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Macro Markets Insights
Make informed investment decisions with unique insights
 
Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.
2021 08 26 11 53 34 Copy
26.08.2021
New 'Common Prosperity' policy: 
Which Sectors look to gain or lose?
China is now pushing its new policy initiative of “common prosperity” that is thus far as long on the progressive rhetoric of redistribution of wealth and overcoming income inequality as it is short on detail. But because of the influence of macro drivers on asset prices as tracked by Quant Insight (Qi), and China’s leading role as a driver of macro, some sectors and asset classes such as European luxury goods firms and commodities are already feeling a little less prosperous.
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Omega Nebula 11053 1920
26.08.2021
Hedging German election risk
Germany goes the polls next month. Does the macro picture offer any cheap hedges for those worried about increased political risk premium?
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Casey Horner Rmowqdcqn2E Unsplash
25.08.2021
European Banks - one to watch
After a fantastic first half of the year, European Banks have stalled. But while SX7P has edged lower, Qi’s macro-warranted model value appears to be trending higher. Both for EU Banks outright, & relative to the broader market.
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24.08.2021
Factor Watch - Commodities
Both crude oil & copper have now reverted to long term trend. The correction in iron ore continues & has taken it below trend.

Across multiple asset classes, energy is - by some margin - a more important driver than metals on current relationships.
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Jeremy Thomas E0Ahdsenmdg Unsplash
24.08.2021
Trading China's "common prosperity"
Dead cat bounce? The recent recovery in risk appetite has enabled European luxury brands to rally after a brutal 2 week sell-off.

But Beijing’s new “common prosperity” policy still implies less Chinese demand for European high margin luxury goods.
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Jake Weirick 09Bqxnvo7Eu Unsplash
23.08.2021
Top Down vs.
Bottom Up
In the last 10 days, weak economic data – most notably Consumer Confidence & Retail Sales – has prompted US tracking GDP growth to fall from 6% to 3.6% in annualised terms.

Yet at the same time we have seen a raft of upgrades from retailers.

Walmart raised their outlook for 2021 for the second time in 3 months; Macy’s did likewise; Home Depot recorded their highest quarterly revenues ever. How do we square the two seemingly opposing stories?
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23.08.2021
The lucky country no more?
The chart shows the 10 biggest Fair Value Gaps across all Qi’s FX models. It has a distinct ANZAC bias.

Aussie features 4 times – each time it is cheap, & the FVG is at or close to a 1y extreme. The Kiwi features 3 times & each time screens as cheap & at 1y FVG lows.
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Nasa Rtzw4F02Zy8 Unsplash
13.08.2021
US vs. Rest of the World
Two charts - S&P500 versus Developed equities, S&P500 vs Emerging Market equities.
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Omega Nebula 11053 1920
12.08.2021
Peak Infrastructure
Looking at the sector level may be too crude for stock pickers who seek to identify the individual winners & losers from the US Infrastructure deal.

Nevertheless the sector view can provide some signals on how the broader US equity market is pricing the successful passage of President Biden’s bill.
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Pexels Sam Willis 3934512
11.08.2021
US Inflation - then & now
Peak reflation was March 31st. At least as measured by 10y US Treasury yields which hit a 2021 high at 1.74% on that date. With the next batch of US CPI data due today, how sensitive are the different equity sectors to US inflation expectations now versus the end of Q1?

US equity sector sensitivity to inflation expectations –
Aug 10th
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2021 08 26 11 53 34 Copy
26.08.2021
New 'Common Prosperity' policy: 
Which Sectors look to gain or lose?
China is now pushing its new policy initiative of “common prosperity” that is thus far as long on the progressive rhetoric of redistribution of wealth and overcoming income inequality as it is short on detail. But because of the influence of macro drivers on asset prices as tracked by Quant Insight (Qi), and China’s leading role as a driver of macro, some sectors and asset classes such as European luxury goods firms and commodities are already feeling a little less prosperous.
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A brutal two week sell-off followed the introduction of Beijing’s “common prosperity” as investors wagered that it will also mean less Chinese demand for European high-margin luxury goods. And while they have recovered some lost ground on a return of risk appetite in the second half of August, they are still looking vulnerable. Qi’s RETINA™ service tracking trend and momentum is flashing a bearish signal on the iShares Stoxx 600 Personal and Household Goods ETF (EXH7) in which luxury brands account for over 40% of the overall sector. This ETF’s biggest weightings are in the luxury goods manufacturers LVMH (19%), L’Oreal (11%), Richemont (5.6%) and Hermes (5%). Qi signals are pointing to a downtrend in this sector, and while it appears to be cheap on a valuation basis to macro, model confidence is low so it looks like trend, momentum and sentiment are in the driver’s seat for now.
2021 08 26 14 40 44
Checking the Oil Gauge:   Which Assets is Oil driving:
The new vibe coming out of China has also contributed to a sinking feeling felt by most commodity complexes in recent weeks. The uncertainty for China economic growth of “common prosperity” and sudden fear of lower demand for oil and other commodities was quick and harsh. But oil and copper have reverted to their long-term trend for the first time in some while. And if China is moving oil prices, it is important for investors to know that oil prices are moving a number of other assets since crude is currently serving as a reliable barometer for risk appetite.



Investors who are looking for oil to resume its bull trend can of course play this with the energy ETFs XLE, XOP and OIH, which rank as highly sensitive to oil prices. No surprise there. But also sensitive to the direction of oil are the unlikely bedfellows of Cannabis and Turkey which investors can sample through POTX and TUR, their respective ETFs (although they would be discouraged from sampling cannabis in Turkey). In addition, US government bonds also react to oil prices, with the sensitivity increasing sharply as you move out the yield curve. In fact, long term Treasuries (WN) are 19x more sensitive than 5-year Treasury futures (FV). European government bonds, by contrast, are largely indifferent to energy shifts.

FX investors should be aware that oil also moves currencies, and some that you might not expect. The usual petro-currencies have strong linkages to oil prices, but less intuitive is the TRY/JPY currency pair, which has the highest sensitivity at the moment. Again, Turkey features as a high beta play on risk appetite. The Aussie Dollar (AUD), which is well known to be highly influenced by commodities, oil included, is currently trading as very cheap. Indeed, against the USD, Euro, Japanese yen and Swiss franc it is nearing a one-year valuation low. AUD/USD is not only at a one-year extreme but at levels not seen since 2009. It seems a strong view on higher oil and commodity prices would want to include a play on AUD just now.

It should also be noted that the New Zealand Kiwi is looking cheap against safe havens like the Yen and Swiss Franc. “The message from the FX market is clear,” says Huw Roberts, Head of Analytics at Quant Insight. “A fair degree of bad news, both in terms of the global economic cycle and in terms of risk appetite, is in the price.”
2021 08 26 14 41 03
Bottom’s Up for a Dovish Powell:
While the backdrop for China growth expectations has wrought havoc on the European luxury sector, commodity prices and even some commodity sensitive currencies, disappointing retail and consumer confidence data in the US fomenting economic growth concerns has largely been ignored by the US retail sector. Walmart (WMT) raised their outlook for 2021 for the second time in three months while Macy’s (M) did the same and Home Depot (HD) recorded their highest quarterly revenues ever.

But only WMT investors will need to be cheering for a dovish speech from Fed Chairman Jerome Powell on August 27. That’s because, unlike M and HD, WMT is in a strong macro-regime and is trading rich to its macro model. Since Fed QE is a dominant driver of WMT’s macro model, accounting for 36% of the model’s explanatory power, a Powell speech offering more of the current everyday low-priced monetary conditions will be a good deal.

But what about the retailers not currently driven by macro factors? “Where a model is not in a macro regime, stock pickers can have greater confidence that disappointing GDP trends won’t necessarily impact revenues and earnings,” says Roberts. “But when a model is in regime, even a bottom-up investment process needs to consider their macro risks.
24.08.2021
Factor Watch - Commodities
Both crude oil & copper have now reverted to long term trend. The correction in iron ore continues & has taken it below trend.

Across multiple asset classes, energy is - by some margin - a more important driver than metals on current relationships.
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EnergyMetals
Equity investors typically have less visibility on shifts in macro factors. But even macro players may lose a degree of perspective. Qi looks at macro factors in z-score terms, capturing their moves relative to long term trend. Crude's bounce this week coincided with Qi's measure showing the process of mean reversion to trend was complete.

Qi’s Optimise Trade Selection function enables users to stress test different scenarios – like crude oil shifts – across asset classes.
  • Which equity ETF benefits if oil resumes its bull trend? Energy ETFs XLE, XOP & OIH unsurprisingly rank as highly sensitive but so too do Cannabis ETF POTX & TUR, the iShares tracker for MSCI Turkey. Both presumably reflect crude oil as a barometer for risk appetite.
  • Which FX pair best captures further downside in crude? The usual petro-currencies all feature but the cross with the greatest sensitivity is TRYJPY. Once again Turkey appears to be the high beta risk appetite play.
  • Amongst global government bonds there is a clear US / Europe divide. The latter are largely indifferent while energy shifts are a significant driver of US futures with sensitivity increasing sharply as you move out the yield curve. WN contracts are 19x more sensitive than FV futures.
23.08.2021
The lucky country no more?
The chart shows the 10 biggest Fair Value Gaps across all Qi’s FX models. It has a distinct ANZAC bias.

Aussie features 4 times – each time it is cheap, & the FVG is at or close to a 1y extreme. The Kiwi features 3 times & each time screens as cheap & at 1y FVG lows.
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Aaa
Unwinding RBNZ rate hikes, the delta variant, slow vaccination progress, civil unrest plus global growth concerns all form the common narrative explaining recent price action.

From a quant macro perspective, AUDUSD is the most interesting. RETINA™ has flagged a divergence signal: model fair value is flat-lining, in contrast to the recent fall in spot. Moreover, at 2.3 sigma (5.5%) cheap to model, the FVG is not only at a 1y extreme but at levels only seen once before since 2009.

AUDJPY is often seen as a barometer for global growth &, at -0.8 sigma (2.7%), may interest reflationists. Note though that macro fair value is trending lower. The FVG reflects spot moving lower quicker than model value. That contrasts with the divergence signal in AUDUSD.

Combined with the Kiwi screening as cheap versus safe havens the Yen & Swiss Franc, the message from the fx market is clear – a fair degree of bad news, both in terms of the global economic cycle & in terms of risk appetite – is in the price. That is not to say the outlook can’t deteriorate further – but, to do so, increasingly requires the macro factors to do the work.
Nasa Rtzw4F02Zy8 Unsplash
13.08.2021
US vs. Rest of the World
Two charts - S&P500 versus Developed equities, S&P500 vs Emerging Market equities.
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SPY vs. EFA (iShares ETF tracking MSCI EAFE) spot price is in white, macro-warranted model value in red. US outperformance versus DM equities has been especially strong of late but appears to be peaking. Both spot & model value are topping out / potentially rolling over.

On this occasion the market has led. The white line has already rolled over and S&P500 is now 0.5 sigma (1.2%) cheap to DM equities on Qi models. Diversification away from US equities into the likes of Europe is already in motion. Our STOXX 600 vs S&P500 model is not in regime but a +0.5 sigma (+0.6%) Fair Value Gap points to the same conclusion.
Screen Shot 2021 08 11 At 161835
Same chart but this time SPY vs. EEM. The valuation perspective is the same. Spot price in white was trending higher but has lost some momentum recently.

One narrative to explain this would be the shift towards tapering from the Fed. Large parts of EM are already experiencing Central Bank monetary tightening. If Fed policy moves in that direction, one US tailwind / EM headwind is negated (or at least the contrast is less extreme).

The difference is the red line which still appears to be trending higher. Macro fair value has yet to peak & still supports US outperformance. Pick the right diversification play.
Screen Shot 2021 08 13 At 074844
Pexels Sam Willis 3934512
11.08.2021
US Inflation - then & now
Peak reflation was March 31st. At least as measured by 10y US Treasury yields which hit a 2021 high at 1.74% on that date. With the next batch of US CPI data due today, how sensitive are the different equity sectors to US inflation expectations now versus the end of Q1?

US equity sector sensitivity to inflation expectations –
Aug 10th
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Screen Shot 2021 08 10 At 190942
US equity sector sensitivity to inflation expectations – March 31st
Screen Shot 2021 08 10 At 191112
At the margin, sensitivity to inflation has fallen. Back in March, a one standard deviation increase in inflation expectations saw 4 sectors benefit (outperform the S&P500) by 2% plus. Today it’s only two models that display such sensitivity.

The sector split remains broadly the same – energy & financials are the greatest beneficiaries from reflation.

The biggest change comes in macro valuations. Both XLF & KBE are modestly rich to SPY. Energy (XLE & XOP) now screen as almost one sigma cheap versus the broader market.
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