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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:

The models shown below are not exhaustive but includes a number of this week’s benchmark releases across big tech & cyclicals. The chart shows which are in macro regimes versus those that are driven by idiosyncratic risks. And, for the former, whether they are rich or cheap relative to their macro environment.

In terms of macro’s importance there is a clear skew: most tech stocks lie to the left of the 65% model confidence threshold. Company fundamentals matter more than macro currently. Most of the stocks in macro regimes are industrial names.

In valuation terms perhaps the most striking feature is how close to fair model value most stocks are. Caterpillar is amongst the cheapest but the FVG is only 0.25 sigma, 3.2% below model. Its regime is mixed but the manufacturer is especially reliant on a steeper yield curve.

Boeing is also modestly cheap but this time tight credit spreads, rising crude oil prices & rising US real rates are more important for bulls.

General Dynamics is the richest of those models in regime. At 0.5 sigma, 4.5% the FVG is near 3month highs. Sensitivity to Fed QE is high suggesting it’s a stock that needs to watch event risk like this week’s FOMC & next month’s Jackson Hole.

Users can now interact with RETINA™ and fire requests to the trade bot @qi-trade-bot asking for an updated trend / momentum chart, or the latest valuation picture. Simply ask the bot to “plot momentum” or “plot valuation” for an automatically generated updated chart.

Plot Momentum

Now, for the first time since October 2020, Qi’s Cross Asset Absorption Ratio shows a sharp rise from a very low level. That suggests financial markets are becoming less diverse – across asset classes & across geographies, markets are being driven by a single factor (probably global Central Bank policy stimulus). Such concentration risk often provides an early warning of a ‘risk off’ event.

Qi’s Vol Indicator, another measure that looks at macro’s ability to explain the variance of equity, bond & FX markets, is also rising. Again, when macro fundamentals can’t explain the price action of global capital markets, the risk is markets are at the mercy of more volatile drivers such as positioning & sentiment.

The Vol Indicator is not yet at levels that have historically been consistent with significant VIX spikes, but it is moving towards that territory. Moreover, when combined with the other two signals, there are sufficient alarm bells ringing. There are building signs that risky assets could face turbulence ahead.

Of the 24 US companies releasing this week, over half are in macro regimes. In the chart below, the 9 models to the left of the vertical bound are in micro regimes. It’s business-as-usual for stock pickers who can focus on idiosyncratic earnings. However, all those models to the right of the vertical bound are being driven by macro factors. Equity investors focused exclusively on company news will miss vital market-moving information.

As always, the start of earning season is dominated by financials & several of this week’s reporting big banks share some common macro characteristics. All are modestly rich to model. JPM & Goldman Sachs are the most expensive, both at +0.5 sigma to macro fair value; amongst the bulge bracket Citi, at +0.2 sigma vs model, is the least expensive.

All the banks want rising inflation, rising real rates & steeper yield curves. Interestingly, Delta Air Lines wants the same macro environment &, given it is at model fair value, what these critical drivers do next will be hugely important for the DAL stock price.

The days ahead will see a wealth of stock specific analysis but, as “The impossibility of a ‘bottom up’ equity strategy” explains, “however you pick [your] stocks, you usually end up with something that is largely driven by macro factors”. It’s earnings season, but macro still matters.

Read the full article here