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.

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.

06.05.2021

BoE Quantitative Easing
& the Pound

Today’s Bank of England meeting will be closely watched for any signs of a taper in their asset purchase programme. The Pound’s sensitivity to BoE QE has crept higher of late.

05.05.2021

Global equity indices & inflation

The recent round of global PMI data has sharpened fears about supply bottlenecks & upward pressure on inflation.

05.05.2021

Nikkei 225 vs. S&P500

The Fair Value Gap on Qi’s Nikkei 225 vs. S&P500 model hit -1.1 sigma (-4.8%) at the end of April. Yesterday’s fall in US equities has enabled the Nikkei to start clawing back some of its recent underperformance & the FVG now sits at -0.8 sigma (-3.6%).

Missing the absolute low in valuation has one potential benefit though – the latest price action looks to have established a trend turn & we now have a momentum signal.

04.05.2021

Tactical opportunity in US Tech

Over the last 10 days the US technology sector has underperformed the broader market by around 2.5%. Yet macro fair value for XLK / SPY ratio has actually increased slightly over the same period. That has opened up a Fair Value Gap of 1.7 sigma (2.8%) & triggered a Divergence signal.

30.04.2021

US vs. Europe

European equities are near recent lows relative to the US. On Qi, the Euro Stoxx 600 vs S&P500 model is 0.7 sigma (1.2%) below macro fair value, towards the bottom of recent ranges.

30.04.2021

European Autos

Qi’s Tactical Asset Allocation work flagged that the uptrend in the European Auto sector was exhausted & rolling over. The momentum picture remains weak – RETINA™ shows a new ST downtrend while the LT uptrend is sharply decelerating. However, from a macro valuation perspective it is starting to screen as cheap relative to several peers.

29.04.2021

Canada: the multi-asset view

No excitement from the Fed overnight but it’s now one week since the Bank of Canada became the first G7 central bank to signal an end to extraordinary monetary policy accommodation. How has the dust settled?

28.04.2021

Qi & Bloomberg

Bloomberg's article "Bitcoin at Inflection Point Amid Recent Selloff, Technicals Show" cites Qi's analysis of the crypto complex.

28.04.2021

Food Inflation

Commodity prices continue to surge higher. What is striking in the table below is:

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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06.05.2021

BoE Quantitative Easing
& the Pound

Today’s Bank of England meeting will be closely watched for any signs of a taper in their asset purchase programme. The Pound’s sensitivity to BoE QE has crept higher of late.

Most GBP fx crosses are close to macro model value. Of those in regime, only the GBPCHF model is more than 0.5 sigma away from macro fair value (0.7 sigma, 2.2% cheap to model). But, in terms of stress testing different BoE policy announcements, which crosses are likely to react to a taper tantrum style scenario?

BoE QT expectations are now the biggest single positive driver for GBPSEK (chart above). There is no valuation edge, the cross is at macro fair value. The percentage impact is similar for EURGBP but this time there is a small valuation edge with the Euro 0.4 sigma (0.9%) rich to model. Both offer relatively efficient vehicles for any hawkish BoE surprise.

Note also nominal interest rate differentials feature as strong drivers in both models. A hawkish BoE that shocks UK rates higher relative to Euro/Krona rates would add further impetus to Sterling upside.

Cable is at fair value & this time sensitivity runs in the opposite direction. Ongoing QE is a marginal plus for the Pound.

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05.05.2021

Global equity indices & inflation

The recent round of global PMI data has sharpened fears about supply bottlenecks & upward pressure on inflation.

On current patterns, nearly every equity index globally has positive sensitivity to inflation expectations; i.e. they remain a tailwind rather than a headwind to equity performance. When sensitivity flips to negative we will see evidence of a significant regime shift - that markets are worrying about margin compression or an earlier policy response from Central Banks.

In pure sensitivity terms it is European markets - notably Austria EWO, Greece, Norway ENOR, Italy & Spain - that are the biggest beneficiaries from rising inflation expectations.

In broader macro valuation terms there is a distinct East - West split. US & European models are consistently rich to macro model value. Those that are cheap to model include both the Nikkei & TOPIX in Japan, Indonesia EIDO, South Africa EZA, South Korea EWY & the broader EM index EEM

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05.05.2021

Nikkei 225 vs. S&P500

Yesterday’s sell-off in the US has generated some upside in the Nikkei 225 / S&P500 ratio & that has triggered a momentum buy signal on Qi RETINA™. On our metrics the NKY / SPX ratio looks oversold. The FVG entry level is now less extreme but the downtrend was stretched & is starting to show signs of turning.

RETINA™ aligns macro valuations with trend/momentum dynamics.

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04.05.2021

Tactical opportunity in US Tech

In outright terms, US technology is currently not explained by macro factors. NASDAQ, US IT, XLK, SOXX etc are all below our threshold for a macro regime. However, the relative value model of XLK vs. SPY is in regime with model confidence at 69%.

That regime demonstrates tech’s resilience in a defensive environment. XLK outperforms when inflation expectations & commodities are falling, when real rates decline & credit spreads widen. This is a good entry level for those thinking the reflation trade is due further consolidation.

Note though that one third of model explanatory power comes from Quantitative Easing expectations. Tech needs ongoing Fed QE to outperform. Long XLK versus the broader market looks good tactically given the entry level, but there is clear event risk on the horizon – if the June 16th FOMC does start the clock for a possible taper of Fed asset purchases, on current patterns that will provide a significant headwind to the US tech sector.

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30.04.2021

US vs. Europe

European equities are near recent lows relative to the US. On Qi, the Euro Stoxx 600 vs S&P500 model is 0.7 sigma (1.2%) below macro fair value, towards the bottom of recent ranges.

For those who believe that the European vaccination programme has turned a corner & can trigger a broader re-opening phase, this looks an interesting entry level.

Since 2009, buying dips at a -0.7 sigma Fair Value Gap (when in regime) has produced a 65.6% hit rate for an average return of +0.62%. There have been 32 such instances &, on average, it’s taken 17 business days to close the FVG.

Europe outperforms in a global cyclical upturn. Rising commodity prices, higher inflation expectations in both the US & Europe are consistent with the SXXP/SPX ratio going up. The ratio wants tight credit spreads & lower EURUSD fx, but also is positively sensitive to Central Bank Quantitative Tightening expectations. That suggests it is relatively protected in another taper tantrum style scenario.

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30.04.2021

European Autos

The chart below shows the 10 biggest valuation gaps across all Qi’s global ETF relative value models. European Autos (EXV5) is in three of the top 10 FVGs; & each time it is cheap & at a one year extreme.

There is a strong need for bottom up analysis here - to assess the impact from the shortage in semiconductor chips & possible production cuts. Align Qi’s macro valuation plus trend/momentum analytics with company fundamentals.

From a macro perspective, Autos are 6.8% cheap versus Travel & Leisure EXV5 vs. EXV9, 6.8% cheap vs Banks EXV1 vs. EXV5 & 5.6% cheap vs Media EXV5 vs. EXH6.

All back-test well. Buying Autos vs Banks at 1.4 sigma since 2009, for example, produces a 75% hit rate & +1.7% average return. Moreover, it now has a Divergence signal too with spot price of EXV1 / EXV5 & macro fair value moving in opposite directions over the last 10days.

Separately, Qi RETINA™ has flagged a momentum sell signal on European Industrials. The sector is in a strong macro regime but there is no FVG of note. This is not a valuation call, but a pure trend signal – the uptrend looks stretched & has started to lose momentum.

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29.04.2021

Canada: the multi-asset view

Equities. The TSX 60 ETF XIU is in a strong regime & one where it is comfortable with reflation. Rising inflation, higher bond yields are all tailwinds – they currently reflect stronger growth, not tighter financial conditions. A FVG of +0.4 sigma (+2.2%) suggests a modest amount of this favourable scenario is already discounted.
FX. Spot CAD has moved aggressively since the BoC last week but, on the whole, it is moving in line with macro fundamentals. Most models are within 0.5 sigma of fair value. The exception is USDCAD at -0.9 sigma (-2.2%). A 1 year low for the FVG & a level that back-tests well (72% hit rate, +0.8% average return).
Fixed Income. Canadian credit (VSC, ZCM) & Canadian rates are close to model value. Even with the BoC induced re-pricing of the front end, 1y1y CAD is within 0.5 sigma of fair value. Most interesting is the 2s10s curve – in regime & 18bp too flat versus macro. An attractive entry point for those who believe QT + issuance equates to a steeper yield curve.

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28.04.2021

Qi & Bloomberg

Bloomberg's article "Bitcoin at Inflection Point Amid Recent Selloff, Technicals Show" cites Qi's analysis of the crypto complex.

28.04.2021

Food Inflation

Commodity prices continue to surge higher. What is striking in the table below is:

Despite idiosyncratic supply shocks, overall the commodity complex remains well explained by macro fundamentals.
Only 4 models that are in regime are more than 0.5 sigma away from macro fair value. Commodities are largely trading in line with their macro environment.
There is a notable valuation skew to soft commodities being rich to macro.

Copper *, at 0.8 sigma (8.2%) above model fair value, is the only metal in the rich zone.
Otherwise the standouts are all agricultural commodities. Wheat is not in a macro regime but rich; Corn is 1.4 sigma (18.2%) rich to macro while the broader Invesco Agriculture ETF DBA is 1.2 sigma (7.7%) above model.
Commodities are inherently a unique asset class - macro signals must always be aligned with supply/demand fundamentals. But even with cold & dry weather in US & Brazil, macro factors suggest anyone looking for a pause in this latest leg of the commodity super cycle should consider agriculture first up.

* since April 15th's "Copper - the pause that refreshes" spot copper has rallied 10.5%. The FVG was -0.3 sigma at that time & now stands at +0.8 sigma. Macro-warranted model value has moved higher from $428 to $435, but spot has moved up more aggressively.

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