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Usual health warning with commodities & their propensity for supply/demand shocks. However, at 86%, Qi’s model confidence suggests traditional macro factors are doing a good job of explaining the price action in Brent & WTI.

Crude is close to macro fair value. Spot price (white) & model value (red) in the chart above track each other closely. Spot is 3.9% above but that is a negligible +0.25 in standard deviation terms. Moreover, RETINA™ has been unambiguously bullish on crude from a trend / momentum perspective.

The macro profile displays a desire for healthy Chinese economic growth & no sovereign stress in China or Europe. The other big driver is bond yields - the top 3 positive drivers are 10y US Treasury & Bund yields, plus 10y US real rates. It speaks to a healthy demand backdrop / risk on environment.

Together, they identify one scenario bears should monitor. Slower Chinese credit impulse that weighs on economic growth & credit quality, & potentially fuels a flight-to-quality trade in DM government bonds, is a toxic combination for crude oil on current patterns.

Growth, product development and unique trading signals

Recently we've opened a US office responding to rapid customer growth. With Qi customers evaluating
the effects of reflation and growth expectations this year, we see particular interest in Relative Value opportunities at the sector or index level, using macro valuation plus price momentum to improve tactical asset allocation, and adding macro screens to
enhance stock selection.
Hot off the press is Qi's new RETINA service providing a pipeline of actionable trading signals. I hope the following client insights and product updates are useful and look forward to hearing from you.

Mahmood Noorani, CEO and Co-Founder

Download the full 'What's new' article below

The grid below shows Qi FVGs where red (green) denotes the currency in the column header is rich (cheap) to macro versus the currency in each row. If the font in the cell is black, then that cross is in a macro regime; grey shows that pair is below Qi’s 65% threshold.

The Dollar is uniformly rich but the FVGs are modest & only two are in regime. USDJPY & USDCHF are slightly above macro model value. RETINA™ clients will have noted USDJPY’s momentum chart is carving out a new bullish formation, signalling a potential new uptrend.

The bigger standout though are the Antipodeans. Both Aussie & Kiwi screen as consistently cheap versus macro currently. In terms of macro valuations, they offer better entry levels.

The three Aussie crosses in regime – EURAUD, AUDJPY & AUDCHF – all share one common, dominant driver: interest rate differentials which account for at least a quarter of model explanatory power across all three. All show higher Aussie rates support the AUD &, in the case of AUDJPY, they explain 41% of the model!

At -0.6 sigma (-2.7%), AUDJPY’s valuation gap is at a 1y low. Since 2009, buying the dip at this FVG has produced 25 trades with a 76% hit rate & an average return of +0.88%.

The next RBA meeting is July 6th. Given the Fed shift & the rude health of the latest Australian employment stats, AUDJPY looks an interesting prospect for those anticipating a change in tone from Governor Lowe & a potential re-pricing of Aussie rates.

For those unable to invest in Fixed Income securities, the traditional inflation hedge lies in the commodity complex. That trade can take many shapes – spot commodities, commodity currencies, ETFs, or resource stocks. Many have rallied aggressively in 2021 but, more recently, several - like copper - have experienced a sharp pullback.

Relative to the macro environment, which offers the best trade expression currently? Qi’s “Commodity Super Cycle” watchlist is a curated list of potential commodity related plays.

At +1.6 sigma (+2.1%), European equities are extremely rich versus the US in macro terms. Model confidence has slipped but the regime is highly intuitive. European equities are the high beta global recovery play. They outperform with inflation expectations in both US & Europe rising, higher real rates, steeper yield curves, tight credit & low risk aversion.

Rates markets are sending the same signal. US yields have fallen sharply versus their Euro equivalent, narrowing the USD-EUR 5y5y spread further than macro fundamentals warrant. RETINA™ has now flagged an inflection signal – after a period of divergence, both spot & model value have risen in tandem over the last 3 days. Combined with a -1.6 sigma FVG, the decline in US yields looks extended.

There is a health warning here too - Qi model value has turned lower in the last two days. In bigger picture terms though, both rates & equity markets are suggesting that US growth is deteriorating relative to Europe’s. In itself, not especially controversial; but, even with the caveats, Qi modelling suggests a fair amount of that narrative is now in the price.

None have yet to cross the 65% threshold denoting a new macro regime &, as such, their valuation signals come with a health warning. However, the valuation picture is consistent – the BRL looks rich to model.

Looking at the crosses with the biggest jumps in model confidence a clear pattern emerges. AUDBRL, CHFBRL, BRLJPY, BRLCLP have some differences but share the fact that risk aversion is the single biggest driver. Even versus the Chilean Peso, the current pattern shows the Real as the high beta asset that needs VIX & other measures of risk aversion to stay low.

Combining valuations with the key driver of this new regime, suggest the Real could be an efficient vehicle for any risk off scare.

Indeed, RETINA™ has triggered a bearish momentum signal on BRLCLP. The recent uptrend looks overbought & is showing signs of rolling over.

The chart below shows macro model confidence for auto company Sonic Automotive. Macro had strong explanatory power throughout 2020 & Q1’21, but something changed in April. Model confidence fell sharply &, by the end of the month, SAH was out of regime.

It isn’t quite as aggressive but the profile is the same for CarMax.

There is an argument that the share price of car companies can be used as a guide for exactly how transitory the current bout of inflation is. Single stock equities as a potential lead indicator for inflation & hence Fed policy.

The sharp fall in model confidence suggests these stock prices became divorced from macro fundamentals; driven instead by other factors, perhaps the extraordinary shocks caused by lockdowns a year ago & the current economic re-opening.

It is by no means definitive but, watching Qi’s models to see when confidence returns, could be one signal to suggest the current supply/demand imbalances are calming down & fundamentals are re-asserting themselves.

It is, at least, a real time quantifiable metric worth monitoring. For both individual stock pickers; & macro types looking for clues on the inflation debate & the timing of monetary policy normalisation.

The chart above shows XLE spot price (white) versus macro fair value (red). The recent divergence has opened up a +0.8 sigma (+12.4%) Fair Value Gap. But while macro valuation is rich to model, RETINA™ continues to show the uptrend is in good health. Equally, crude oil - unsurprisingly the biggest single macro driver - retains good momentum.

XLF is just 0.3 sigma from model, i.e. in line with macro fair value. The momentum picture, however, is more mixed. Relative to XLE, the uptrend looks less secure.

Both XLE & XLF model value have started to roll over. It is modest thus far, but worth watching. Today’s event risk could be the catalyst for the next big move. Qi users can align macro fundamentals & trend/momentum dynamics in real time. Signal from noise™

This is normally done via bottom up analysis of company fundamentals. Qi offers a quantitative macro view. The chart below looks at S&P500 single stocks & identifies those with a positive relationship with inflation expectations (as measured by US inflation swaps) versus those with a negative relationship.

This is the independent pattern of association between single stock & inflation. All other factors - economic growth, commodities, the Dollar, interest rates etc - are all held constant. Then we simply sum up the number of S&P500 stocks with a positive (tailwind) & negative (headwind) relationship with inflation.

Those arguing inflation has the potential to hurt US equities would expect the blue line to rise. It did over Q4 2020, presumably reflecting Biden’s election win & the anticipation of fiscal easing. But the Georgia win at the start of 2021 actually saw a sharp fall. The market initially interpreted the Democrat’s clean sweep as an unambiguous reflationary boon for equities.

By March, the number of stocks worried about inflation rose as markets started to fret about overheating. More recently that has turned again & currently 411 benefit while 95 fear inflation. Not definitive but one way to empirically look under the hood & see unfolding relationships, enabling stock pickers to marry their bottom up analysis with macro factors.