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02.05.2024
Qi MacroVantage
#1 Are we any the wiser post the FOMC? SPX Sensitivity to FCI rising
#2 Any Taper Tantrum for FX?
#3 Rising concerns on US consumer? XRT is the most sensitive US sector to financial conditions
#4 Any disappointment is being pounced on; same goes for any cracks in the growth outlook – watch Qi GDP Growth Basket and US Industrials
#5 Stay away from “Bond Proxies” are among the richest sectors to Qi macro-warranted fair value in the US
#6 But if you are looking for something that goes with a lower Dollar…MNST
Premium content, for a full analysis sign up to a month of insights#2 Any Taper Tantrum for FX?
#3 Rising concerns on US consumer? XRT is the most sensitive US sector to financial conditions
#4 Any disappointment is being pounced on; same goes for any cracks in the growth outlook – watch Qi GDP Growth Basket and US Industrials
#5 Stay away from “Bond Proxies” are among the richest sectors to Qi macro-warranted fair value in the US
#6 But if you are looking for something that goes with a lower Dollar…MNST
30.04.2024
Qi Market Spotlight: The Global Value Play on Qi - Japan
Qi shows that a weak Yen is no longer a big positive for the Nikkei.
Japan GDP (absolute & relative strength) is now the bigger driver – a rarity in the last 10yrs.
In fact, this is what has driven the Nikkei rally since last summer.
On Qi, Nikkei is cheap on an absolute basis (in both local currency and USD common currency terms) and on a relative to SPX basis. Bear steepening being the key risk.
Japan GDP (absolute & relative strength) is now the bigger driver – a rarity in the last 10yrs.
In fact, this is what has driven the Nikkei rally since last summer.
On Qi, Nikkei is cheap on an absolute basis (in both local currency and USD common currency terms) and on a relative to SPX basis. Bear steepening being the key risk.
See more
25.04.2024
Qi MacroVantage
# 1. The Dollar is Rising in Importance for Risky Assets
# 2. Value in Nikkei after the Shake-Out
# 3. Where are all the Safe Havens gone?
# 4. US Utilities are Trading as a Defensive Hedge but the Sector is Now Rich Relative to the Market
# 5. The 2nd Best Relative Performance of European Banks Ytd of the last 25yrs – Trading +1.1 Sigma Above Qi Model Value into Earnings Season
# 6. Charles Schwab SCHW & XLF Financial ETF vs. Market
Premium content, for a full analysis sign up to a month of insights# 2. Value in Nikkei after the Shake-Out
# 3. Where are all the Safe Havens gone?
# 4. US Utilities are Trading as a Defensive Hedge but the Sector is Now Rich Relative to the Market
# 5. The 2nd Best Relative Performance of European Banks Ytd of the last 25yrs – Trading +1.1 Sigma Above Qi Model Value into Earnings Season
# 6. Charles Schwab SCHW & XLF Financial ETF vs. Market
24.04.2024
Qi Market Spotlight: The Dollar Juggernaut – what will it break?
Thus far, equity markets have largely taken the re-pricing of Fed rate cuts in their stride. The narrative has simply shifted onto strong economic growth & healthy eanrings.
That removal of rate cuts has, however, had a profound effect on the US Dollar which is back near recent highs. The path to a lower Dollar is narrow, given on the one hand US exceptionalism and divergence in Central Bank monetary policies, and / or safe haven demand given lingering uncertainty in risky assets.
If a strong Dollar is here to stay, how much of a headwind is that for equities? The perceived wisdom is it’s bad news for risky assets, but that’s too broad an assertion & the reality is more nuanced. The impact of the Dollar shifts over time; there will be winners & losers within equity internals. Capturing different parts of the equity market’s sensitivity to the Dollar is the Qi value-add.
Our analysis sees the Dollar increasing in importance for risky assets – the negative sensitivity of the Dollar to SPY is high relative to history and high relative to the importance of other macro factors
Premium content, for a full analysis sign up to a month of insightsThat removal of rate cuts has, however, had a profound effect on the US Dollar which is back near recent highs. The path to a lower Dollar is narrow, given on the one hand US exceptionalism and divergence in Central Bank monetary policies, and / or safe haven demand given lingering uncertainty in risky assets.
If a strong Dollar is here to stay, how much of a headwind is that for equities? The perceived wisdom is it’s bad news for risky assets, but that’s too broad an assertion & the reality is more nuanced. The impact of the Dollar shifts over time; there will be winners & losers within equity internals. Capturing different parts of the equity market’s sensitivity to the Dollar is the Qi value-add.
Our analysis sees the Dollar increasing in importance for risky assets – the negative sensitivity of the Dollar to SPY is high relative to history and high relative to the importance of other macro factors
18.04.2024
Qi MacroVantage
#1. Attributing the pullback to macro – financial conditions and risk aversion are front & centre
#2. The S&P500 Macro Beta Impulse is also starting to rise led by sensitivity to real yields and the dollar
#3. All eyes on Janet Yellen
#4. SANOFI – Cheap with Interesting Macro Exposure Characteristics for Portfolio Construction
#5. Market breadth stifled - US Technology model momentum now waning, led by the more speculative end i.e. ARKK
#6. Across commodity equities , energy still cheap to macro model value but precious / base metal equities still rich
#2. The S&P500 Macro Beta Impulse is also starting to rise led by sensitivity to real yields and the dollar
#3. All eyes on Janet Yellen
#4. SANOFI – Cheap with Interesting Macro Exposure Characteristics for Portfolio Construction
#5. Market breadth stifled - US Technology model momentum now waning, led by the more speculative end i.e. ARKK
#6. Across commodity equities , energy still cheap to macro model value but precious / base metal equities still rich
See more
17.04.2024
Qi Market Spotlight: Attributing this pullback - is macro back?
Qi equity model momentum has stalled across markets – SPX in particular has definitively rolled over with non-US indices also following suit.
The bounce from the October 2023 lows was initially driven by macro but YTD 2024 has been prinicipally a fundamentals/idio story with macro sensitivities at low levels, as we have reported.
However, this has begun to change in the last two weeks with the risk attributable to macro heading upwards from multi-year lows. The concerns around macro have been exacerbated by the continuing uptrend in US inflation and geopolitical events stoking oil price worries.
The key Qi macro factors leading this re-emergence of macro are risk aversion, credit spreads and the USD.
A lot of money has been made this year in risk assets – US equity L/S YTD in the US is up in the high single digits but it might be time to be more circumspect on positioning as the macro impact on markets increases.
The bounce from the October 2023 lows was initially driven by macro but YTD 2024 has been prinicipally a fundamentals/idio story with macro sensitivities at low levels, as we have reported.
However, this has begun to change in the last two weeks with the risk attributable to macro heading upwards from multi-year lows. The concerns around macro have been exacerbated by the continuing uptrend in US inflation and geopolitical events stoking oil price worries.
The key Qi macro factors leading this re-emergence of macro are risk aversion, credit spreads and the USD.
A lot of money has been made this year in risk assets – US equity L/S YTD in the US is up in the high single digits but it might be time to be more circumspect on positioning as the macro impact on markets increases.
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11.04.2024
Qi MacroVantage
#1. Qi's US equity model momentum now fading, led by NASDAQ
#2. Under the hood, the US momentum trade was relying on a soft CPI print & supportive financial conditions - is the party over?
#3. Screening for sectors / ETFs most vulnerable to higher inflation expectations / higher rate vol
#4. USDJPY - fundamentals versus jawboning
#5. Heading into earnings season, the S&P500 macro beta impulse is rising - a big onus on earnings.
#6. Credit - this time it's different?
#7. L'Oreal - "because it's worth it", on macro
Premium content, for a full analysis sign up to a month of insights#2. Under the hood, the US momentum trade was relying on a soft CPI print & supportive financial conditions - is the party over?
#3. Screening for sectors / ETFs most vulnerable to higher inflation expectations / higher rate vol
#4. USDJPY - fundamentals versus jawboning
#5. Heading into earnings season, the S&P500 macro beta impulse is rising - a big onus on earnings.
#6. Credit - this time it's different?
#7. L'Oreal - "because it's worth it", on macro
04.04.2024
Qi MacroVantage
#1. GDX & Gold Over-Extended
#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything”
#3. FTSE 100 . From YtD laggard to tactically over-extended
#4. CHFJPY - New carry king?
#5. 10y US Treasury yields at 2024 highs on Qi
#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything”
#3. FTSE 100 . From YtD laggard to tactically over-extended
#4. CHFJPY - New carry king?
#5. 10y US Treasury yields at 2024 highs on Qi
See more
03.04.2024
Qi Market Spotlight: Gold is talking...What's it Saying?
Gold is pushing $2300 after Easter
There has been much commentary on the breakdown in the traditional relationships between Gold and Real Rates and the US Dollar
The significance of the Gold moves of the last couple of years is interpreted variously as a market verdict on the US debt/deficit, the credibility of the FED, US Fiscal Dominance and the general geopolitical environment driving decoupling
So what does Qi show as the key macro drivers around this…?
1. Qi confirms a significant lowering of Gold sensitivity to US$ real rates relative to the last 10yrs - particularly the “spiky” behaviour
2. Similarly, the US$ seems to have lost some of its signalling power over Gold recently
Qi shows that Gold does appear to be signalling concern in the US’s ability to run at this level of debt/deficits AND be the world’s reserve/trade cussrency AND have US$ real rates at 1.5-2%
With the traditional drivers of real yields and the dollar doing a poor job explaining Gold, the real answer may well be that real assets are a safer bet than US government debt. The diminishing sensitivity to real yields is particularly evident post Covid
Premium content, for a full analysis sign up to a month of insightsThere has been much commentary on the breakdown in the traditional relationships between Gold and Real Rates and the US Dollar
The significance of the Gold moves of the last couple of years is interpreted variously as a market verdict on the US debt/deficit, the credibility of the FED, US Fiscal Dominance and the general geopolitical environment driving decoupling
So what does Qi show as the key macro drivers around this…?
1. Qi confirms a significant lowering of Gold sensitivity to US$ real rates relative to the last 10yrs - particularly the “spiky” behaviour
2. Similarly, the US$ seems to have lost some of its signalling power over Gold recently
Qi shows that Gold does appear to be signalling concern in the US’s ability to run at this level of debt/deficits AND be the world’s reserve/trade cussrency AND have US$ real rates at 1.5-2%
With the traditional drivers of real yields and the dollar doing a poor job explaining Gold, the real answer may well be that real assets are a safer bet than US government debt. The diminishing sensitivity to real yields is particularly evident post Covid
28.03.2024
Qi MacroVantage
#1 Commodity equities – From agriculture, to precious / base metals, to energy – all trading macro-rich
#2 US Value is no longer cheap to macro, in contrast to the beginning of March
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow
#2 US Value is no longer cheap to macro, in contrast to the beginning of March
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow
See more
30.04.2024
Qi Market Spotlight: The Global Value Play on Qi - Japan
Qi shows that a weak Yen is no longer a big positive for the Nikkei.
Japan GDP (absolute & relative strength) is now the bigger driver – a rarity in the last 10yrs.
In fact, this is what has driven the Nikkei rally since last summer.
On Qi, Nikkei is cheap on an absolute basis (in both local currency and USD common currency terms) and on a relative to SPX basis. Bear steepening being the key risk.
Japan GDP (absolute & relative strength) is now the bigger driver – a rarity in the last 10yrs.
In fact, this is what has driven the Nikkei rally since last summer.
On Qi, Nikkei is cheap on an absolute basis (in both local currency and USD common currency terms) and on a relative to SPX basis. Bear steepening being the key risk.
See more
Qi is showing that the weak Yen is no longer a positive for the Nikkei – global investor reluctance appears to be rising as JPY weakens.
Some commentators have argued we are now in a secular bull market for Japan, similar to 1960s into early 70s when Japan strongly outperformed the rest of the world. This case is made on the basis of geopolitics - Japan is fast becoming the high-tech production hub for the Western hemisphere; political pressure to create demand-driven inflation; an acceleration in corporate reforms. A byproduct of this has been a weakening JPY which has been encouraging greater inbound tourism also.
Over the last 1yr, the Nikkei has returned 31.5% in local currency terms (vs. 30% for the Nasdaq), setting a new ATH. In USD terms, performance has been more disappointing – in fact, YTD the Nikkei” has underperformed SPX by ~ 4% in USD terms. On Qi the weak Yen/ strong Nikkei relationship is also waning:
Some commentators have argued we are now in a secular bull market for Japan, similar to 1960s into early 70s when Japan strongly outperformed the rest of the world. This case is made on the basis of geopolitics - Japan is fast becoming the high-tech production hub for the Western hemisphere; political pressure to create demand-driven inflation; an acceleration in corporate reforms. A byproduct of this has been a weakening JPY which has been encouraging greater inbound tourism also.
Over the last 1yr, the Nikkei has returned 31.5% in local currency terms (vs. 30% for the Nasdaq), setting a new ATH. In USD terms, performance has been more disappointing – in fact, YTD the Nikkei” has underperformed SPX by ~ 4% in USD terms. On Qi the weak Yen/ strong Nikkei relationship is also waning:
In fact, today Japan GDP Nowcast is a bigger driver than JPY – that is a rare occurrence on Qi’s models.
The Nikkei's strength since summer 2023 has coincided with the rising importance of Japan GDP Nowcast:
Qi macro-warranted fair value for USDJPY, is struggling to get past 154-155. However, this is not a core tenet of the Nikkei thesis.
While the sensitivity to USDJPY , is still negative, Japan GDP Nowcast, DM economic confidence (proxied by tightening peripheral European govt bond spreads), copper and falling rate vol have been dominant drivers of Qi model value over the last 2mths. Nikkei strength does require a reflationary narrative.
This has left investors with the question of whether the current dip is seen as a buying opportunity. At the global index level, the Nikkei is the global value play using Qi’s framework. It is currently the cheapest index globally on Qi’s framework. The Nikkei is trading at -1.2 sigma (-10%) to Qi’s LT model value. That gap is particularly large vs. history, especially as macro confidence starts to rise from the decline over Q4 2023
This has left investors with the question of whether the current dip is seen as a buying opportunity. At the global index level, the Nikkei is the global value play using Qi’s framework. It is currently the cheapest index globally on Qi’s framework. The Nikkei is trading at -1.2 sigma (-10%) to Qi’s LT model value. That gap is particularly large vs. history, especially as macro confidence starts to rise from the decline over Q4 2023
Qi sees this value also on an RV basis – BOTH in local currency and USD common currency terms. A key driver of this value of later has been the higher sensitivity of SPY to US FCI / wider credit spreads. It has been noted that several global indices have been outperforming the US, even the almighty Nasdaq (in LC terms) – the FSTE A50, Nikkei, Euro Stoxx 50 etc. Europe, Japan, China are all seen a reflationary, value plays if we are remain in a world where growth remains robust but where the US potentially has a stickier inflation outlook.
Qi sees this value also on an RV basis – BOTH in local currency and USD common currency terms. A key driver of this value of later has been the higher sensitivity of SPY to US FCI / wider credit spreads. It has been noted that several global indices have been outperforming the US, even the almighty Nasdaq (in LC terms) – the FSTE A50, Nikkei, Euro Stoxx 50 etc. Europe, Japan, China are all seen a reflationary, value plays if we are remain in a world where growth remains robust but where the US potentially has a stickier inflation outlook.
Qi sees this value also on an RV basis – BOTH in local currency and USD common currency terms. A key driver of this value of later has been the higher sensitivity of SPY to US FCI / wider credit spreads. It has been noted that several global indices have been outperforming the US, even the almighty Nasdaq (in LC terms) – the FSTE A50, Nikkei, Euro Stoxx 50 etc. Europe, Japan, China are all seen a reflationary, value plays if we are remain in a world where growth remains robust but where the US potentially has a stickier inflation outlook.
Qi sees this value also on an RV basis – BOTH in local currency and USD common currency terms. A key driver of this value of later has been the higher sensitivity of SPY to US FCI / wider credit spreads. It has been noted that several global indices have been outperforming the US, even the almighty Nasdaq (in LC terms) – the FSTE A50, Nikkei, Euro Stoxx 50 etc. Europe, Japan, China are all seen a reflationary, value plays if we are remain in a world where growth remains robust but where the US potentially has a stickier inflation outlook.
18.04.2024
Qi MacroVantage
#1. Attributing the pullback to macro – financial conditions and risk aversion are front & centre
#2. The S&P500 Macro Beta Impulse is also starting to rise led by sensitivity to real yields and the dollar
#3. All eyes on Janet Yellen
#4. SANOFI – Cheap with Interesting Macro Exposure Characteristics for Portfolio Construction
#5. Market breadth stifled - US Technology model momentum now waning, led by the more speculative end i.e. ARKK
#6. Across commodity equities , energy still cheap to macro model value but precious / base metal equities still rich
#2. The S&P500 Macro Beta Impulse is also starting to rise led by sensitivity to real yields and the dollar
#3. All eyes on Janet Yellen
#4. SANOFI – Cheap with Interesting Macro Exposure Characteristics for Portfolio Construction
#5. Market breadth stifled - US Technology model momentum now waning, led by the more speculative end i.e. ARKK
#6. Across commodity equities , energy still cheap to macro model value but precious / base metal equities still rich
See more
1. Attributing the pullback to macro – financial conditions and risk aversion are front & centre
The S&P500 index has fallen x.x% from its local peak on 28th March. Qi's macro return attribution model is able to reveal the macro components of the drawdown thus far - important for any risk manager to understand as cross-asset vol rises, alongside any traditional style / industry exposure analysis.
Through a macro lens, the largest drags have come from risk aversion and financial conditions. Risk aversion is proxied by VIX; while the primary drag within financial conditions comes from wider HY credit spreads, dollar strength and higher Fed QT expectations (i.e. rate vol). The pullback thus far has NOT been about growth concerns - indeed, in aggregate the component of returns from our growth expectations bucket has been positive. Specific returns are the residual of returns that cannot be explained by macro - this component is also positive. In other words.
The S&P500 index has fallen x.x% from its local peak on 28th March. Qi's macro return attribution model is able to reveal the macro components of the drawdown thus far - important for any risk manager to understand as cross-asset vol rises, alongside any traditional style / industry exposure analysis.
Through a macro lens, the largest drags have come from risk aversion and financial conditions. Risk aversion is proxied by VIX; while the primary drag within financial conditions comes from wider HY credit spreads, dollar strength and higher Fed QT expectations (i.e. rate vol). The pullback thus far has NOT been about growth concerns - indeed, in aggregate the component of returns from our growth expectations bucket has been positive. Specific returns are the residual of returns that cannot be explained by macro - this component is also positive. In other words.
2. The S&P500 Macro Beta Impulse is also starting to rise led by sensitivity to real yields and the dollar
Had apathy grown about the ability of equities to rally regardless of the news?
We have said in several recent reports that risky asset vulnerability would be reflected in
1) Falling model price momentum and
2) A rising macro beta impulse. Both of those boxes are now ticked.
Further, we are seeing signs that financial conditions are starting to matter – it is not merely about the growth outlook.
We had previously commentated that in Q1 the S&P500 sensitivity to real yields almost turned positive – a reflationary mindset.
That is now changing into Q2 where we see the sensitivity to real yields turning more negative – a sign of market nervousness.
Had apathy grown about the ability of equities to rally regardless of the news?
We have said in several recent reports that risky asset vulnerability would be reflected in
1) Falling model price momentum and
2) A rising macro beta impulse. Both of those boxes are now ticked.
Further, we are seeing signs that financial conditions are starting to matter – it is not merely about the growth outlook.
We had previously commentated that in Q1 the S&P500 sensitivity to real yields almost turned positive – a reflationary mindset.
That is now changing into Q2 where we see the sensitivity to real yields turning more negative – a sign of market nervousness.
3. All eyes on Janet Yellen
Her "serious concerns" comment effectively gives the Japanese a green light to intervene in USDJPY. She is also in charge of the Quarterly Refunding Announcement due in 2 weeks time.
Aside from earnings season, these are arguably the two most important bits of event risk facing markets today. The preferred scenario for risky asset bulls is:
1.) MoF intervention - it has marked the top in the Dollar & US yields on the previous two occasions they've stepped in
2.) a repeat of November's QRA that skewed US debt issuance from bonds to bills &, alongside the Fed pivot, was the catalyst for the "everything rally" over the last 5 months.
If that transpires, FX players will be back seeking strategies that work in a low vol, high carry environment. On Qi, USDMXN looks the most interesting for believers in a Dollar reversal.
It's been 0.8 sigma (1.9%) rich to macro & in regime just 8x since 2009. Back-testing that FVG as a sell signal elicits a 63% hit rate & +1.5% average return. Over the last year Qi's FVG & spot price have posted a strong correlation suggesting there's good risk-reward on the current gap closing the 'right' way.
Her "serious concerns" comment effectively gives the Japanese a green light to intervene in USDJPY. She is also in charge of the Quarterly Refunding Announcement due in 2 weeks time.
Aside from earnings season, these are arguably the two most important bits of event risk facing markets today. The preferred scenario for risky asset bulls is:
1.) MoF intervention - it has marked the top in the Dollar & US yields on the previous two occasions they've stepped in
2.) a repeat of November's QRA that skewed US debt issuance from bonds to bills &, alongside the Fed pivot, was the catalyst for the "everything rally" over the last 5 months.
If that transpires, FX players will be back seeking strategies that work in a low vol, high carry environment. On Qi, USDMXN looks the most interesting for believers in a Dollar reversal.
It's been 0.8 sigma (1.9%) rich to macro & in regime just 8x since 2009. Back-testing that FVG as a sell signal elicits a 63% hit rate & +1.5% average return. Over the last year Qi's FVG & spot price have posted a strong correlation suggesting there's good risk-reward on the current gap closing the 'right' way.
4. SANOFI – Cheap with Interesting Macro Exposure Characteristics for Portfolio Construction
• Sanofi is cheap to the Qi macro warranted model price by 1.2 standard deviations or 8.4%
• This is close to the cheapest it’s been in the last year on macro model valuation while macro has been significant in terms of explanatory power of share price
• The drivers are also interesting for portfolio construction purposes as they are fairly opposite to the SXXP index, Sanofi wants
1. Higher inflation
2. Higher real rates/credit spreads
3. Lower GDP and a flatter curve
• Stock was hit in Q4 last year owing to concerns about further R&D spend and Q124 earnings are out next week
• Sanofi is cheap to the Qi macro warranted model price by 1.2 standard deviations or 8.4%
• This is close to the cheapest it’s been in the last year on macro model valuation while macro has been significant in terms of explanatory power of share price
• The drivers are also interesting for portfolio construction purposes as they are fairly opposite to the SXXP index, Sanofi wants
1. Higher inflation
2. Higher real rates/credit spreads
3. Lower GDP and a flatter curve
• Stock was hit in Q4 last year owing to concerns about further R&D spend and Q124 earnings are out next week
5. Market breadth stifled - US Technology model momentum now waning, led by the more speculative end i.e. ARKK
In a sticky inflation world, the improvement in S&P500 breadth is now stifled and folk will try to hide in quality, mega cap tech over small caps and bond proxies. However, this isn’t really a great recipe for a risk-on market. For breadth, we need speculative areas to outperform. See the first chart.
We track Qi model price momentum across all securities. Zooming in on our universe of 179 equity ETFs, we note that only 25% of this subset have seen their macro warranted model value rise over the last 4wks. See the second chart below. Digging further into where macro momentum has been weakest, we see the more speculative end of Technology as the biggest laggards e.g. ARK Innovation, Biotech, ARK Next Generation Internet, Global Autonomous and Electric Vehicles etc. Indeed, these pockets are the most sensitive to financial conditions.
Qi has constructed a measure of the US credit impulse which speaks to financial conditions relative to trend. Be aware that credit has now turned a net headwind for markets / the economy. See the third chart.
In a sticky inflation world, the improvement in S&P500 breadth is now stifled and folk will try to hide in quality, mega cap tech over small caps and bond proxies. However, this isn’t really a great recipe for a risk-on market. For breadth, we need speculative areas to outperform. See the first chart.
We track Qi model price momentum across all securities. Zooming in on our universe of 179 equity ETFs, we note that only 25% of this subset have seen their macro warranted model value rise over the last 4wks. See the second chart below. Digging further into where macro momentum has been weakest, we see the more speculative end of Technology as the biggest laggards e.g. ARK Innovation, Biotech, ARK Next Generation Internet, Global Autonomous and Electric Vehicles etc. Indeed, these pockets are the most sensitive to financial conditions.
Qi has constructed a measure of the US credit impulse which speaks to financial conditions relative to trend. Be aware that credit has now turned a net headwind for markets / the economy. See the third chart.
6. Across commodity equities, energy still cheap to macro model value but precious / base metal equities still rich
In the scenario of a Fed policy error actually manifesting, the dollar would ultimately succumb to weakness. The equity market destination would be commodity sensitive equities, in the desire to increase exposure to real assets.
However, there is a distinction to be made within commodity equities. Recently, we highlighted GDX as a sell idea – dislocating from higher real yields and dollar strength. While GDX has started to weaken, it is still 1.7 sigma rich to Qi’s macro-warranted fair value. Alongside, COPX (Global Copper Miners) is still 0.6 sigma rich (first chart below). Copper itself is particularly sensitive to financial conditions, namely rate vol and CDX HY. Copper is 2 sigma rich to its Qi macro-warranted fair value.
The flipside is that US Energy equities trade cheap to their Qi model value and at the cheaper end compared to its US sector peers. Particularly, on an RV basis to US Financials (see the second chart below).
In the scenario of a Fed policy error actually manifesting, the dollar would ultimately succumb to weakness. The equity market destination would be commodity sensitive equities, in the desire to increase exposure to real assets.
However, there is a distinction to be made within commodity equities. Recently, we highlighted GDX as a sell idea – dislocating from higher real yields and dollar strength. While GDX has started to weaken, it is still 1.7 sigma rich to Qi’s macro-warranted fair value. Alongside, COPX (Global Copper Miners) is still 0.6 sigma rich (first chart below). Copper itself is particularly sensitive to financial conditions, namely rate vol and CDX HY. Copper is 2 sigma rich to its Qi macro-warranted fair value.
The flipside is that US Energy equities trade cheap to their Qi model value and at the cheaper end compared to its US sector peers. Particularly, on an RV basis to US Financials (see the second chart below).
17.04.2024
Qi Market Spotlight: Attributing this pullback - is macro back?
Qi equity model momentum has stalled across markets – SPX in particular has definitively rolled over with non-US indices also following suit.
The bounce from the October 2023 lows was initially driven by macro but YTD 2024 has been prinicipally a fundamentals/idio story with macro sensitivities at low levels, as we have reported.
However, this has begun to change in the last two weeks with the risk attributable to macro heading upwards from multi-year lows. The concerns around macro have been exacerbated by the continuing uptrend in US inflation and geopolitical events stoking oil price worries.
The key Qi macro factors leading this re-emergence of macro are risk aversion, credit spreads and the USD.
A lot of money has been made this year in risk assets – US equity L/S YTD in the US is up in the high single digits but it might be time to be more circumspect on positioning as the macro impact on markets increases.
The bounce from the October 2023 lows was initially driven by macro but YTD 2024 has been prinicipally a fundamentals/idio story with macro sensitivities at low levels, as we have reported.
However, this has begun to change in the last two weeks with the risk attributable to macro heading upwards from multi-year lows. The concerns around macro have been exacerbated by the continuing uptrend in US inflation and geopolitical events stoking oil price worries.
The key Qi macro factors leading this re-emergence of macro are risk aversion, credit spreads and the USD.
A lot of money has been made this year in risk assets – US equity L/S YTD in the US is up in the high single digits but it might be time to be more circumspect on positioning as the macro impact on markets increases.
See more
- Qi equty model momentum has stalled across markets -- SPX, DAX, Nikkei
- Risk asset model uptrends that had been holding on are now also being challenged – the USD model in Qi is strengthening over EUR, JPY and Asian currencies, the high yield credit model is also getting hit with spreads widening, among commodities the Copper model has rolled over but oil and precious metals are still holding up well in Qi
- Overall though, there appears to be a definitive shift downwards in our risk models – the first we have seen since the October bottom
- Qi returns attribution shows that the bounce from the October 2023 lows was initially driven by macro but much of the YTD 2024 move in SPX has been prinicipally a fundamentals/specific story but now macro is re-asserting itself from low levels. This time around, further mean-reversion of the impulse may well coincide with an elevated risk of the Fed compromising its inflation-fighting credibility.
- The key Qi macro factors driving SPX since the end of Q1 are risk aversion, credit spreads and the strengthening dollar, specific risk has countered this downtrend making the coming earnings season yet more important:
- The sector implication of the latest CPI release is pressure on (1) the most inflation sensitive sectors which are the classic domestically-geared sectors of regional banks, construction, homebuilders and real estate and (2) the sectors most sensitive to the tightening of financial conditions which are more speculative tech like ARK, long duration like BioTech, renewables and small caps.
- If we start to see financial conditions tighten in earnest then also Momentum longs will come under pressure. Below we show the screen of the most vulnerable sectors / ETFs to both higher inflation AND tighter financial conditions
04.04.2024
Qi MacroVantage
#1. GDX & Gold Over-Extended
#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything”
#3. FTSE 100 . From YtD laggard to tactically over-extended
#4. CHFJPY - New carry king?
#5. 10y US Treasury yields at 2024 highs on Qi
#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything”
#3. FTSE 100 . From YtD laggard to tactically over-extended
#4. CHFJPY - New carry king?
#5. 10y US Treasury yields at 2024 highs on Qi
See more
#1. GDX & Gold Over-Extended
Earlier this week, in the insight “Gold is talking…What’s it Saying?”, we highlighted that the diminishing negative sensitivity to real rates possibly reflected investor belief that real assets are a safer bet than US government debt. However, from a valuation perspective, both gold and gold miners are trading well above their Qi macro-warranted fair value.
Consider that GDX is trading +2.2 sigma (10.6% above its Qi model value), at its 100th percentile over the last 12mths, and Qi model value has flatlined over the last 3 weeks. See the first chart below overlaying GDX to its FVG. GDX is looking for a weaker dollar and lower real yields. However, against these two macro factors GDX is clearly over-extended – see the second chart.
Earlier this week, in the insight “Gold is talking…What’s it Saying?”, we highlighted that the diminishing negative sensitivity to real rates possibly reflected investor belief that real assets are a safer bet than US government debt. However, from a valuation perspective, both gold and gold miners are trading well above their Qi macro-warranted fair value.
Consider that GDX is trading +2.2 sigma (10.6% above its Qi model value), at its 100th percentile over the last 12mths, and Qi model value has flatlined over the last 3 weeks. See the first chart below overlaying GDX to its FVG. GDX is looking for a weaker dollar and lower real yields. However, against these two macro factors GDX is clearly over-extended – see the second chart.
#2. Bond Proxies e.g. DVY and Utilities also Over-Extended – there has been no discernment yet in the “everything” rally
Consider that (1) DVY trades at +0.8 sigma (92nd percentile over last 12mths) (2) US Utilities at +1.4 sigma (100th percentile) (3) an equity basket of bond proxies (GSXUBOND) trades at +1.2 sigma (100th percentile). The message is that income yield plays look over-extended.
Qi has created an equity L/S basket tracking US 10yr yields (GSPQ10YR, available from Goldman Sachs). This tracking is shown below. The first observation is that the equity tracker has recently been outperforming the 10yr yield level itself, likely reflecting reflation optimism – see the first chart.
The second observation is that while the long leg of this basket has been performing strongly, the short leg has also shown strong performance since mid-February – see the second chart. This short leg is primarily bond proxies, which ordinarily would care more about the possibility of higher long end rates.
Consider that (1) DVY trades at +0.8 sigma (92nd percentile over last 12mths) (2) US Utilities at +1.4 sigma (100th percentile) (3) an equity basket of bond proxies (GSXUBOND) trades at +1.2 sigma (100th percentile). The message is that income yield plays look over-extended.
Qi has created an equity L/S basket tracking US 10yr yields (GSPQ10YR, available from Goldman Sachs). This tracking is shown below. The first observation is that the equity tracker has recently been outperforming the 10yr yield level itself, likely reflecting reflation optimism – see the first chart.
The second observation is that while the long leg of this basket has been performing strongly, the short leg has also shown strong performance since mid-February – see the second chart. This short leg is primarily bond proxies, which ordinarily would care more about the possibility of higher long end rates.
#3. FTSE 100. From YtD laggard to tactically over-extended
The fact that the FTSE 100 benefits from a weaker GBP and higher energy / metal prices is well known, given its constituent make-up. Qi shows similar drivers also. The FTSE 100 has been a laggard ytd but an outperformer over the last month as manufacturing / commodity optimism has risen, alongside a weaker pound.
However, today the FTSE stands at +1.9 sigma (97th percentile over the last 12mths) and has rarely traded much above 2 sigma. See the first chart below. Running a backtest selling when the FTSE 100 is above 1.5 sigma had resulted in an 86% Win Rate, albeit on only 7 trades – it is a rare event.
The fact that the FTSE 100 benefits from a weaker GBP and higher energy / metal prices is well known, given its constituent make-up. Qi shows similar drivers also. The FTSE 100 has been a laggard ytd but an outperformer over the last month as manufacturing / commodity optimism has risen, alongside a weaker pound.
However, today the FTSE stands at +1.9 sigma (97th percentile over the last 12mths) and has rarely traded much above 2 sigma. See the first chart below. Running a backtest selling when the FTSE 100 is above 1.5 sigma had resulted in an 86% Win Rate, albeit on only 7 trades – it is a rare event.
#4. CHFJPY - New carry king?
Qi's CHFJPY model confidence has risen 22% in the last 2 weeks and is back in regime for the first time in a year.
There's no valuation edge currently; spot is only slightly below our 168 fair value. The bigger standout is the sharp shift lower in macro momentum.
Macro-warranted model value has fallen 2.25% since March 19th & the BoJ rate hike. Two days later the SNB surprised with a rate cut. That policy divergence has FX investors pivoting to use the Franc as their preferred funding vehicle.
Qi shows interest rate differentials are the main driver of the cross accounting for around a quarter of model explanatory power. Otherwise it is worth noting that, on current patterns, higher crude oil and copper prices are consistent with Swiss Franc depreciation.
For a long time, the Yen has been the sole funding currency in G10 fx. Now, carry dynamics plus the commodity rally point to a new downtrend in macro momentum in CHFJPY.
Qi's CHFJPY model confidence has risen 22% in the last 2 weeks and is back in regime for the first time in a year.
There's no valuation edge currently; spot is only slightly below our 168 fair value. The bigger standout is the sharp shift lower in macro momentum.
Macro-warranted model value has fallen 2.25% since March 19th & the BoJ rate hike. Two days later the SNB surprised with a rate cut. That policy divergence has FX investors pivoting to use the Franc as their preferred funding vehicle.
Qi shows interest rate differentials are the main driver of the cross accounting for around a quarter of model explanatory power. Otherwise it is worth noting that, on current patterns, higher crude oil and copper prices are consistent with Swiss Franc depreciation.
For a long time, the Yen has been the sole funding currency in G10 fx. Now, carry dynamics plus the commodity rally point to a new downtrend in macro momentum in CHFJPY.
#5. 10y US Treasury yields at 2024 highs on Qi
At the start of March Qi flagged that 10y UST yields were 35bp too low relative to macro-warranted fair value. Since then yields have backed up around 25bp, a move that has helped partially close Qi's Fair Value Gap.
But rising crude oil prices and higher inflation expectations have kept pushing model value higher at the same time. Currently, Qi says 10s should yield 4.48%.
That's the high for 2024. Any break higher would suggest renewed macro momentum in the reflation trade & ongoing pressure in the US bond market.
At the start of March Qi flagged that 10y UST yields were 35bp too low relative to macro-warranted fair value. Since then yields have backed up around 25bp, a move that has helped partially close Qi's Fair Value Gap.
But rising crude oil prices and higher inflation expectations have kept pushing model value higher at the same time. Currently, Qi says 10s should yield 4.48%.
That's the high for 2024. Any break higher would suggest renewed macro momentum in the reflation trade & ongoing pressure in the US bond market.
28.03.2024
Qi MacroVantage
#1 Commodity equities – From agriculture, to precious / base metals, to energy – all trading macro-rich
#2 US Value is no longer cheap to macro, in contrast to the beginning of March
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow
#2 US Value is no longer cheap to macro, in contrast to the beginning of March
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow
See more
#1 Commodity equities – From agriculture, to precious / base metals, to energy – all trading macro-rich
Consider the following:
• DBA – Invesco DB Agriculture: +2.1 Sigma FVG
• SXEP – EU Energy: +1.5 Sigma FVG
• GDX – Gold Miners: +1.5 Sigma FVG
• S5ENRS – US Energy: +1.4 Sigma FVG
• COPX – Global Copper Miners: +0.9 Sigma FVG
While DBA’s fate seems dependent on the fortunes of cocoa, energy equities have been rallying ahead of crude itself. See the first chart. Both in the US and Europe, the FVG for the Energy sector is close to 12mth highs. While Qi’s analysis from earlier this week showed real asset exposure would outperform in the event of a perceived Fed error where inflation expectations harden, at this juncture commodity equities are at profit taking levels as opposed to long entry levels.
The second chart shows the GDX FVG vs. spot price. Qi shows an inverse relationship between GDX and the dollar – and currently there is a dislocation. See the third chart.
Consider the following:
• DBA – Invesco DB Agriculture: +2.1 Sigma FVG
• SXEP – EU Energy: +1.5 Sigma FVG
• GDX – Gold Miners: +1.5 Sigma FVG
• S5ENRS – US Energy: +1.4 Sigma FVG
• COPX – Global Copper Miners: +0.9 Sigma FVG
While DBA’s fate seems dependent on the fortunes of cocoa, energy equities have been rallying ahead of crude itself. See the first chart. Both in the US and Europe, the FVG for the Energy sector is close to 12mth highs. While Qi’s analysis from earlier this week showed real asset exposure would outperform in the event of a perceived Fed error where inflation expectations harden, at this juncture commodity equities are at profit taking levels as opposed to long entry levels.
The second chart shows the GDX FVG vs. spot price. Qi shows an inverse relationship between GDX and the dollar – and currently there is a dislocation. See the third chart.
#2 US Value is no longer cheap to macro, in contrast to the beginning of March
At the start of March, we wrote a note “Value in Value”. We highlighted that US Banks and US Energy were among the cheapest sectors relative to the macro backdrop. Since then both of these typical value sectors have strongly outperformed. Today, they both trade macro-rich on Qi’s models.
This is perhaps best illustrated looking at RPV – the Invesco Pure Value ETF. The fair value gap is only +0.6 sigma but still large relative to recent history. See the chart below.
At the start of March, we wrote a note “Value in Value”. We highlighted that US Banks and US Energy were among the cheapest sectors relative to the macro backdrop. Since then both of these typical value sectors have strongly outperformed. Today, they both trade macro-rich on Qi’s models.
This is perhaps best illustrated looking at RPV – the Invesco Pure Value ETF. The fair value gap is only +0.6 sigma but still large relative to recent history. See the chart below.
#3 Periphery-core bond yield spreads in Europe currently dictating equity risk appetite
Periphery Eurozone bond spreads feature as a key driver across Qi’s equity models, globally. Given the prevalence in Qi’s models, we view this measure of Eurozone confidence as a key barometer of risk appetite. After all, European equities have outperformed the S&P500 ytd. The Sharpe of the rally of the last five months is a stand-out compared to the last few years.
With this in focus, we note that the sensitivity of European equities to this macro driver is at post Covid highs. See the first chart below. The second chart shows the z-score of the BTP-Bund spread – any loss of momentum would likely imply caution for risky assets. The sector flagbearer of Europe, EU Banks (SX7P) is already trading rich to macro at a FVG of +1.2 sigma.
Periphery Eurozone bond spreads feature as a key driver across Qi’s equity models, globally. Given the prevalence in Qi’s models, we view this measure of Eurozone confidence as a key barometer of risk appetite. After all, European equities have outperformed the S&P500 ytd. The Sharpe of the rally of the last five months is a stand-out compared to the last few years.
With this in focus, we note that the sensitivity of European equities to this macro driver is at post Covid highs. See the first chart below. The second chart shows the z-score of the BTP-Bund spread – any loss of momentum would likely imply caution for risky assets. The sector flagbearer of Europe, EU Banks (SX7P) is already trading rich to macro at a FVG of +1.2 sigma.
#4 S&P 500 Macro Beta Impulse has collapsed potentially reflecting complacency – beware when it mean-reverts
The macro beta impulse shows how the sensitivity of the S&P 500 to macro drivers is changing, using our short term model. Sensitivities to macro have collapsed. Indeed, the sensitivity to real yields is almost positive. Similarly, the sensitivity to risk aversion has sharply diminished. Real yields were previously such a focal point (as a drag) from late last year into February – no longer.
The below chart shows the relationship between the macro beta impulse vs. the S&P500 deviation from its 50d MA – it is negative. Our hypothesis is that 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. Now that hasn’t been the case in recent months – the macro beta has been rising BUT in favour of the index.
We are at a point now where the beta impulse sits at multi-year lows. This indicator does not trend; rather, it mean-reverts. Mean-reversion from current levels would likely coincide with a more choppy market.
The macro beta impulse shows how the sensitivity of the S&P 500 to macro drivers is changing, using our short term model. Sensitivities to macro have collapsed. Indeed, the sensitivity to real yields is almost positive. Similarly, the sensitivity to risk aversion has sharply diminished. Real yields were previously such a focal point (as a drag) from late last year into February – no longer.
The below chart shows the relationship between the macro beta impulse vs. the S&P500 deviation from its 50d MA – it is negative. Our hypothesis is that 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. Now that hasn’t been the case in recent months – the macro beta has been rising BUT in favour of the index.
We are at a point now where the beta impulse sits at multi-year lows. This indicator does not trend; rather, it mean-reverts. Mean-reversion from current levels would likely coincide with a more choppy market.
#5 Qi Model Price Momentum across regions – EEM the laggard but the divergence has scope to narrow
We have been highlighting the strong Qi model price momentum across developed market equities. See the charts below. Note that the 3mth change in the model price is close to the highs of their multi-year ranges. The outlier is EEM. Qi model price momentum has risen only 1% over the last 3mths. Further, relative to the S&P500, the divergence looks particularly wide relative to history. Under the assumption that the elastic is unlikely to stretch much further, EEM underperformance likely sees some respite from here.
We have been highlighting the strong Qi model price momentum across developed market equities. See the charts below. Note that the 3mth change in the model price is close to the highs of their multi-year ranges. The outlier is EEM. Qi model price momentum has risen only 1% over the last 3mths. Further, relative to the S&P500, the divergence looks particularly wide relative to history. Under the assumption that the elastic is unlikely to stretch much further, EEM underperformance likely sees some respite from here.