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The chart below shows the IBEX 35 vs. Stoxx 600 Fair Value Gap; the FTSE MIB vs. Euro Stoxx 600 model is slightly less extreme but largely the same. The fall in the spot price of the RV ratio is happening while macro model value remains unchanged.

Both models are in regime & show FTSE MIB / IBEX 35 as high beta plays on a European recovery. Rising economic growth/inflation expectations, steeper yield curves, low risk aversion & tight credit spreads are all consistent with Italian / Spanish outperformance.

Covid - the impact of the Delta variant on the European tourism industry - could be one factor at play. Increasingly though it appears as though the IBEX & FTSE MIB have priced at least some of the bad news in terms of the economic fall-out.

Maybe tonight’s Euro 2020 semi-final will provide a sentiment bounce for at least one of the southern European equity markets.

This has been a growing theme on Qi as well with China-related factors rising in importance.

The charts take six global benchmark assets - S&P500, Euro Stoxx 600, 10y US Treasury & 10y Bund yields, plus EURUSD & USDJPY - & shows the ranking of Chinese sovereign CDS as a driver amongst the entire model factor set.

The higher the ranking, the more important this measure of Chinese sovereign stress is for that asset. Sovereign CDS can be interpreted as insurance against default risk. Wider (narrower) spreads implies there is greater (less) demand for protection against a Chinese credit event.

China stress is a top 5 driver for 10y US Treasuries & Bunds. However, it is US rates which really stand out. It is the second biggest driver in the entire factor set - second only to crude oil. A one standard deviation widening in Chinese CDS currently equates to a 10bp decline in UST yields.

US & European equity benchmarks were highly sensitive to China in May but that has fallen in June. Note though model confidence for the S&P500 is now 62% - it has fallen out of regime. Declining sensitivity could reflect a broader shift away from macro rather than the driver itself.

China stress is the second biggest driver of USDJPY. The relationship is positive – turbulence in China is consistent with higher USDJPY. That paints a mixed picture since USDJPY’s sensitivity to traditional risk aversion metrics (VIX etc) have recently re-established a negative relationship. After months early in 2021 when spikes in VIX benefitted the Dollar, they now favour the Yen once again.

This demonstrates that not all ‘risk off’ episodes are created equal. The catalyst for a deterioration in risk appetite can vary. Choosing the right hedge first requires the ability to recognise the source of ‘risk off’; but then to know which assets are sensitive to that particular move.

RETINA™ is flashing a bullish momentum signal on EM bonds.EMB, the iShares ETF tracking JPM’s hard currency EM bond index, is potentially carving out a new uptrend.

Both ST & LT z-scores are positive denoting an uptrend; the slope is turning increasingly positive suggesting momentum is picking up. Hence the 3 bar conviction level. RETINA™ operates on a 0-4 bar conviction scale; calibrating where macro valuation & trend/momentum dynamics are aligned, or not. One is average conviction; four is full conviction.

This is a 3-bar signal because macro valuation is neutral. The Fair Value Gap is +0.2 sigma (+0.4%).

Note a strong macro regime (83% model confidence) & Central Bank QE Expectations account for almost half of the model. EMB needs ongoing QE to perform.

If you believe the Fed & other CBs keep bond volatility low / prevent another taper tantrum, then the momentum outlook for EM Bonds looks encouraging.

This is not a valuation signal. Having spent most of 2021 cheap to macro, the recent bounce has closed the Fair Value Gap. The Qi model for the Global X ETF that tracks MSCI’s China Information Technology sector is now essentially at macro fair value.

With the valuation picture neutral - rather than opposing momentum - that means RETINA™ assigns a 3-bar conviction level to the signal. Four bar signals are the highest conviction trades.

The next Qi upgrade due in early July will include the addition of the RETINA™ trend / momentum charts to each model page. Clients will be able to see all Qi’s traditional macro analysis plus the trend charts for all models across every asset class.

In the case of Chinese technology, investors will need to maintain a close eye on Beijing’s regulatory push. However, subscribers will be able to align macro fundamentals with momentum dynamics, & monitor both in real-time. Signal from noise™

On Qi, the standout is the KraneShares China Internet ETF KWEB which is 1.4 sigma (19%) cheap to macro. As ever with tech, antitrust legislation is a clear risk; & probably explains why, at 63%, Qi’s model is just below the threshold for a macro regime.

That means valuation signals come with a health warning. Still, the valuation gap is close to 1y lows & the contrast with both the NASDAQ & ChiNext is stark. It has also lagged the recovery experienced by other tech favourites.

At the index level, while NASDAQ & ChiNext flirt with new highs, in macro terms Hang Seng Tech looks more like KWEB. That may speak to micro factors as the two rival exchanges compete but, at 8% cheap to macro model value, the contrast is again striking.

Another popular tech vehicle are the ARK Invest funds. Qi has models for both ARK Innovation ARKK & ARK Genomic Revolution ARKG. At the lows in mid-May, they were 28% & 24% cheap to model respectively.

Both have now caught up & trade in line with model fair value. Note also both are back in macro regimes. Even funds focused exclusively on disruptive technology are not immune to their macro environment.