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In broad terms, the global multi-asset investment clock is largely unchanged. Since March while all equity markets retain a strong bias to higher inflation, several have moved to show a negative relationship with growth. This we still interpret as a variation on the Goldilocks theme – wanting just enough reflation to provide support, not too hot that brings forward overheating & fears of a Fed policy response.

Both globally & in the US, Real Estate (REET, USRT) & Small Caps (SCZ, IWM) are areas traditionally perceived as ‘growth’ plays. All four want are emphasising this balanced reflation rather than outright ‘boom’.

Valuation gaps remain modest. Both red & green dots are small denoting most are within +/- 0.5 sigma of macro fair value.

Government bond ETFs are clustered in the “Goldilocks” quadrant – they want rising strong growth but falling inflation. TLT (20y+ US Treasuries) are the extreme.

While macro valuations are close to home, the momentum picture throws up some potential opportunities.

Index-linked Gilts INXG are potentially on the cusp of a new uptrend. The ‘buy zone’ seeks to capture the early phase of a new uptrend as momentum starts to accelerate higher.

Global large caps IOO start off as slightly rich in valuation terms but share the same trend & momentum profile.

Several Fixed Income ETFs feature in the top left quadrant where models are in a downtrend, but losing downside momentum.

Four US Treasury ETFs are slightly cheap to macro model value & in the ‘oversold’ box. They cover the entire maturity spectrum – from the front end SHY, to intermediates IEF & through to the long end of the yield curve TLT. The ETF GOVT represents the whole US Treasury curve.

The February / March sell-off has, in valuation terms, left it 1.5 sigma (6.1%) cheap to macro-warranted model value. Back-tests suggest this is a rare but statistically significant level. Since 2009, only three times has ChiNext been in regime & with this big a negative FVG. Buying those dips elicited a 67% hit rate & 4.9% average return.

Perhaps most interesting of all is that Qi’s RETINA ™ is now flagging a Divergence buy signal.

RETINA ™ combines Qi’s existing macro valuations with a numerical measure of trend plus accelerating / decelerating momentum. In this instance the signal is exclusively predicated on valuation & one of Qi’s optimisation strategies.

A Divergence rule identifies when macro-warranted model value & spot price have moved in the opposite direction over the last 10 days. In this instance, the most recent sell-off has not been justified by macro fundamentals.

Macro valuation + trend / momentum overlay. Look Up ™

Qi’s S&P500 vs. MXEF model is in regime & now shows emerging markets as 1.7 sigma (6.3%) cheap versus the US.

Critically though macro-warranted model value (the red line below) continues to trend higher. While the valuation gap is starting to look significant, we would need to see macro fundamentals deteriorate before signalling a top in this ratio.

The key macro drivers are intuitive. EM suffers when the US Dollar strengthens, credit spreads widen & the reflation trade (inflation expectations, commodity prices, yield curve) is under pressure.

The current Fair Value Gap suggests a fair amount of bad news for EM is now priced. But only when macro fair value rolls over would the valuation signal be corroborated.

Only Blackrock is below our model confidence threshold & a function of micro, idiosyncratic drivers.

Otherwise, macro matters for US financials. Moreover, they are largely moving in line with macro fundamentals. Most of this week’s reporters are close to model fair value.

At the margin, Goldman Sachs & Morgan Stanley offer a slight valuation edge, trading just below macro model value. At the other end of the range, Bank of NY Mellon & State Street are both around 5% rich to model.

The macro profile is similar across the sector. Tight credit spreads remains the number one driver. Reflation is captured via a positive sensitivity to both inflation expectations & energy prices. Rising US real yields are a tailwind not a headwind.

In every case macro model value is flat-lining; consolidating after a 5month uptrend. The move in these factors will be critical in deciding the next move for financials.

The Qi Vol Indicator captures the ability of macro to explain price action across some key global benchmark instruments in equity, rates & FX markets.

When macro’s explanatory power falls, markets are more vulnerable to other factors like positioning & sentiment; both of which can cause sharp price swings. Hence, low macro model confidence equates to a higher Qi Vol Indicator which can, in turn, signal a period of elevated volatility.

There are some ‘false dawns’ but overall the Qi Vol Indicator has done a good job of leading sharp spikes in VIX over the last 5 years - summer 2016, “Volmageddon” early in 2018, Jan 2019 & most recently the Covid shock of February/March 2020.

Neither the absolute level, nor the rate of change in our Vol Indicator is currently giving any cause for concern. That said, the divergence versus the VIX is notable & worth monitoring.

One potential risk for H2 2021 is if, in sharp contrast to the stimulus in the US, Beijing chooses to actively rein in its growth. In z-score terms, the Chinese recovery (the blue line is Now-Casting’s China tracking GDP) has been the outlier & the clear engine of recovery early in 2021.

For all the talk of reflation, relative to long term trend, US growth has yet to post a similar upswing.

The ability to track the impact of Chinese or US growth on different asset classes over the months ahead will be absolutely critical. One to monitor. Moreover, Qi’s Optimise Trade Selection functionality gives clients the ability to identify which markets are most sensitive to Chinese or US GDP going forward.

Macro model confidence is typically high & most valuations are close to fair value.

Steel company Nucor appears to have discounted some of the good macro news already. Otherwise the models that are modestly rich to model are at the sector level (Materials XLB & Industrials XLI) or specialist infrastructure ETFs – PAVE & IGF.

Single stocks are, relatively speaking, modestly lagging the potential Biden uplift. Commercial vehicles company Cummins which is working on electric buses is the book-end at 3.4% cheap to macro.

Each stock-picker will have their preferred play. Qi clients can run their own picks versus the prevailing macro regime to see where the bottom-up & top-down views align.