HomeSolutionsInsightsNewsroomPeopleContactLogin

Acclaimed macro analytics
Portfolio Construction & Risk Management
Trading Solutions
Macro Models
Thematic equity baskets

Announcements
Press
Blog

This is a premium content article - to see full analysis sign up for a month of insights

That retracement was partly a function of macro model value moving higher – itself a function of this week’s bounce in crude oil. But the bigger move, certainly in the US, was the 14bp decline in spot since recent highs.

These are not models forecasting future CPI levels; rather, the empirically observed relationship between market expectations for future inflation versus their macro environment.

Observing where GDP growth is tracking, what financial conditions are doing & how risk appetite is behaving, macro model value has edged higher while the market has re-priced inflation expectations lower. Net-net, spot is now in line with macro fundamentals.

Unsurprisingly, the FVG for 10y USTs has also closed. On this occasion, the signal showing yields as 20bp too high has been closed by spot falling 10bp & model value rising 10bp, again courtesy of the bounce in crude oil prices. Signal from noise™

A more aggressive fiscal response in the US, plus secular trends like green technology remain important arguments for a commodity super cycle. But China’s impact on metal prices is traditionally very strong. Unsurprisingly, the z-scores for copper & iron ore have tracked Chinese GDP growth lower.

Qi’s Optimise Trade Selection enables users to screen their holdings for sensitivity to macro factors such as these.

That has prompted speculation the recovery in tech & growth potentially contains a broader message – that when the more defensive areas of the equity market outperforms, that rotation is signalling an earlier Fed tightening.

On Qi, that would manifest itself in a change in underlying relationships with the macro factors. The biggest driver in the current regime remains expectations around Fed Quantitative Easing. It alone accounts for 37% of model explanatory power.

The current relationship still shows QT is consistent with Value outperforming Growth. Moreover, sensitivity is not only large but rising.

For now, this looks more like a simple correction from an overshoot rather than any signal the Fed’s policy stance is shifting.

This is a premium content article - to see full analysis sign up for a month of insights

The USDCAD model is also interesting for its key drivers. Yes, the Canadian Dollar benefits from higher crude oil prices; but risk appetite & financial conditions dominate the current regime.

A spike in VIX & wider credit spreads are both consistent with higher USDCAD. So, a FVG of -1 sigma (-2.8%) makes it a potentially interesting play for any ongoing sell-off in risky assets.

The Antipodeans stand out as the two Dollar crosses where macro is not presently driving price action. Note, however, that RETINA™ is worth watching here. While macro model confidence is low, there is potential for a momentum signal instead. Both AUDUSD & NZDUSD are potentially carving out new uptrends - RETINA™ is tracking both.

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.

This is a premium content article - to see full analysis sign up for a month of insights

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.

This is a premium content article - to see full analysis sign up for a month of insights

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.