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06.05.2022
Cyber threats
“US sent cyber team to Lithuania over Russia hacking threat” was a story on Bloomberg yesterday. It cites reports from the Ukrainian authorities that cyberattacks have increased threefold since the war started compared with the same period a year ago.
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Daoudi Aissa Pe1Ol9Olc4O Unsplash
05.05.2022
China upside without Beijing risk
Equity bulls sense a favourable policy shift. Beijing is showing signs of more aggressively supporting the economy & risk appetite. The Fed have seemingly removed the more aggressive 75bp rate hike option.
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04.05.2022
Not all defensive bets
are created equal
Fed day. A hawkish outcome is expected. Given beaten up equity market sentiment, tactical players may look for short term upside. However, here we consider efficient bearish bets.
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03.05.2022
Really?
The S&P500 remains cheap on Qi valuations. Even when the market bounces, Qi’s macro-warranted model value continues to move lower so the Fair Value Gap remains wide.
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03.05.2022
China
China’s stock exchanges remain closed for Labour Day but optimists point to a shift in rhetoric from Beijing as reason to hope policy stimulus can prompt a bounce when they re-open.
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Joshua Sortino Lqkhndzsf 8 Unsplash
28.04.2022
Gold
The recent sell-off in Gold has happened while Qi model value has continued to trend higher. That divergence has opened up a Fair Value Gap of almost -1 sigma or -3.3%.
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27.04.2022
USDJPY
Qi’s USDJPY model fell out of regime in November last year. Through the first 3mths of 2022 model confidence remained low but over the last month it has risen almost 30%.
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Omega Nebula 11053 1920
26.04.2022
Demand destruction
For many investors, there will be a turning point when the market pivots from worrying about price inflation, to growth deflation.

In reality such pivots are a process rather than a single trading day, but yesterday’s China lockdown news felt like it had some of those characteristics.
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25.04.2022
This time is different
Friday’s sell-off took the S&P500 to 1.85 sigma (6.1%) cheap to Qi’s model fair value. The index has only been in regime & this cheap to macro 3x before. Back-tests show this is a highly significant discount. One that, since 2009, has provided attractive entry levels to buy the dip. It worked effectively just a month ago in early March.
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22.04.2022
Struggling for trade ideas?
RETINA™ provides a pipeline of trade ideas on securities you care about pumped into your workflow. Think of it as Bloomberg IB but instead of chat & commentary, it’s a series of signals flagging when markets have diverged from macro fair value.
See more
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06.05.2022
Cyber threats
“US sent cyber team to Lithuania over Russia hacking threat” was a story on Bloomberg yesterday. It cites reports from the Ukrainian authorities that cyberattacks have increased threefold since the war started compared with the same period a year ago.
See more
Qi has models for two cyber security ETFs that give investors exposure to the theme – HACK, ETFMG’s Prime Cyber Security fund, & BUG from Global X.

Both are in strong macro regimes & both are cheap to macro. In BUG’s case the deficit is over one standard deviation (-7.1% cheap to model).
Bug Etf
The macro regimes are very similar & fairly intuitive for US equities – reflation, healthy risk appetite & tight credit spreads are the top 3 desires for cyber bulls.

That may mean investors who foresee a recession & subsequent “risk off” move will look past any macro-based valuation edge.

As always, use Qi Historical Model Value charts to gauge whether macro conditions are improving or deteriorating. Currently they continue to point south.

But, at these FVGs, some degree of bad macro news is already priced. It is also noticeable that valuation gaps are back to the cheap end of the range that has prevailed since late February when Russia first invaded Ukraine.

For those bullish on the cyber security theme, these look potentially interesting trades to monitor.
03.05.2022
Really?
The S&P500 remains cheap on Qi valuations. Even when the market bounces, Qi’s macro-warranted model value continues to move lower so the Fair Value Gap remains wide.
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Watching Qi model value for a reversal higher in the S&P500 is probably the single most important chart we are currently watching. See “This time is different”.

In that context the chart below stands out. The DAX future is rich to model for the first time since the end of January.
Dax
The valuation gap is small - just +0.3 sigma, +1.7% - but it’s more the fact that it’s even positive when most of its peers show deeply negative FVGs.

Critically, looking at the Historical Model Value chart, macro-warranted fair value continues to trend lower for the DAX just as it does for the S&P500 & most global equity indices.

It could be the market believe the Fed, ECB etc can engineer a soft landing &, as such, Germany represents a decent cyclical bet. With most shunning growth strategies, value plays are a potential beneficiary for some asset allocators.

Looking at model attribution not only do the macro profiles look the same, if anything the DAX is a high beta version of Emini SPX futures. Risk appetite & credit spreads dominate the macro regime for SPX, together accounting for 41% of model value. It’s the same for the DAX except they explain 58% of Qi fair value.

In that context anyone fearful that wider credit spreads & risk off have more legs yet, the current risk-reward on the DAX do not look great.
Raychel Sanner 0Pswkddfxii Unsplash
03.05.2022
China
China’s stock exchanges remain closed for Labour Day but optimists point to a shift in rhetoric from Beijing as reason to hope policy stimulus can prompt a bounce when they re-open.
See more
The majority of Qi’s China-related models are not in macro regimes currently. Some, like FXI (large cap China ETF) & KWEB (China internet ETF) were in regime but macro lost its explanatory power in March – presumably as politics (strict lockdowns) assumed greater importance.

Others, like Shanghai Comp & Alibaba are either close to our 65% threshold or have model confidence trending higher.

The broader Emerging Market equity ETF EEM (where China is a 30% weight) is in regime & the current patterns show stronger China growth & a weaker Dollar / stronger Yuan both feature as top 10 drivers.

But while low model confidence means Qi valuation signals comes with a health warning, that doesn’t stop us from putting the recent moves in some critical factors into some historical context.
China Eco GrowthUsdcnh
On Now-Casting, weak PMI data has reduced tracking Chinese GDP growth by around 3% (from 7.4% YoY to 4.3% YoY). In Qi z-score terms, this has taken growth 3.5 standard deviations below trend. Levels only surpassed during the initial Covid lockdowns & the Yuan devaluation episode.

Talking of 2015-16, the rally in USDCNH has now taken the cross 4 standard deviations above trend. Levels consistent with the Yuan devaluation. Not new news by any stretch, but essential context. Policy stimulus can only help but it is worth noting the starting point.
Aaron Burden Nxt5Prob 7U Unsplash
27.04.2022
USDJPY
Qi’s USDJPY model fell out of regime in November last year. Through the first 3mths of 2022 model confidence remained low but over the last month it has risen almost 30%.
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Screenshot 2022 04 27 At 085756
Sharp falls in macro’s explanatory power often pre-empt bouts of higher volatility. The chart below shows Qi model confidence (blue) & 1mth implied USDJPY vol (red, inverted).

The aggressive fall in model RSq at the end of 2021 did lead USDJPY vol higher. There were tentative signs of increased model confidence in mid Feb before the RSq rolled over once again. And once again, it was followed by another increase in 1mth implied vol.
Image
If a new regime reasserts itself, there are a few observations we can make.

Macro valuation signals once again carry more weight. Qi’s Historical Model Value chart show macro model value has consistently trended higher for USDJPY in 2022. The question is to what degree has the market front-run & overrun versus those improved fundamentals.

USDJPY is currently +1 sigma rich to model. Hypothetically, if model confidence was back above 65%, back-testing that FVG as a sell signal reveals a 78% hit rate & an average return of +1.0%.

Intuitively, volatility is lower when macro fundamentals drive the market rather than trend / flow / sentiment. The chart above is crude but does suggest long vol positions need to keep a close eye on Qi’s model confidence.
25.04.2022
This time is different
Friday’s sell-off took the S&P500 to 1.85 sigma (6.1%) cheap to Qi’s model fair value. The index has only been in regime & this cheap to macro 3x before. Back-tests show this is a highly significant discount. One that, since 2009, has provided attractive entry levels to buy the dip. It worked effectively just a month ago in early March.
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‘This time is different’ are supposedly the four most expensive words in the English language. But the chart below shows why a discretionary client of Qi would not pull the trigger on the current signal.

It shows S&P500 macro-warranted fair value over a 4mth (blue) & 12mth (red) look-back period; i.e. given the growth/inflation mix, overall financial conditions & levels of risk appetite where 'should' SPX trade. Both ST & LT models show macro conditions are deteriorating.
Screenshot 2022 04 25 At 095402
Between them risk aversion & corporate credit spreads account for almost half of model value. Higher VIX & wider High Yield spreads are driving macro fair value lower.

Moreover, the picture is compounded when we run the same chart for US High Yield. Macro fair value for HYG is making fresh lows as it accelerates lower on both ST & LT models.

The only consolation for US equities is that the current FVG suggests it has discounted some of this bad news already. HYG is also cheap to model but ‘only’ 0.9 sigma (2.2%).
Screenshot 2022 04 25 At 095424
Sunil Ray Aqprqg Ji3C Unsplash
22.04.2022
Struggling for trade ideas?
RETINA™ provides a pipeline of trade ideas on securities you care about pumped into your workflow. Think of it as Bloomberg IB but instead of chat & commentary, it’s a series of signals flagging when markets have diverged from macro fair value.
See more
As well as choosing your assets & the Fair Value Gap trigger for trade entry, RETINA™ assigns a degree of confidence to each signal. Historical back-tests showing the efficacy of the signal, how macro model value is behaving & trend/momentum dynamics combine to assign conviction levels.

Four bar signals are our highest conviction ideas & here we look at their 2022 YTD performance in FX & macro equities (indices & index futures).
Screenshot 2022 04 22 At 083418
  • Using a 1 sigma threshold, RETINA™ generated 21 signals. That averages out to 1.3 high quality ideas per week.
  • The hit rate was 95% for an average return of +3.77%. On average the trades were open for just shy of 3 weeks (13 business days).
  • The asset class mix was 6 FX trades. The rest were equity indices – 7 of which were US, then 4 each for European & Asian indices.
  • For those with lower turnover, moving the FVG threshold out to 1.5 sigma reduces the number of trade signals to 9 – crudely one idea every second week.
  • A wider entry level produces even stronger results: 100% hit rate & average return of +5.76%.
RETINA is available to all Qi clients - speak to your sales contact - & is available via Symphony or Slack. In Symphony, for example, subscribers received a signal in early March when e-mini SPX futures produced a -1.3 sigma Qi Fair Value Gap & a bullish inflection signal. The signal appeared like this:
Screenshot 2022 04 22 At 085750
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Quant Insight’s Macro Analytics
on Goldman Sachs Marquee
Goldman Sachs is embedding Qi’s data-science-driven
macro factor risk data into Marquee to offer risk
management capabilities that help provide clarity to your
investment analysis as you navigate your portfolio exposures,
asset by asset, through dynamic market conditions.
Goldman Sachs is embedding Qi’s data-science-driven macro factor risk data into Marquee to offer risk management capabilities that help provide clarity to your investment analysis as you navigate your portfolio exposures, asset by asset, through dynamic market conditions.