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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.

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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.

Qi’s US 60:40 model has a 60% allocation to the S&P500 SPY, 16.6% to US Treasuries GOVT, 12.2% to IG credit LQDE, & 11.2% to Mortgages MBB.

It is in regime & is bang in line with macro fair value. Spot was rich to macro through April but the subsequent correction has seen it retrace back in line with macro fundamentals.

Those macro fundamentals are pointing lower but arguably most arresting is the overall profile. It’s Goldilocks. Higher crude oil, higher inflation expectations, stronger growth, low risk aversion & tight credit spreads. Monitoring these for a regime shift will be critical but, on current relationships, it’s not obvious much has changed & the death of 60:40 is exaggerated.

This is a comparatively rare event. Since 2009 there have only ever been 17 occasions when TAIEX’s FVG has hit -0.8 sigma when in a macro regime. That signal has produced a 64.7% hit rate & +1.26% average return.

Clearly caution is warranted during periods of short, sharp position unwinds. Qi models add some further health warnings. Increased risk aversion - notably VIX, EM VIX & Chinese sovereign CDS - are driving macro fair value lower.

Moreover, macro explanatory power is rolling over – down 10% in the last 2 weeks. Still, bulls can employ the Qi framework to help calibrate any potential dip buying opportunity.

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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.

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.

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.

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.