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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.
16.12.2021
It's the economy, stupid
Amidst all the analysis of last night’s Fed, one development went largely unnoticed. The Atlanta Fed’s GDPNow model for US growth fell sharply from 8.7% to 7.0%.
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Faster Fed taper
- winners & losers II
- winners & losers II
Yesterday’s insight looked at global equity markets & which will benefit, or suffer, from a faster taper. Here we develop that a stage further.
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14.12.2021
Faster Fed taper
- winners & losers
- winners & losers
By now the market is braced for a faster pace of Quantitative Tightening from the Fed. However, just because consensus expectations have shifted doesn’t mean the entire market is necessarily comfortable with the new reality – there will still be winners & losers.
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Best EUR fx trade for a
hawkish ECB surprise
hawkish ECB surprise
The Lagarde ECB is widely perceived to be dovish. Certainly, relative to the Fed, the consensus expects little chance of a hawkish surprise on Thursday.
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Bullish China? What to buy
There are signs of a shift in Beijing’s policy stance - a renewed focus on stabilising the economy. The prospect of stimulus has focused attention on how significantly China has lagged other international equities over 2021.
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08.12.2021
New regime, new optimism
in European equities
in European equities
European equities are in a new macro regime. After 3months below the Qi threshold, model confidence has risen 19% over the last 2 weeks & now stands at 67%.
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07.12.2021
RETINA™ - XLI vs. XLU
US Industrials are one sigma (2.2%) cheap versus Utilities relative to the macro environment; close to a 1 year low in Qi’s Fair Value Gap terms & now RETINA™ is flagging a bullish inflection signal.
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R.I.P. the 2021 reflation trade
The chart shows Qi’s measure of US inflation expectations in z-score terms back to the start of January 2020.
The initial deflationary shock from the first Covid lockdown in March 2020 was a 7 standard deviation event. The Q4 2021 scare saw inflation expectations rise to 3 standard deviations above long term trend.
Since then inflation expectations have fallen hard & have reverted a fair way back towards trend.
The initial deflationary shock from the first Covid lockdown in March 2020 was a 7 standard deviation event. The Q4 2021 scare saw inflation expectations rise to 3 standard deviations above long term trend.
Since then inflation expectations have fallen hard & have reverted a fair way back towards trend.
See more
03.12.2021
Green light for US High Yield
In “Beware High Yield” we noted that US High Yield was starting to look cheap versus its macro environment. At that point, however, macro model value was still deteriorating so a clear buy-the-dip signal wasn’t quite there.
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02.12.2021
Where next for the US Dollar?
It’s that time of year when year ahead predictions start to clutter up inboxes. 12 months ago the entire market seemed unified around a bearish US Dollar view. Fast forward a year & long the Dollar seems to be the consensus 2022 call.
The chart below plots Qi’s macro-warranted model fair value for the Dollar against its DM peers. All indexed to 100 on Jan 1st it shows how macro fair value has evolved over the last 12 months. All show USD as the base currency – EURUSD, AUDUSD etc are inverted.
Premium content, for a full analysis sign up to a month of insightsThe chart below plots Qi’s macro-warranted model fair value for the Dollar against its DM peers. All indexed to 100 on Jan 1st it shows how macro fair value has evolved over the last 12 months. All show USD as the base currency – EURUSD, AUDUSD etc are inverted.
15.12.2021
Faster Fed taper
- winners & losers II
- winners & losers II
Yesterday’s insight looked at global equity markets & which will benefit, or suffer, from a faster taper. Here we develop that a stage further.
See more
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.
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.
13.12.2021
Bullish China? What to buy
There are signs of a shift in Beijing’s policy stance - a renewed focus on stabilising the economy. The prospect of stimulus has focused attention on how significantly China has lagged other international equities over 2021.
See more
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.
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.
08.12.2021
New regime, new optimism
in European equities
in European equities
European equities are in a new macro regime. After 3months below the Qi threshold, model confidence has risen 19% over the last 2 weeks & now stands at 67%.
See more
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.
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.
06.12.2021
R.I.P. the 2021 reflation trade
The chart shows Qi’s measure of US inflation expectations in z-score terms back to the start of January 2020.
The initial deflationary shock from the first Covid lockdown in March 2020 was a 7 standard deviation event. The Q4 2021 scare saw inflation expectations rise to 3 standard deviations above long term trend.
Since then inflation expectations have fallen hard & have reverted a fair way back towards trend.
The initial deflationary shock from the first Covid lockdown in March 2020 was a 7 standard deviation event. The Q4 2021 scare saw inflation expectations rise to 3 standard deviations above long term trend.
Since then inflation expectations have fallen hard & have reverted a fair way back towards trend.
See more
This may seem inconsistent with many peoples’ views on the economy.
Supply bottlenecks remain. High frequency economic data has been mixed but Data Surprise indices continue to tick higher. The Fed are contemplating a faster taper. The next CPI report is due Friday & the top end of the forecaster’s range includes prints of 7.0%+.
It is, however, consistent with the flattening of the US yield curve. Thus far at least, the Fed’s policy response is seen as capping the rise in inflation.
It also reiterates the need for equity managers to understand macro. Recent market volatility underpins the idea equity markets are struggling to compute the degree to which elevated valuations are simply a function of Fed easy money policies, & how much is due to healthy underlying company fundamentals. The latter requires stock picking skills. The former requires a robust framework to quantify the myriad of macro risks facing investors.
Supply bottlenecks remain. High frequency economic data has been mixed but Data Surprise indices continue to tick higher. The Fed are contemplating a faster taper. The next CPI report is due Friday & the top end of the forecaster’s range includes prints of 7.0%+.
It is, however, consistent with the flattening of the US yield curve. Thus far at least, the Fed’s policy response is seen as capping the rise in inflation.
It also reiterates the need for equity managers to understand macro. Recent market volatility underpins the idea equity markets are struggling to compute the degree to which elevated valuations are simply a function of Fed easy money policies, & how much is due to healthy underlying company fundamentals. The latter requires stock picking skills. The former requires a robust framework to quantify the myriad of macro risks facing investors.
03.12.2021
Green light for US High Yield
In “Beware High Yield” we noted that US High Yield was starting to look cheap versus its macro environment. At that point, however, macro model value was still deteriorating so a clear buy-the-dip signal wasn’t quite there.
See more
Qi fair value for HYG now appears to have bottomed. In fact, RETINA™ is flagging an inflection signal with both spot & model value turning higher over the last 3 days.
Another US High Yield ETF JNK is also being flagged by RETINA™. Again a bullish inflection signal, this time with spot 1.4 sigma (1.0%) low versus model value
Away from ETFs & for those executing in Fixed Income markets, CDX US High Yield spreads are 1.6 sigma too wide & once again the recent trend towards wider spreads in macro model value appears to be topping out.
All three back-test well. Using current FVGs as entry levels the hit rates are 54%, 60% & 88% respectively.
Qi’s S&P500 model remains out of regime. In part because long-held sensitivity to credit spreads has waned. It will be interesting to observe whether a potential turn in credit spreads provides a broader fillip to risky assets.
Away from ETFs & for those executing in Fixed Income markets, CDX US High Yield spreads are 1.6 sigma too wide & once again the recent trend towards wider spreads in macro model value appears to be topping out.
All three back-test well. Using current FVGs as entry levels the hit rates are 54%, 60% & 88% respectively.
Qi’s S&P500 model remains out of regime. In part because long-held sensitivity to credit spreads has waned. It will be interesting to observe whether a potential turn in credit spreads provides a broader fillip to risky assets.