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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.

10.08.2021

The commodity super cycle,
re-visited

Early in 2021, commodities led the global reflation charge. The direction of travel was clear; the only dilemma facing investors was how to best capture the bull move. Now, with crude, gold & silver all experiencing sharp pullbacks, what is the story from an objective macro perspective?

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09.08.2021

Qi adds Trend & Momentum metrics
to existing Macro Framework

Qi’s macro framework has a new feature. In addition to the macro profile of an asset, Qi users can now look at the trend & momentum characteristics of the same security.

09.08.2021

XLF on the move

Friday’s strong jobs report prompted a sharp increase in US bond yields. That in turn enabled Financials to be the star performer of the day, rising 2% & outperforming all other sectors. Rising interest rates are typically seen as a tailwind for Financials.

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05.08.2021

The Upside Down

Not Netflix’s Stranger Things, but the unorthodox policy beliefs of Turkish President Erdogan who argues higher interest rates result in higher inflation. With the Central Bank of Turkey meeting next week, Erdogan is ramping up pressure for a rate cut.

04.08.2021

Energy - a protected short

RETINA™ is flashing a bearish signal on US energy versus European energy using the sector ETFs XLE & EXH1.

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03.08.2021

Aussie FX

A major narrative in markets currently is the threat to global growth from the Delta variant. In that context, the RBA’s decision to look through Australia’s economic lockdowns is notable. Their assessment overnight was to reassert their confidence in the recovery & stick with plans to gradually reduce the pace of QE.

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02.08.2021

Factor Watch - Real Rates

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.

29.07.2021

Trading Central Bank
Policy Divergence II

Yesterday we demonstrated how the Qi framework can identify which currency pairs are being driven by interest rate differentials; & hence show which FX crosses best capture the different speed of Central Bank policy normalisation. The next step is to add a valuation overlay.

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28.07.2021

Trading Central Bank
Policy Divergence

It’s Fed day. Whatever the outcome, what is evident is the growing divergence opening up between global Central Banks. More specifically, how quickly each exits the extraordinary monetary policy easing seen during the Covid pandemic. Currently, the RBNZ / BoC & ECB appear to be the hawkish & dovish bookends respectively.

27.07.2021

Navigating China Stress

Events in China are critical. The implications are widespread & potentially enormous for financial markets. How can investors track across asset classes, across geographies to monitor where the fall-out is leading or lagging?

09.08.2021

Qi adds Trend & Momentum metrics
to existing Macro Framework

Qi’s macro framework has a new feature. In addition to the macro profile of an asset, Qi users can now look at the trend & momentum characteristics of the same security.

On the Qi web platform, two tabs side-by-side enable clients to switch between the macro picture & the trend outlook. A quantitative way to align macro valuation & trend signals, giving clients the opportunity to see when an asset is:

rich or cheap versus macro-warranted model value.
on the cusp of forming a new trend.
the existing trend is overstretched, losing momentum & potentially reversing.

Sometimes the message from macro will conflict with the trend & momentum picture. But, when aligned, users have a powerful signal combining two of the critical dynamics driving any investment decision.

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05.08.2021

The Upside Down

That has already weighed on the Turkish Lira but it is striking that TRY features four times in the chart below which shows the ten biggest Fair Value Gaps across all Qi’s fx models. In all four, the Lira screens as rich to macro fair value.

Both USDTRY & EURTRY are around one sigma (circa 5.0%) cheap to macro fair value. Versus safe havens the Yen & Swiss Franc, the Lira is around 0.5 sigma rich.

The former two back-test well. Buying USDTRY at a -1 sigma FVG when in regime has, since 2009, produced a 78.6% hit rate for an average return of 3.1%. The equivalent numbers for EURTRY are 70.6% & +0.5%.

President Erdogan would note that in each model, Developed Market bonds feature as a top driver & lower UST yields, Bunds yields etc are consistent with higher Dollar, Euro. Arguably though this speaks more to a quality dynamic.

China stress & crude oil are also prominent drivers. Risk off is Lira negative. Domestic Turkish monetary policy aside, the suggestion is TRY is vulnerable here if you believe markets face a deterioration in risk appetite.

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02.08.2021

Factor Watch - Real Rates

The collapse in bond yields since March has been well documented. But, as the chart below shows, the move in 10y real rates is starting to look significant. European real yields in particular are now 3 standard deviations below trend – a level only seen on a handful of occasions over the last 10 years plus.

The signal from the bond market would appear to be that inflation is indeed transitory & growth concerns are escalating. What are the implications?

Real rates do not look attractive from a long term valuation perspective. They have seen significant inflows of late but TIPS & BUNDei’s especially are not necessarily the best inflation hedges right here, right now.

Real yield differentials are the key driver of EURUSD & the move above helps explain the downward pressure on the Euro over May-July. Euro bears need to be on alert for any potential mean reversion.

Screening European equities for sensitivity to EUR real rates reveals it only a modest driver at both the index & sector level. At the margin, peripheral rather than core indices are the most sensitive; while Travel & Leisure plus Banks are the sectors that want real rates higher.

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28.07.2021

Trading Central Bank
Policy Divergence

FX markets will be a popular way to play this & interest rate differentials could emerge as a key driver of currencies. Except rate differentials aren’t always the primary driver of FX. The first step is to quantify where & when they are the dominant engine for FX markets.

Qi’s G10 fx models include rate differentials at three points along the yield curve. 1y1y & 2y2y differentials are pure plays on relative Central Bank rate expectations.

The third is the 5y5y cross market spread. This captures market perceptions of the terminal rate in each country.

In the chart, red (faded) dots capture models that are in (outside) a macro regime. The y-axis shows where the interest rate differential bucket ranks as a driver versus the other variables in the model’s factor set.

If a model is in regime & rate differentials are the number one driver, that FX cross represents an efficient trading expression for any views on the respective Central Banks’ policy stance.

A simple blanket approach does not work. The RBNZ is perceived as hawkish but while NZDJPY & NZDCHF are sensitive to rate differentials, NZDUSD & NZDCAD are not in regime.

Neither is USDCAD. EURUSD is all about real yields not nominal rate differentials. Respective yield curve shape is more important than rate differentials for USDJPY.

Having identified where rates matter, tomorrow we will add a valuation overlay into the mix.

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27.07.2021

Navigating China Stress

The Qi framework help investors maintain a real-time objective picture of Beijing’s tech crackdown. Optimise Trade Selection allows users to run empirical stress tests. So, for example, if you think a Yuan devaluation is a potential risk scenario, managers can screen their asset class for sensitivity to USDCNH.

Watchlists are useful ways to monitor how different asset classes are faring under the enhanced regulatory regime in China. This “China Multi-Asset” watchlist is now available to all Qi subscribers. Thus far it is worth noting:

Chinese equity indices are all around two sigma cheap to their macro environments. When regulatory risk is the key driver of markets, it might be expected to see low macro model confidence. However, while Shanghai Comp has just 27% R-Squared, every other Chinese equity market – whether index, future or tracking ETF – is in a macro regime.
In other areas though the sell-off is less extreme. The S&P500 is ‘only’ 3.4% rich versus Chinese large caps on our SPY vs FXI model. That’s just a 0.5 standard deviation move.
KWEB - the China Internet ETF - is approaching one sigma cheap to macro on an outright basis; but is only half a sigma cheap when looking at the relative value versus either US internet (FDN) or US tech more broadly (NASDAQ)
Chinese small caps - ECNS is the iShares ETF tracking MSCI’s China small caps index – have not suffered as much. Model confidence is just 51% but the FVG is ‘only’ 0.7 sigma, 6.9%. One to watch if you fear broader contagion?
Note the sole Chinese asset with a rich macro valuation is REMX – the VanEck Rare Earth ETF. Ultimately, this is not the end in the secular growth of technology; just about how the data is used, where the companies list & how the industry is regulated.
In Fixed Income, Chinese yields have been on a multi-month downtrend. 2y & 5y yield models are not in regime. The 10y is & shows yields as 16bp below macro-warranted model value.
Credit is taking a beating. Whether China specific – KCCB is the KraneShares China High Yield ETF & is 1.6% cheap to macro. Or a broader Asian view. China has a 44% weight in the iShares Asia High Yield ETF AHYG. EverGrande, for example, was the second biggest holding as of end-July.
Finally, note USDCNH. It is in a strong macro regime & the Dollar is now 1.4% rich versus the Yuan. That’s modest but still the highest FVG since late April. Memories of the 2015/16 devaluation which effectively exported deflation to the rest of the world will be front-&-centre for many investors.

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