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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.
12.12.2023
Navigating Market Hopes vs. Fears into 2024
The SPX Macro Beta Impulse indicates whether Qi’s macro factor sensitivities to the S&P 500 - e.g. credit spreads, commodities, interest rates etc - are rising or falling, i.e. the beta.

We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.

The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.

By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.
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Logo Eye With Space 1
05.12.2023
Quant Insight's Macro 2024 Outlook
A selection of just some of the charts and observations from our LinkedIn live event looking back at 2023 and the outlook for 2024.
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Pexels Miriam Espacio 110854
05.12.2023
Finessing the second wave
of the AI revolution
Nvidia is the poster child of the AI trade but despite a 200% plus gain in 2023, it appears to have lost some momentum. In contrast, software names have had a strong run - the sector has rallied almost 20% since the October lows.

There is a narrative that the AI revolution is evolving. The early winners (chip makers) are giving way to a new set of beneficiaries - the software companies that will help develop the necessary infrastructure. 

On Qi, IGV (the iShares ETF tracking Expanded Tech Software) is in regime with a strong valuation story. Outright, versus semiconductors (SOXX) and versus the broader market (SPY) it screens as rich versus prevailing macro conditions.

Even if you believe in a rotation in the AI winners, these do not look the optimal levels to be chasing software.
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Nasa Hi5Dx2Obas Unsplash
29.11.2023
US equity rally - it's not liquidity
Seasonals, positioning, FOMO, soft landing hopes. There are several narratives being used to explain the recent US equity rally.

This week the FT's excellent Unhedged posited a new explanation - improving liquidity conditions have helped the market higher.

Qi has a custom model for the S&P500 that includes one additional variable - a Fed liquidity factor. The descriptors we use to build our Fed liquidity factor are the same as the measure the FT cites.

This enables us to measure the independent impact of Fed liquidity on SPX. Short answer - liquidity has helped but the impact is marginal.
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Adam Birkett 77Hmm5Tg N4 Unsplash
07.11.2023
The Qi Macro Beta Impulse for the S&P500
Introducing Qi's Macro Beta Impulse – now equity portfolio managers and risk managers have a timely, easily identifiable metric informing them when macro risks on their books are rising or falling.

Mr. Market swings between fearful and euphoric as macro regimes evolve. Now, our unique macro factor approach quantifies how Mr. Market responds.

Assess macro volatility on your book, asset, or any index with a single measure measuring the impact of macro volatility on any asset’s volatility.
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31.10.2023
What's going on with the Euro?
Recent data has only added to the narrative that contrasts a resilient US economy with the fragility of the Euro Zone.

As a result of weak growth and sizeable falls in inflation, markets now price the first ECB rate cut in April next year. In the US the first rate cut isn't priced until July.

The typical investment conclusion is that combination points to lower European equities, bond yields and single currency.

Indeed, the latest CFTC snapshot shows spec's net long position in the Euro has more than halved in the last two months.
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Brendan Church Pkef6Tt3C08 Unsplash
26.10.2023
Equities need a regime change?
Equity bulls need the “generals” to hold in. The Magnificent 7 are responsible for 2023’s performance. Given poor breadth, if they roll over now there’s a very real risk of a deeper correction.

Aside from the idea of AI as a genuine game changer, the obvious argument for the Magnificent Seven to retain a bid is their role as a comparative safe haven. Typically, they have strong balance sheets and wide moats in Buffett speak.

Qi can measure each of these seven stocks’ sensitivity to VIX as a way to see if there’s a regime change going on.
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David Moum Nbqlwhovu6K Unsplash
17.10.2023
2024 credit cliff - where is the most pain?
The credit market remains the dog that refuses to bark.

Anecdotal evidence - credit surveys, bankruptcies, delinquencies - continues to point to a slow moving credit crunch. But credit spreads remain well behaved on any long term historical basis. 

That doesn't negate the need to prepare for the lagged effects of Central Bank policy tightening to finally impact at some point.
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Felix Mittermeier L4 16Dmz 1C Unsplash
10.10.2023
Insurers - where company & macro fundamentals meet?
Banks kick start the Q3 reporting season this week but arguably it is the non-banks part of the Financials sector that is most interesting right now.

Insurers in particular stand out. Aside from their traditional defensive properties, history shows they are often one of the better performing sectors after the final Fed rate hike.

That might explain the FactSet chart below showing earnings projections for the Financials sector broken down by industry. If analysts expectations are right, insurers are the strongest group by some margin with YoY earnings growth of 64%.
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05.10.2023
Qi Credit Impulse
There are several Financial Conditions Indices out there already – Chicago Fed, Bloomberg, GS, MS etc. All have slightly different methodologies* but essentially capture the same thing: are overall credit conditions getting tighter or looser?

A negative (positive) number on our credit impulse means the change in credit conditions is becoming a drag (tailwind) to economic growth & risky assets.
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12.12.2023
Navigating Market Hopes vs. Fears into 2024
The SPX Macro Beta Impulse indicates whether Qi’s macro factor sensitivities to the S&P 500 - e.g. credit spreads, commodities, interest rates etc - are rising or falling, i.e. the beta.

We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.

The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.

By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.
See more
Ak1
In contrast, 2023 was about the improving growth / inflation trade-off aka Goldilocks, in the face of the naysayers calling for a hard landing after the fastest Fed tightening we had see in recent years.

During a disinflationary period, the fear of a late business cycle and the lagged impacts of policy is what matters for risk-off more than financial conditions. The S&P 500 in 2023 has an inverse relationship to its beta to growth relative to financial conditions. See the second chart below.
Ak2
This should not surprise. If the economic backdrop was benign, investors will not be worried about growth i.e. sensitivities will remain relatively muted. When growth fears rise, the beta to growth will rise relative to other factors.

Today, under the hood, since early December the beta to growth has started to rise relative to financial conditions – how much tighter do we really expect credit spreads to get from here? In other words, the second chart suggests equities look rich relative to the growth / inflation trade-off – a similar level of confidence was also seen in late July. The bar is set high. Thus we would argue the market is trading on hope rather than fear into 2024.
Ak3
Next year, the outlook is more poised on a knife-edge in our view. Street strategists simply extrapolate the last 3mth price action into their annual outlooks. The length of the runway for stocks will be dictated again by the growth / inflation trade-off and Qi offers the tools to expose this.
Pexels Miriam Espacio 110854
05.12.2023
Finessing the second wave
of the AI revolution
Nvidia is the poster child of the AI trade but despite a 200% plus gain in 2023, it appears to have lost some momentum. In contrast, software names have had a strong run - the sector has rallied almost 20% since the October lows.

There is a narrative that the AI revolution is evolving. The early winners (chip makers) are giving way to a new set of beneficiaries - the software companies that will help develop the necessary infrastructure. 

On Qi, IGV (the iShares ETF tracking Expanded Tech Software) is in regime with a strong valuation story. Outright, versus semiconductors (SOXX) and versus the broader market (SPY) it screens as rich versus prevailing macro conditions.

Even if you believe in a rotation in the AI winners, these do not look the optimal levels to be chasing software.
See more
Igv
Qi's model for IGV has 79% confidence. This latest regime started at the beginning of May and confidence has been pretty stable since then.

On current patterns, the Software sector is dominated by a desire for reflation, rate volatility to remain contained and credit spreads to tighten. Software loves Goldilocks.

The Fair Value Gap is +1.1 standard deviations which currently translates into IGV standing 7.8% rich to overall macro conditions. In short, and from a pure macro perspective, a fair amount of good news is in the price.
Igv Soxx
The chart above shows IGV relative to semiconductors. The white line is the spot price of the IGV/SOXX ratio; the red line is Qi's macro-warranted model value for the pair. 

Once again IGV wants reflation. Higher inflation expectations are consistent with Software outperforming Semis. The recent fall in inflation expectations are the biggest reason for the 3% fall in Qi model value over the last month.

That decline in model fair value stands in sharp contrast to the recent spate of IGV outperformance. Hence a 8.7% rich valuation on Qi.
Igv Spy
And finally we show Software versus the broader market by modelling the IGV/SPY ratio.

The desire for reflation is there again but this time other factors have worked to offset the drag from falling inflation expectations. The net result is macro momentum has eeked out a 0.9% gain on the month. 

And once again, the recent rally in IGV has outstripped where aggregate macro conditions say it 'should' trade. Software screens as 6.5% rich relative to the S&P500 on Qi.

This is not to dispute the idea that the second wave of the AI revolution could provide a huge benefit to software stocks. The AI theme is not going away in 2024.

It is a warning that, should the mood of the market turn down, then IGV looks vulnerable from a tactical perspective. More specifically any scenario that speaks to sticky inflation, rising bond vol and wider credit spreads poses a risk.

Even bottom-up or thematic investors should know that, with Payrolls on Friday and the Fed meeting next Wednesday, the macro angle needs to be factored in.
Adam Birkett 77Hmm5Tg N4 Unsplash
07.11.2023
The Qi Macro Beta Impulse for the S&P500
Introducing Qi's Macro Beta Impulse – now equity portfolio managers and risk managers have a timely, easily identifiable metric informing them when macro risks on their books are rising or falling.

Mr. Market swings between fearful and euphoric as macro regimes evolve. Now, our unique macro factor approach quantifies how Mr. Market responds.

Assess macro volatility on your book, asset, or any index with a single measure measuring the impact of macro volatility on any asset’s volatility.
See more
Macro Beta Impulse1
  • Qi identifies the sensitivities of a security to a broad set of macro factors. This macro factor information set spans real-time indicators of growth, risk appetite and financial conditions.
  • These sensitivities inform us of the most important macro influences on the security, point-in-time. However, by capturing this information daily, we can also determine how these sensitivities are changing over time i.e. as factor sensitivities rise, the volatility of the security is being increasingly dictated by the volatility of the macro factors. In other words, we can say that the beta of the security to macro factors has risen. We refer to this beta as the “Qi macro beta impulse” – a single measure of how macro factor sensitivities for the security in question are changing.
  • Conceptually, what does the Qi macro beta impulse tell us? Mr. Market is a neurotic patient that would prefer a backdrop of macro factor stability / low beta to macro over a backdrop of increasing macro factor volatility / high beta to macro. By way of example, equities want tighter credit spreads, but if the sensitivity to credit spreads is increasing as opposed to stable, market attention is clearly more focused on the health of the credit cycle. Therefore, the simple hypothesis is that Mr. Market is more likely to come under pressure when the macro beta impulse is rising.
  • We have considered in this note the Qi macro beta impulse for the S&P 500. Specifically, the impulse is calculated weekly - definAed as the sum of the 4wk change in the absolute sensitivities to all our macro factors. This time series represents S&P500’s macro beta impulse. Given the dynamism of this indicator, we use Qi’s short term models to capture regime shifts in a world where investor observation mindsets have become shorter and shorter. We compare this to the S&P 500, specifically the deviations of the index from its 50d MA.
Macro Beta Impulse2
  • The first chart suggests there is merit in our initial hypothesis. As the gradient of macro factor sensitivities accelerates, the beta of the market to macro factors is rising and Mr. Market struggles to digest the macro gyrations, with the index more likely to be below its 50d MA.
  • We acknowledge that there can be periods where despite a high macro factor beta, the index makes headway because those macro factors are moving in a favourable direction. Earlier this year, the macro beta impulse rose, but US data was strong alongside AI dominance.
  • The data shown is from Jan2018. By late October, the market was clearly oversold relative to the macro beta impulse – the aggregate change in macro factor sensitivities over the prior 4wks was close to zero – indicating a market progressively coming to greater ease with macro.
  • On this basis the market was oversold in Oct22, Jun22, Mar 20 relative to the macro beta impulse. The market was overbought in Jul23, Q1 22, Nov21. Essentially, these are periods of over / under exuberance in risky assets relative to how their underlying sensitivity to macro factors is changing.
  • In the bottom chart we show the beta impulse by the broad 3 macro factor buckets – financial conditions, growth, risk appetite. There is, unsurprisingly, a high degree of correlation as macro factors do not tend to move in isolation with each other.
  • Going forward this indicator will be available weekly in our Monday Macro Hub publication.
31.10.2023
What's going on with the Euro?
Recent data has only added to the narrative that contrasts a resilient US economy with the fragility of the Euro Zone.

As a result of weak growth and sizeable falls in inflation, markets now price the first ECB rate cut in April next year. In the US the first rate cut isn't priced until July.

The typical investment conclusion is that combination points to lower European equities, bond yields and single currency.

Indeed, the latest CFTC snapshot shows spec's net long position in the Euro has more than halved in the last two months.
See more
Image 6
But the Euro has quietly rallied almost 2% in October. That would appear to contradict the narrative about comparatively weak European growth. It's also taken place against a backdrop of US nominal yields moving higher than their European equivalent.

So what is driving things?

When we look at Qi model value for EURUSD we can see it bottomed at 1.0463 on Oct 19th and has subsequently bounced almost two big figures.
Eurusd2
The biggest driver of that move?

Partly that the initial "risk off" move - credit spreads and China stress - hasn't gotten any worse. But the main push behind macro model value has come from relative inflation expectations.
Eurusd3
The chart below shows the difference in European and US 5y inflation expectations in z-score terms. EU inflation expectations are now almost 2 standard deviations below trend versus their US equivalent.

The market is starting to price a hard landing in Europe.
Eurusd
Now at some point that disinflationary scenario will probably become a headwind for the Euro. Similarly a renewed surge in US nominal yields or credit spreads legging wider both have the power to shift macro momentum once again.


But the recent pattern suggests real yields have mattered more and are currently favouring higher EURUSD.

There is no valuation edge - spot is trading in line with macro conditions - but a good example of how important it is to understand exactly what it is driving markets.
David Moum Nbqlwhovu6K Unsplash
17.10.2023
2024 credit cliff - where is the most pain?
The credit market remains the dog that refuses to bark.

Anecdotal evidence - credit surveys, bankruptcies, delinquencies - continues to point to a slow moving credit crunch. But credit spreads remain well behaved on any long term historical basis. 

That doesn't negate the need to prepare for the lagged effects of Central Bank policy tightening to finally impact at some point.
See more
This chart from Apollo looks at the maturity profile of different US equity sectors across both Investment Grade and High Yield credit.

There are several useful observations to be drawn but, regardless of credit quality, Transport and Real Estate stand out as two of the more vulnerable sectors; Telecommunications and Energy emerge as ones that are comparatively immune from any "refinancing cliff".
Img 1173
Qi's unique factor sensitivities can augment this kind of analysis to help complete equity risk managers' stress tests.

Every US equity sector model on Qi includes US High Yield spreads as a driver. In traditional risk jargon, US HY is a descriptor within the US equity model.

More specifically, we measure the percentage impact on any ETF for a one standard deviation shock higher in CDX US High Yield spreads.

Given Apollo's findings we zoom in on four sectors - Transport, Real Estate, Telecommunications, Energy - and chart their historical sensitivity to HY credit.
Us Sectors Hy Spds
The clear standout is Transport. Holding every other factor (descriptor) unchanged, a one standard deviation widening in US HY equates to a 0.8% fall in IYT.

It is by far the most sensitive sector. So, not only is it a sector that faces a relatively large refinancing cliff in 2024; it is also one that is highly sensitive to shifts in credit spreads.

We would finish by adding that US HY is the biggest single negative driver for Qi; and credit at the bucket level (i.e. adding in European and Japanese credit spreads as drivers / descriptors into the model as well) is the biggest in our model. Credit spreads account for almost a quarter of model explanatory power alone.
Iyt
Real Estate screens as the second most vulnerable. A one standard deviation shock wider in US HY spreads, holding every other macro factor constant, is consistent with a 0.5% fall in IYR on current patterns.

Again credit dominates the current macro regime, both as a bucket and with High Yield as the biggest single negative driver.

Of the two "safe" plays, Energy XLE is noticeable for its comparative indifference to credit spreads. A useful property if you fear credit crunch fears escalate.

Telecommunications IYZ may not face any supply concerns in terms of issuance. And sensitivity is small, but it is starting to pick up.

These sensitivities can be run across any macro factor which you deem the most likely theme for the months ahead. Thereby empowering risk and portfolio managers to get a better handle on tail risk scenarios they wish to stress test.
Felix Mittermeier L4 16Dmz 1C Unsplash
10.10.2023
Insurers - where company & macro fundamentals meet?
Banks kick start the Q3 reporting season this week but arguably it is the non-banks part of the Financials sector that is most interesting right now.

Insurers in particular stand out. Aside from their traditional defensive properties, history shows they are often one of the better performing sectors after the final Fed rate hike.

That might explain the FactSet chart below showing earnings projections for the Financials sector broken down by industry. If analysts expectations are right, insurers are the strongest group by some margin with YoY earnings growth of 64%.
See more
File 1
So the bottom-up view looks constructive, what's the macro picture for insurers?

At the industry level, Qi models IAK - the iShares ETF that tracks the Dow Jones US Select Insurance Index.

What stands out in terms of the macro regime, are insurer's defensive properties:
  • rising interest rate volatility is actually a benefit for the industry
  • sensitivity to credit spreads is negative but very small. Relative to its peers, IAK is comparatively immune to wider credit spreads
  • a stronger Dollar is a tailwind, not a headwind
Focusing on rate volatility given it's importance in this recent re-pricing of the bond market, the chart below shows how IAK is comfortable with rising rate volatility.

That stands in sharp contrast to some others, notably Technology with market leaders like XLK and XLC increasingly vulnerable to our Fed QT Expectations factor.
Iak
It's a similar picture when we screen for sensitivity to credit spreads. IAK's defensive traits are clear to see.
Iak2
The net result of that is that overall macro-warranted fair value has actually moved up during this recent period of equity stress.

The indexed chart below shows Qi model value for IAK versus the broader Financials sector XLF, Technology XLK and Communication Services XLC over the last year.

Financials and insurers took longer to recovery after SVB etc and missed out on the AI-driven rally in Tech over Q2/Q3.

But during the most recent equity market wobble, IAK has seen macro conditions grind higher.
Image 1
There is no strong valuation edge. Qi's model shows IAK at macro fair value. For now, the bigger focus is rising macro momentum.

But an example of how 2 minutes spent on the Qi platform gives bottom-up investors a chance to head into earnings season better prepped.

There's no replacing fundamental analysis, but its equally important to get a quick sanity check on macro dynamics.
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