odds point to higher yields – no surprise given the heightened concerns on a ramp up in the fiscal deficit.
Picture8
Paul Skorupskas 7Kla Xlbsxa Unsplash 099676
19.09.2024
Qi MacroVantage
#1 European Miners – one of the cheapest sectors in Europe
#2 Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
#3 US Rotation – Energy cheap to Consumer Discretionary
#4 Tech momentum into year-end
#5 EUR yield curve – a pause in the steepening?
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#1. European Miners – one of the cheapest sectors in Europe
Picture1
Crude may be close to 3yr lows but other commodities have been holding up better. Copper has risen ~8% from its August lows. Data at the end of last week showed copper inventories on the Shanghai Futures Exchange fall 14% on the week - the largest weekly decline this year – and the LME spot price may have now turned the corner after sinking 20% from a high in May. Today SXPP, the EU Basic Resources sector, is still close to its lowest level since late 2020. See the chart above.
Picture2
Earlier this week, we note in our MacroHub publication, how depressed sentiment was in Europe (a quarter of the Dax stocks are trading below book value). On Qi’s model, the sector is trading -0.8 sigma (~5%) below Qi model value, hovering close to the 1yr range lows. It is one of the cheapest of the Stoxx sectors in Europe.
Picture3
Global GDP growth is one of the top macro drivers of the sector. Since July, that sensitivity has accelerated higher firmly into positive territory. If there is belief in a soft landing any sign of a pick up in global growth confidence, owing upside in this space make sense given how depressed sentiment is.
#2. Qi’s GDP Growth Basket stabilizing alongside Citi US Economic Data Surprise Index.
Picture4
Whatever the extent of the Fed rate cutting cycle, ultimately it is all about soft landing for the economy. The below chart shows the GS Qi long / short basket pair tracking US GDP growth. The dark blue line shows the deviation of that basket from its 200d MA i.e. the deviation from trend as measure of optimism / pessimism. Indeed, shown in this way, there is good relationship with the Citi US economic surprise index. Cyclical re-acceleration may well be a pain trade
Picture5
Defensives have been among the best performing sectors recently and relative to their sector peers are more expensive on Qi’s macro fair value models.
#3. Tech momentum into year-end
Picture6
Tech has been a laggard in the recent SPX rally. Positioning is now also cleaner in the space. Further, we know the strength of Q4 seasonality. SOXX is one of the cheapest sector ETFs at -1.3 sigma. The technology sector in general is a beneficiary of loose financial conditions. See the chart above highlighting the sector ETF sensitivities to FCIs (HY Credit spreads, USD TWI, real rates) vs. sensitivities to GDP. SOXX, COPX, XME, XRT, XLB, IWM, SLF, XLB are all sectors which relatively benefit from loose FCIs alongside trading below.
Picture7
Above we show the Mag7 12mth fwd PE vs. Qi’s model FVG of the PE. On this basis, the 12mth fwd PE of the Mag7 stands ~1 sigma cheap to model value. That is close to the lower end of the valuation range of the last 1yr. A return to Mag7 leadership into year-end is a possibility if we see re-risking into YE.
#4. US Rotation – Energy cheap to Consumer Discretionary
Picture8
Thus far, the recent rotation trade has favoured defensives and certain cyclicals, but not all. Energy has missed out because of the drag from crude oil prices.

But now we note US Energy XLE sits as 0.8 sigma (4.6%) cheap to Consumer Discretionary. Qi’s macro-warranted model value for the RV pair has been flat-lining since mid-August. Put another way, XLE has overshot to the downside relative to broad macro conditions.

Over the last year extremes in Qi’s Fair Value Gap has done a good job of marking local lows and highs in the actual XLE / XLY RV pair trade. If a 50bp rate cut from the Fed helps negate recession fears, maybe its time to be looking for cheap cyclicals that have lagged.
#5. EUR yield curve – a pause in the steepening?
Picture9
The European 2s10s yield curve was almost 60bp inverted as recently as May. Today it is almost back to flat.

There remain good reasons to think the risk-reward favours further curve steepening over the medium to long term. A hard landing means more rate cuts and a bull steepening; cutting when an economy is slowing but growing risks re-awakening the bond vigilantes who will bear steepen the curve.

But Qi’s model which has a high (72%) and stable R-Squared is suggesting this move may have too-far-too-fast. Relative to aggregate macro conditions, the curve sits 1.6 sigma (21bp) too steep.

The chart below shows there are times when the FVG becomes even more extended - last October around the Fed pivot, the gap reached 3 sigma. Even so we’re getting into thin air. Some consolidation could be healthy and offer better re-entry levels to re-set steepeners.
10.09.2024
Qi Market Spotlight: XLF through the lens of Qi’s Macro Factor Equity Risk Model (MFERM)
US Financials are the poster child of the rotation trade. They have led the rally over the last month and sit close to ATHs. In many ways the sector is a litmus test for US equities more broadly – as recession risks rise, navigating the trade off’s between hard and soft landings whilst the Fed engineer easier financial conditions is critical.

The first step in that process is understanding what factors XLF is exposed to. Both macro versus idiosyncratic, & then within macro which factors matter most. Thereafter, only by decomposing risk and returns can we understand what role macro will play over company fundamentals. And, more specifically, which macro factors will dictate Financials performance into year-end.

Thus far, XLF has demonstrated confidence in the credit cycle – HY credit spreads are not back at their tights despite XLF at the highs. It is likely we remain a macro-dominant regime through to year end.
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What have been the major XLF macro exposures ytd?


• Through 2024, XLF has benefited from a weaker dollar, falling 10yr yields and, since the Spring, falling energy prices and a steeper 5s30s curve; i.e. the focus ytd has been the easing in financial conditions.
Picture1
• This has also occurred in a backdrop where there is confidence in the credit cycle – the XLF factor exposure to risk aversion and HY credit spreads have dissipated to cycle tights.
Picture2
If the balance of risks shifts towards recession, what changes should we look out for?

With the balance of risks shifting towards to recession risks, we would expect to see in that backdrop:

1. the exposure to 10yr yields moving towards positive territory; i.e. higher yields / higher XLF
2. the positive exposure to a steeper 5s30s curve continue to rise; i.e. pressure remains high on the Fed to cut
3. the negative exposure to corporate credit and risk aversion to not be so sanguine but rather increase; i.e. credit cycle fears rise

This would also manifest itself back to a regime where macro dominates XLF predicted risk. Early July reflected complacency. Today, we may have returned back to a macro dominant regime to understand risk.
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Macro has dominated both XLF returns and risk since early July

• Macro has also the dominant driver of returns since early July. See the chart below, showcasing the close relationship of XLF to the attributable factor return over the last month (reflecting XLF’s exposures to those factors and the underlying moves in the factors themselves). Like we have seen before, the XLF factor return seems to have peaked a few days before the actual ETF peak. If we suspect macro is to remain dominant, bulls want to see the XLF attributable factor return component trough and move higher.
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• What explains the descent in the XLF factor return from its peak on 27th August? The table below showcase the attributable return by individual macro factor. Reflecting slowdown fears - the jump in credit spreads and risk aversion, alongside dollar strength and the large drop in inflation expectations capture the bulk of the decline.
Picture6
Watch the exposure and risk attributable to HY credit spreads – that may well tilt the scales

• Looking ahead, the Fed has never started an easing campaign with 50 basis points when credit spreads were this tight and unemployment this low. There is plenty of uncertainty: This point in the calendar is hard for risky asset assets – Will the Fed begin the rate cut cycle aggressively from the get go? Will we see a proper rise in the UE rate? Who will win the US election? There are 7 long weeks between Sep FOMC and Nov FOMC.
We would say watch financial conditions – that will tilt the scales:

• Watch if the XLF negative exposure to credit spreads becomes larger

• Watch if the XLF predicted vol attributable to macro continues to rise and if HY credit spreads can explain a larger proportion of the risk. Currently, the factor vol attributable to HY credit spreads is in-line with its long run average contribution i.e. the market is still comfortable with the state of the credit cycle. We should stay alert if we see this start to lurch higher
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This is a case study showcasing the power of Qi’s Macro Factor Equity Risk Model. Qi clients can train any single security or portfolio of assets on the same framework. Thereby identifying their macro factor exposures, and decomposing both their risks & returns into macro versus idiosyncratic. Finally by revealing which specific macro risks they are running, clients are in a position to consider which hedging strategies may be required.
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