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30.05.2022
AUDJPY
AUDJPY is 4.0% cheap versus Qi’s macro-warranted model value.

A bullish signal was flashed on RETINA™ early last week (ref 89.97) & the Aussie Dollar has gained around 1.7% since trade inception.

But model value continues to move higher. The red line in the chart below shows where AUDJPY fair value is given prevailing macro conditions. It has risen ~5% over May, driven by improving risk appetite, metal prices & their impact on Aussie inflation expectations.
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Orion Nebula 11107 1920
26.05.2022
Nowhere to hide
A common problem for US equity managers is where to hide in a bear market? The hit to Walmart & Target makes that job harder as traditional defensives like staples are proving just as susceptible to supple chain bottlenecks, inventory dilemmas & margin compression.
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25.05.2022
Recession > Inflation?
Last week’s “This is important” insight noted a material shift in interest rate markets with regards to pricing of Fed rate hikes. The removal of future hikes suggested an increased focus on recession risks over inflation worries.
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Brendan Church Pkef6Tt3C08 Unsplash
23.05.2022
Bottom Up meets Top Down
- US Retailers
Last week Walmart & Target spooked the equity market. This week a number of additional US retailers report earnings & the fear is they provide further evidence that soaring inflation is hurting margins.
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Pexels Sam Willis 3934512
23.05.2022
Signs of relief?
The bad news keeps coming & the single most important chart on Qi continues to point to deteriorating macro conditions: macro-warranted model value for the S&P500, NASDAQ (indeed most major DM equity indices) continues to point lower.
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Nasa Scbkw9Akgca Unsplash
19.05.2022
Capitulation?
A shamelessly click bait title but when consumer staples like Walmart & Target are down ~20% in one day’s trading, its not a completely unfair question.
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Raychel Sanner 0Pswkddfxii Unsplash
18.05.2022
This is important
Lower inflation expectations, bond yields, commodity prices plus sell-side surveys suggesting cyclicals like Industrials & Materials are where an increasing number of short positions reside. None of these are moving in a straight line but turning points can often be a process rather than a single, clean event.

All the above speak to markets’ increasing focus on downside risks to economic growth rather than fears of inflation. In that context, this chart is important.
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Ferenc Horvath Skcfibu91Aa Unsplash
17.05.2022
Watch Hong Kong
Global investors should be keeping a close eye on Hong Kong.

As a small open economy with a US Dollar peg & growing Chinese influence, it is uniquely exposed to two of the biggest headwinds facing financial markets – the Fed’s policy tightening & the economic hit from China’s tech regulation & zero covid policy.

On an outright basis the Hang Seng is cheap to macro. But that valuation comes with a health warning as model confidence is rolling over aggressively. Macro’s explanatory power has fallen 25% in the last 2 weeks alone.

But Qi’s relative value model for Hong Kong versus broad Emerging Markets paints a different picture. In regime & now the Hang Seng is just over one standard deviation (2.6%) rich versus MSCI Emerging Markets relative to macro conditions. In Qi Fair Value Gap terms, this is the top end of recent ranges.
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Hs 2009 25 Hubble
16.05.2022
US Retail
This week we get a clutch of earnings from US retailers (WalMart, Target, Home Depot, Lowe’s, Macy’s) plus April Retail Sales data.
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Felix Mittermeier L4 16Dmz 1C Unsplash
12.05.2022
Qi Vol Indicator
The Qi Vol Indicator has now risen more than 15 points over the last month. That puts our alternative fear gauge into amber light territory. Back tests show one month increases of 20 points or more have often pre-empted large blow-out spikes in VIX.

As a reminder, the Vol Indicator index shows model confidence (i.e. macro explanatory power) for 6 benchmark instruments across global equity, bond & fx markets.

A rising index number means macro is becoming less influential & markets are increasingly beholden to more transient factors like sentiment, positioning & politics.
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30.05.2022
AUDJPY
AUDJPY is 4.0% cheap versus Qi’s macro-warranted model value.

A bullish signal was flashed on RETINA™ early last week (ref 89.97) & the Aussie Dollar has gained around 1.7% since trade inception.

But model value continues to move higher. The red line in the chart below shows where AUDJPY fair value is given prevailing macro conditions. It has risen ~5% over May, driven by improving risk appetite, metal prices & their impact on Aussie inflation expectations.
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Audjpy
The result is that, even with spot moving higher, the market remains cheap versus Qi model value.

Those key drivers – healthy risk appetite, rising metal prices / Australian inflation – are highly intuitive given this cross is often viewed as a barometer for the global business cycle.

Most financial commentary is focusing on downside risks & a likely recession. A scenario that is not consistent with AUDJPY upside.

Qi model confidence is strong & the signal remains valid while macro fair value continues to appreciate. Economic bears will almost certainly pass on this one. But, for those looking for last week’s rally in risky assets to continue, or those thinking recession talk is overdone, AUDJPY looks an interesting play.
Orion Nebula 11107 1920
26.05.2022
Nowhere to hide
A common problem for US equity managers is where to hide in a bear market? The hit to Walmart & Target makes that job harder as traditional defensives like staples are proving just as susceptible to supple chain bottlenecks, inventory dilemmas & margin compression.
See more
If traditional sector allocations aren’t working, how about a smart beta approach. Fearful of a recession? Surely if bond yields are rolling over, Growth is recovering versus Value? Once again there is a divorce between market narrative & reality – Value has yet to give up any of its 2022 outperformance versus Growth.

Maybe a new perspective is required. Qi’s unique optimiser employs best-in-class, out-of-sample tracking. It finds the combination (names & weights) of liquid single stocks that most efficiently track a target variable.

The example below is Qi’s US inflation basket. A 50:50 Long / Short basket of US blue chips that, since Jan 2019, has produced a 92.3% correlation with US inflation expectations as measured by 5y USD inflation swaps
Newplot 87
The optimizer can be trained on any target variable. Ones that best capture your main macro scenario; or the biggest risk exposure you need to hedge.

It will provide a list of liquid stocks that closely correlate to the target, & is highly customizable: exclude individual names, skew sector allocations, cap single stock exposure to your chosen level of diversification, set a minimum liquidity constraint etc etc

Look Up™
Nasa Scbkw9Akgca Unsplash
19.05.2022
Capitulation?
A shamelessly click bait title but when consumer staples like Walmart & Target are down ~20% in one day’s trading, its not a completely unfair question.
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What started with unprofitable tech is now impacting bricks-&-mortar retailers selling everyday goods; companies normally perceived as relative defensive havens.

To the extent it captures inflationary bottlenecks which compress margins, it is easy to see retailers as a warning of broader pain for corporate profitability. That suggests this is not capitulation but the market questioning future earnings growth. But where does that leave Consumer Staples as a sector?

The classic cyclical barometer of Staples versus Discretionary has just entered a new macro regime. XLP vs. XLY model confidence has risen 10% in the last 2 weeks, 18% over the last month, & now stands at 69%. Macro matters once again.

For the first time since November, Staples are cheap to Discretionary. It’s small (-0.3 sigma, -2.2%) but a notable shift. It is also worth noting that Qi model value continues to point higher, i.e. the macro environment continues to favour Staples outperforming.
Xlp Vs Xly
In sector RV space, RETINA™ has flagged two bullish signals on XLP. Consumer Staples are now 1.7 sigma cheap versus both Health Care & Materials. That’s a record Fair Value Gap for XLP vs. XLV – we’ve never seen a dislocation this big between these two defensive sectors when in regime since 2009.

XLB vs. XLP has only been in regime & this rich to model 3x in the last 14years. The hit rate as a sell signal is 67%.

These are incredibly volatile markets that require additional diligence on any systematic signal. That said, such price action also throws up opportunities & RETINA flags where markets have moved furthest away from macro fundamentals. At a minimum, it is a source of potential trade ideas for consideration.
Hs 2009 25 Hubble
16.05.2022
US Retail
This week we get a clutch of earnings from US retailers (WalMart, Target, Home Depot, Lowe’s, Macy’s) plus April Retail Sales data.
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At the single stock level the picture is mixed. Walmart, Lowe’s & Home Depot are not in regime – company fundamentals matter more than macro currently.

Target & Macy’s are in regime but the valuation picture differs. The former is marginally above model. The latter has traded below macro-warranted fair value throughout 2022. The gap is currently 0.7 sigma or almost 10% cheap versus prevailing macro conditions.

At the sector level, macro’s influence is strong & rising. XRT model confidence is 78%. In valuation terms, at +0.7 sigma (+9.8%) XRT’s Fair Value Gap is close to 2022 highs.
Xrt
However, this is not a significant level. Back-tests show a 54% hit rate & small positive average return. Essentially close to coin flipping territory.

Should we get there, selling a FVG of +1.0 sigma is more interesting with a 64% hit rate for an average return of +1.3%.

The drivers of XRT closely mirror those of the S&P500 – bulls want reflation, lower real rates, tighter credit spreads & well behaved risk aversion.

Retail could be an interesting one to watch for those who believe a bear market squeeze provides another selling opportunity.
Felix Mittermeier L4 16Dmz 1C Unsplash
12.05.2022
Qi Vol Indicator
The Qi Vol Indicator has now risen more than 15 points over the last month. That puts our alternative fear gauge into amber light territory. Back tests show one month increases of 20 points or more have often pre-empted large blow-out spikes in VIX.

As a reminder, the Vol Indicator index shows model confidence (i.e. macro explanatory power) for 6 benchmark instruments across global equity, bond & fx markets.

A rising index number means macro is becoming less influential & markets are increasingly beholden to more transient factors like sentiment, positioning & politics.
See more
Qi Vol Indicator
There are two potentially interesting observations to highlight.

Every cycle is different. The Qi Vol Indicator moved ahead of the initial equity sell-off / VIX spike in January. More recently in April / May the two have moved higher together.

But, while VIX is consolidating somewhat, our Vol Indicator seems to be launching a fresh move higher. Should we see a one month increase of 20 or more, the chances of another leg in this “risk off” move could be imminent.

Put differently, to date, the 2022 bear move has felt generally quite orderly. Until this week that is when a sense of panic & capitulation has crept in.

The Qi Vol Indicator could be speaking to that next (potentially last?) & most aggressive phase of the bear move. Eyeballing the chart we are approaching levels which typically mark blow-out tops before reverting lower.
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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.