Insights

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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.

18.05.2021

The Spanish bull

The chart shows the 10 biggest Fair Value Gaps across Qi’s models of relative value pairs for global equity indices. Five of the top 10 show IBEX 35 as rich versus its peers.

On current patterns, Spanish equities look like the high beta play for European reflation. They outperform when inflation expectations rise, crude oil increases, the European yield curve steepens, credit spreads tighten & the Euro is soft.

But a fair amount of that good news is now priced making it a potentially attractive vehicle for those thinking the European re-opening trade is due a pause.

17.05.2021

Taper Tantrum? Watch the ECB

Last week’s US inflation print prompted USD rate vol rate to spike but it remains just below 2021 highs. Meanwhile, European rate vol hit fresh highs last week.

The chart below captures the move in interest rate volatility, which we use to capture market expectations around Quantitative Easing, in z-score terms. The BoC & BoE have already announced plans to taper; & this picture suggests the market fears the ECB is next. The tantrum is not a uniquely US event.

14.05.2021

The exaggerated death of 60:40

If inflation isn’t transitory then the Fed is committing a huge policy error – one that threatens both bond & equity returns. And the traditional 60:40 balanced fund suffers enormously under this scenario.

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13.05.2021

Even Taiwan?

When Taiwan, with an exemplary record of managing Covid & home to best-in-class chip makers, suffers a huge equity rout, it is clear there is something else going on. The answer it seems is deleveraging with margin calls accelerating the equity sell-off.

From a Qi perspective, macro fair value for the TAIEX future is rolling over, but the speed of the down trade in spot has opened up a -0.8 sigma (8.7%) Fair Value Gap.

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12.05.2021

Inflation

Inflation day in the US. The mood music has started to shift with markets ascribing high commodity prices / inflation as a negative for equities. Have we reached an inflection point where price pressures become a drag on equity markets?

The chart below shows the sensitivity of US equity sectors relative to the broader market to 3 factors – inflation expectations, metal prices (copper, iron ore) & energy prices (crude oil).

11.05.2021

Chinese Cyclicals

Qi has built models for the Global X MSCI universe of ETFs tracking Chinese equity sectors.

Of those in a macro regime, the Chinese Energy sector stands out. The energy complex is rich to macro model in both the US & Europe, but not to the same degree as CHIE which is 2.2 sigma (10.6%) above macro-warranted fair value.

11.05.2021

Qi & Bloomberg

The latest analysis from Bloomberg's John Authers pulls together the reaction to a weak US Payrolls report, & the importance of the current inflation narrative. He cites Qi analysis on global equity markets & their sensitivity to inflation expectations - Qi will flag, in real time, when inflation moves from being a tailwind for risky assets, to a headwind. The original work can be seen here

10.05.2021

Inflation

Wednesday’s US CPI dominates the week ahead. Despite the undershoot in US Payrolls, market expectations for US inflation rose aggressively on Friday. The common narrative being that a weak labour market ensures the Fed keep monetary policy easy for longer.

07.05.2021

Mixed messages

Falling real yields suggest the bond market is signalling peak economic growth. But the commodity market is shouting loudly that inflation is the number one threat.

For now, equity markets seem to be listening to commodities rather than bonds. Hence the cyclical versus tech split in performance this week.

But, if commodities are the main driver, what’s the empirical snapshot – which equities are most sensitive, what do macro valuations look like?

07.05.2021

Macroscope:

Nations love inflation until they dont
While equity investors were put on their heels by US Treasury Secretary Yellen's mere utterance of a possible future rate hike, at the moment inflation is the friend and positive macro driver of most global equity markets, according to Quant Insight (Qi) data tracking the influence of macro drivers on asset prices. Yellen later backtracked but her comment still sent shockwaves through global financial markets, especially after recent PMI data pointing to bottlenecks in supply chains and upward pressure on inflation.

Qi data indicate that some global equity markets benefit more from inflation than others with smaller markets in Europe such as Austria, Greece, Norway, Spain and Italy getting the biggest tailwind from rising inflation expectations. On broader macro valuation terms there is a distinct East-West divide as US and European equity markets look consistently expensive while markets cheap to macro are generally in Asia, with Japan (both the Nikkei and TOPIX indices), Indonesia, Korea, India and Emerging Markets both attractively valued and benefitting from inflation.

18.05.2021

The Spanish bull

Back-testing the significance of these valuations reveals these levels are comparatively rare. For example, selling IBEX vs. Stoxx 600 at a +1.4 sigma FVG (when in regime) since 2009 produces only 5 such trades. The hit rate is 80% for an average return of +1.9%.

The equivalent numbers for the IBEX 35 vs. CAC 40 (+1.5 sigma FVG entry level) is a 73% hit rate & +0.5% average return. Since 2009 there have been 11 such instances. Selling IBEX vs DAX at a +1.1 sigma FVG since 2009 produces 16 trades, a 81% hit rate & a +0.9% average return.

History suggests these RV pairs offer an efficient expression for anyone with a tactically bearish view on European equities.

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17.05.2021

Taper Tantrum? Watch the ECB

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If we see a European taper tantrum, which of the usual suspects look vulnerable?

QE expectations account for a third of explanatory power for European IG credit, IBCX. Whilst it screens as highly vulnerable, model FVG at 3 month lows (-1.2 sigma, -0.7%), suggest it has already discounted some of the bad news.

European Banks are modestly rich to model, both outright & relative to the broader EU equity market. Reflation, tight credit spds & a weak Euro feature more prominently than QE.

10y BTP-Bund spreads are in regime & are already one sigma (18bp wide) versus model value. But macro fair value is moving wider, just not as quickly as spot. QE isn’t a primary driver currently but the regime shows deflation (falling inflation /growth) & ‘risk off’ (wider credit spds, higher VIX) as critical. Note QT explains almost half of model variance for 10y Bunds.

12.05.2021

Inflation

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The chart above shows the sensitivity of US equity sectors relative to the broader market to 3 factors – inflation expectations, metal prices (copper, iron ore) & energy prices (crude oil).

The split is clear. A handful of RV pairs display a negative relationship. That Consumer Staples XLP underperform SPY when inflation expectations rise is not surprising. A function of margin compression. Health Care XLV & Home Construction ITB show the same dynamic.

A host of models hug the vertical axis where sensitivity to these macro factors is more muted.

Meanwhile Energy (XLE, XOP), Financials (XLF, KBE), Metals & Mining (XME) reside wide out on the right hand side of the chart where higher inflation/commodities provide a clear benefit.

The same chart from a month ago is striking in the sense the profile has not really changed. On Apr 11th the same cyclical sectors were on their own out on the far right of the chart with strong positive sensitivity to the broad inflation narrative.

All that has changed is the valuation picture. On Qi metrics, the value sectors were all cheap to the broader S&P500 a month back, & today are rich. The valuation picture helps explain recent market gyrations more than any fundamental shift in market drivers.

Arguably the most important shift will not be the move north from cheap to rich versus macro fair value. But from right to left – that is when Qi’s independent factor sensitivities will flag a regime change. One where inflation & commodities move from tailwind to headwind.

11.05.2021

Chinese Cyclicals

Back-tests show when Chinese Energy is in regime, the FVGs have a strong track record of flagging profitable trading opportunities. This FVG level, however, hasn’t been seen before. Combined with macro fair value moving higher (just at a slower pace than spot) & the conclusion is that trying to pick a top in commodity plays currently is not prudent.

Instead, RETINA™ signals an alternative cyclical trade - Chinese Industrials. CHII isn’t in regime currently (55% model confidence) but valuation, even with that caveat, is close to macro fair value.

That leaves a neutral valuation picture but a positive momentum outlook with RETINA™ flagging a new uptrend potentially forming. Growth bulls looking for ongoing rotation to cyclicals, & looking for diversification away from western equities, could consider this alternative expression.

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11.05.2021

Qi & Bloomberg

10.05.2021

Inflation

5y TIPS break-evens are in line with macro fair value but 10y break-evens & the closely watched 5y5y forward inflation swap are both now high versus model value. The former are 0.5 sigma above, the latter 0.9 sigma; both currently equate to spot being around 13bp high versus model.

So relative to economic growth, commodity prices, Fed rate/QE expectations etc, inflation expectations look elevated.

Qi does not model the US Consumer Price Index. Qi displays the macro anatomy of the financial instruments that reflect market expectations for future inflation. This should not be interpreted as a call on US inflation itself. It shows how aggressive the re-pricing of US inflation expectations has been relative to other macro factors & financial assets.

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07.05.2021

Mixed messages

The chart shows equity indices & their sensitivity to metals (copper, iron ore) & energy (crude oil); plus a macro valuation (Qi Fair Value Gap). The further to the right a model is, the bigger the benefit it gets from rising commodity prices.

Russell 2000 is the winner but there is a diverse mix – Indonesia EIDO, Austria EWO & Mexico EWW. The common factor is all are rich to macro already; albeit the Russell only marginally so.

Looking for the equity market with the strongest sensitivity to commodities but a cheap valuation suggests South Africa EZA has lagged & offers an attractive entry level.

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07.05.2021

Macroscope:

Download our PDF to read more and view:

1. Global Markets this week - Top Macro drivers
2. Key Insights

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