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Macro Markets 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.
31.10.2023
What's going on with the Euro?
Recent data has only added to the narrative that contrasts a resilient US economy with the fragility of the Euro Zone.

As a result of weak growth and sizeable falls in inflation, markets now price the first ECB rate cut in April next year. In the US the first rate cut isn't priced until July.

The typical investment conclusion is that combination points to lower European equities, bond yields and single currency.

Indeed, the latest CFTC snapshot shows spec's net long position in the Euro has more than halved in the last two months.
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Brendan Church Pkef6Tt3C08 Unsplash
26.10.2023
Equities need a regime change?
Equity bulls need the “generals” to hold in. The Magnificent 7 are responsible for 2023’s performance. Given poor breadth, if they roll over now there’s a very real risk of a deeper correction.

Aside from the idea of AI as a genuine game changer, the obvious argument for the Magnificent Seven to retain a bid is their role as a comparative safe haven. Typically, they have strong balance sheets and wide moats in Buffett speak.

Qi can measure each of these seven stocks’ sensitivity to VIX as a way to see if there’s a regime change going on.
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David Moum Nbqlwhovu6K Unsplash
17.10.2023
2024 credit cliff - where is the most pain?
The credit market remains the dog that refuses to bark.

Anecdotal evidence - credit surveys, bankruptcies, delinquencies - continues to point to a slow moving credit crunch. But credit spreads remain well behaved on any long term historical basis. 

That doesn't negate the need to prepare for the lagged effects of Central Bank policy tightening to finally impact at some point.
See more
Felix Mittermeier L4 16Dmz 1C Unsplash
10.10.2023
Insurers - where company & macro fundamentals meet?
Banks kick start the Q3 reporting season this week but arguably it is the non-banks part of the Financials sector that is most interesting right now.

Insurers in particular stand out. Aside from their traditional defensive properties, history shows they are often one of the better performing sectors after the final Fed rate hike.

That might explain the FactSet chart below showing earnings projections for the Financials sector broken down by industry. If analysts expectations are right, insurers are the strongest group by some margin with YoY earnings growth of 64%.
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05.10.2023
Qi Credit Impulse
There are several Financial Conditions Indices out there already – Chicago Fed, Bloomberg, GS, MS etc. All have slightly different methodologies* but essentially capture the same thing: are overall credit conditions getting tighter or looser?

A negative (positive) number on our credit impulse means the change in credit conditions is becoming a drag (tailwind) to economic growth & risky assets.
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Orion Nebula 11107 1920
04.10.2023
What breaks next?
The back-up in bond yields is reaching that point where global investors are wondering what breaks next?

History has taught us that moves like these often end with some kind of financial accident.

A short video showcasing how Qi can give multi-asset investors a ready reckoner; a quick way to identify which pockets of the market are potentially most at risk.
See more
Daoudi Aissa Pe1Ol9Olc4O Unsplash
26.09.2023
Kryptonite!
Q4 is just four trading days away. What will be the key theme? Santa Claus rally or recession?

For some, it's stagflation rather than recession that is the biggest fear. And Europe is probably the poster child for that risk scenario currently.

Which makes the current picture from Qi's investment clock somewhat concerning.

The chart below is from Apollo. It captures Bloomberg consensus forecasts for economists' growth and inflation projections for Europe. The message is clear - stagflation with falling economic growth but sticky inflation.
See more
19.09.2023
Equity investors - you're watching
the wrong part of the bond market
Last year, macro tourists looked at the bond market and latched onto the inverted yield curve and its role as a lead indicator for recessions.

More recently the headlines have followed the back up in bond yields.

Both can be important, but they are not the critical indicator for equities right now. Interest rate volatility is the one to watch.

There's lots of focus on the depressed levels of VIX currently. Understandable, some of the stats are striking.
See more
Hs 2009 25 Hubble
12.09.2023
Credit > Inflation. Regime shift for US equities?
In some quarters there are arguments that the inflation debate is losing significance. The bigger macro theme is the unfolding tightening of credit conditions.

That is partly right. The slow motion credit crunch is indeed critical but it is premature to argue inflation's importance has dwindled in any way.

Qi's macro factor sensitivity data can provide a real-time demonstration of what matters most. Inflation and credit are both critical, and it is Technology that is most reliant on a Goldilocks mix of reflation plus easy credit.
See more
Oil Markets
04.09.2023
Crude oil at 10mth highs
- what does it mean for you?
Crude's rally is starting to attract attention. Most equity analysis immediately focuses on XLE, but how are managers supposed to marry a macro story like energy with their fundamental stock picks?

Different parts of the equity market have very different relationships with crude oil. It is essential these are understood.

The chart below takes a look across global equity indices in developed and emerging markets and maps sensitivity to WTI. The y-axis shows the percentage gain/loss in each equity market for a one standard deviation shift in WTI in isolation.
See more
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31.10.2023
What's going on with the Euro?
Recent data has only added to the narrative that contrasts a resilient US economy with the fragility of the Euro Zone.

As a result of weak growth and sizeable falls in inflation, markets now price the first ECB rate cut in April next year. In the US the first rate cut isn't priced until July.

The typical investment conclusion is that combination points to lower European equities, bond yields and single currency.

Indeed, the latest CFTC snapshot shows spec's net long position in the Euro has more than halved in the last two months.
See more
Image 6
But the Euro has quietly rallied almost 2% in October. That would appear to contradict the narrative about comparatively weak European growth. It's also taken place against a backdrop of US nominal yields moving higher than their European equivalent.

So what is driving things?

When we look at Qi model value for EURUSD we can see it bottomed at 1.0463 on Oct 19th and has subsequently bounced almost two big figures.
Eurusd2
The biggest driver of that move?

Partly that the initial "risk off" move - credit spreads and China stress - hasn't gotten any worse. But the main push behind macro model value has come from relative inflation expectations.
Eurusd3
The chart below shows the difference in European and US 5y inflation expectations in z-score terms. EU inflation expectations are now almost 2 standard deviations below trend versus their US equivalent.

The market is starting to price a hard landing in Europe.
Eurusd
Now at some point that disinflationary scenario will probably become a headwind for the Euro. Similarly a renewed surge in US nominal yields or credit spreads legging wider both have the power to shift macro momentum once again.


But the recent pattern suggests real yields have mattered more and are currently favouring higher EURUSD.

There is no valuation edge - spot is trading in line with macro conditions - but a good example of how important it is to understand exactly what it is driving markets.
David Moum Nbqlwhovu6K Unsplash
17.10.2023
2024 credit cliff - where is the most pain?
The credit market remains the dog that refuses to bark.

Anecdotal evidence - credit surveys, bankruptcies, delinquencies - continues to point to a slow moving credit crunch. But credit spreads remain well behaved on any long term historical basis. 

That doesn't negate the need to prepare for the lagged effects of Central Bank policy tightening to finally impact at some point.
See more
This chart from Apollo looks at the maturity profile of different US equity sectors across both Investment Grade and High Yield credit.

There are several useful observations to be drawn but, regardless of credit quality, Transport and Real Estate stand out as two of the more vulnerable sectors; Telecommunications and Energy emerge as ones that are comparatively immune from any "refinancing cliff".
Img 1173
Qi's unique factor sensitivities can augment this kind of analysis to help complete equity risk managers' stress tests.

Every US equity sector model on Qi includes US High Yield spreads as a driver. In traditional risk jargon, US HY is a descriptor within the US equity model.

More specifically, we measure the percentage impact on any ETF for a one standard deviation shock higher in CDX US High Yield spreads.

Given Apollo's findings we zoom in on four sectors - Transport, Real Estate, Telecommunications, Energy - and chart their historical sensitivity to HY credit.
Us Sectors Hy Spds
The clear standout is Transport. Holding every other factor (descriptor) unchanged, a one standard deviation widening in US HY equates to a 0.8% fall in IYT.

It is by far the most sensitive sector. So, not only is it a sector that faces a relatively large refinancing cliff in 2024; it is also one that is highly sensitive to shifts in credit spreads.

We would finish by adding that US HY is the biggest single negative driver for Qi; and credit at the bucket level (i.e. adding in European and Japanese credit spreads as drivers / descriptors into the model as well) is the biggest in our model. Credit spreads account for almost a quarter of model explanatory power alone.
Iyt
Real Estate screens as the second most vulnerable. A one standard deviation shock wider in US HY spreads, holding every other macro factor constant, is consistent with a 0.5% fall in IYR on current patterns.

Again credit dominates the current macro regime, both as a bucket and with High Yield as the biggest single negative driver.

Of the two "safe" plays, Energy XLE is noticeable for its comparative indifference to credit spreads. A useful property if you fear credit crunch fears escalate.

Telecommunications IYZ may not face any supply concerns in terms of issuance. And sensitivity is small, but it is starting to pick up.

These sensitivities can be run across any macro factor which you deem the most likely theme for the months ahead. Thereby empowering risk and portfolio managers to get a better handle on tail risk scenarios they wish to stress test.
Felix Mittermeier L4 16Dmz 1C Unsplash
10.10.2023
Insurers - where company & macro fundamentals meet?
Banks kick start the Q3 reporting season this week but arguably it is the non-banks part of the Financials sector that is most interesting right now.

Insurers in particular stand out. Aside from their traditional defensive properties, history shows they are often one of the better performing sectors after the final Fed rate hike.

That might explain the FactSet chart below showing earnings projections for the Financials sector broken down by industry. If analysts expectations are right, insurers are the strongest group by some margin with YoY earnings growth of 64%.
See more
File 1
So the bottom-up view looks constructive, what's the macro picture for insurers?

At the industry level, Qi models IAK - the iShares ETF that tracks the Dow Jones US Select Insurance Index.

What stands out in terms of the macro regime, are insurer's defensive properties:
  • rising interest rate volatility is actually a benefit for the industry
  • sensitivity to credit spreads is negative but very small. Relative to its peers, IAK is comparatively immune to wider credit spreads
  • a stronger Dollar is a tailwind, not a headwind
Focusing on rate volatility given it's importance in this recent re-pricing of the bond market, the chart below shows how IAK is comfortable with rising rate volatility.

That stands in sharp contrast to some others, notably Technology with market leaders like XLK and XLC increasingly vulnerable to our Fed QT Expectations factor.
Iak
It's a similar picture when we screen for sensitivity to credit spreads. IAK's defensive traits are clear to see.
Iak2
The net result of that is that overall macro-warranted fair value has actually moved up during this recent period of equity stress.

The indexed chart below shows Qi model value for IAK versus the broader Financials sector XLF, Technology XLK and Communication Services XLC over the last year.

Financials and insurers took longer to recovery after SVB etc and missed out on the AI-driven rally in Tech over Q2/Q3.

But during the most recent equity market wobble, IAK has seen macro conditions grind higher.
Image 1
There is no strong valuation edge. Qi's model shows IAK at macro fair value. For now, the bigger focus is rising macro momentum.

But an example of how 2 minutes spent on the Qi platform gives bottom-up investors a chance to head into earnings season better prepped.

There's no replacing fundamental analysis, but its equally important to get a quick sanity check on macro dynamics.
Orion Nebula 11107 1920
04.10.2023
What breaks next?
The back-up in bond yields is reaching that point where global investors are wondering what breaks next?

History has taught us that moves like these often end with some kind of financial accident.

A short video showcasing how Qi can give multi-asset investors a ready reckoner; a quick way to identify which pockets of the market are potentially most at risk.
See more
The spike in bond yields in Q1 culminated with the mini banking crisis and SVB / Signature / Credit Suisse hitting the headlines.

That leaves investors nervously watching for where the next pocket of stress will emerge.
  • for many, Commercial Real Estate - USRT or single names like Boston Properties - is the obvious weak link in the chain.
  • if CRE goes, how does leave that bank's balance sheets? Are US - KRE, KBE - or European banks - SX7E Future - more exposed?
  • what about private equity BIZD - is that a hidden corner of potential deleveraging?
  • everyone is aware how locking in low rates has, to a fair degree, insulated the credit market but what about corners of the credit market like leveraged loans BKLN?
Whatbreaks
The 2 minute video above shows how a Watchlist can be created with your curated list of assets that you deem the best proxies for financial stress.

And how that list provides a quick and easy way to eyeball where:

1.) macro conditions are important
2.) which assets are already pricing in bad news
3.) which assets are potentially complacent and therefore vulnerable?

Speak to your Qi sales contact to get the "What breaks next?" Watchlist and/or learn how to customise your own.
Daoudi Aissa Pe1Ol9Olc4O Unsplash
26.09.2023
Kryptonite!
Q4 is just four trading days away. What will be the key theme? Santa Claus rally or recession?

For some, it's stagflation rather than recession that is the biggest fear. And Europe is probably the poster child for that risk scenario currently.

Which makes the current picture from Qi's investment clock somewhat concerning.

The chart below is from Apollo. It captures Bloomberg consensus forecasts for economists' growth and inflation projections for Europe. The message is clear - stagflation with falling economic growth but sticky inflation.
See more
Img 1159 1
That combination is all the more concerning when viewed in conjunction with the Qi investment clock which follows industry convention with one important difference. It divides assets (here global equity indices) into quadrants with each quadrant capturing a macro regime. The regimes are industry standard and follow the typical business cycle - boom, recession, Goldilocks, stagflation.

Economic growth and inflation are the two variables that dictate which regime / quadrant any equity index lies in. But the key difference is how that is measured.

Traditional investment clocks rely on the discretionary view of the asset allocator. That is probably influenced by factors such as history (behaviour during previous cycles) or fundamentals (during an energy-led inflation shock, for example, is the country a net oil exporter or importer). Such analysis is subjective and relies on history perfectly repeating itself.

Qi's proprietary version of PCA means we capture the independent pattern of association between an equity index and economic growth (Now-Casting tracking GDP) and inflation expectations (inflation swaps). Country indices are allocated a regime on the investment clock by maths not opinion.
Kryptonite2
The first standout from the chart above is how NASDAQ is in a boom regime. But while the sensitivities are smaller, what is equally striking is the confluence of European equity indices in the Goldilocks quadrant.

The Euro Stoxx 600,DAX , CAC, IBEX, FTSE MIB are all in that top left quadrant.

Again it is worth stressing the sensitivities are modest: close to zero for economic growth, while the relationship with inflation is a small negative.

But the basic point remains - if the Bloomberg consensus above is correct, this is the worst possible combination for European equities.

Is there any respite? This view focuses on just two factors - economic growth and inflation expectations. What about the rest of the macro complex?

We've observed that growth is not a major driver currently. Inflation is a top driver for these models - European equity indices need inflation to conform to target.

And that speaks to the other key drivers in the current macro regimes. Rate volatility, credit spreads and risk aversion typically screen as the three biggest factors currently. European equities need well behaved inflation, because they need the Kool-Aid of easy money from the ECB.
Kryptonite3
The pie chart above simply shows the relative importance of all the macro factors in our DAX model. A quick way to ascertain which macro factors are driving the current regime.

And it does offer some potential relief if you believe in an ECB pivot. Put another way, investors need to have high confidence that we don't see a policy mistake from the ECB that engineers a sharp tightening in financial conditions and subsequent hit to risk appetite.

The textbook Central Bank policy response to stagflation entails higher-for-longer rates and an acceptance of weaker growth while we wait for inflation to subside. For many equity investors, that will read like the definition of a policy mistake.

And sadly it is particularly dangerous combination for the region which, if the economists are right, seems most likely to experience it.
19.09.2023
Equity investors - you're watching
the wrong part of the bond market
Last year, macro tourists looked at the bond market and latched onto the inverted yield curve and its role as a lead indicator for recessions.

More recently the headlines have followed the back up in bond yields.

Both can be important, but they are not the critical indicator for equities right now. Interest rate volatility is the one to watch.

There's lots of focus on the depressed levels of VIX currently. Understandable, some of the stats are striking.
See more
  • last Thursday VIX closed at 12.8, a new low in the post-Pandemic era
  • in fact, VIX has only closed < 13 on 75 occasions over the last 5years
  • VIX has now spent over 125 days trading below the 200 day Moving Average
  • its been over 120 trading days since VIX posted consecutive closes over the 20 level - the longest such streak since 2017
Less well publicised is that the most popular indicator of interest rate volatility - the MOVE index - closed at its lowest level since Mar 2022 on Friday.
Cb Qt Expecs
Qi employs swaption (instead of US Treasury) volatility but they capture the same story. Higher volatility in the rates market tends to be associated with periods of stress. Obvious culprits in recent years have been monetary policy fears - the 2013 Taper Tantrum, the 2022 inflation fight.

Traditionally, higher rate vol is a headwind for risky assets like equities. So the chart above showing the collapse in rate vol in z-score terms in the US, Europe and UK is good news.

Why should equity investors care about this relatively obscure part of capital markets? Because Qi's models show that falling rate volatility is critical right now.

More important, in fact, than the level of bond yields. The chart below shows the percentage shift in the S&P500 for a one standard deviation shock higher in both 10y US real yields and US rate vol. Remember every other macro factor is held constant each time to show the true, independent impact of each factor shift on SPX.
Ylds Vs Vol
Real yields were the story in 2022. As the Fed abandoned transitory and embarked on an aggressive rate hike campaign, real yields became the main transmission channel by which policy tightening impacted the equity market.

At its peak, a one standard deviation rise in real yields equated to a 1% fall in the S&P500. Today sensitivity is close to zero.

Meanwhile in 2023 the story has been the rising importance of interest rate vol which Qi labels 'FED QT Expectations'. It has moved in the opposite direction. S&P500 sensitivity was effectively zero over H2 2022, but factor leadership has changed and it has become a highly prominent driver.
Spx Attribution
That can also be seen in the attribution chart above. Other bond market signals like the level of real yields or shape of the yield curve have had little effect on S&P500 model value over the last month.

Instead low rate vol, tight credit spreads and the rally in crude oil have been instrumental in moving macro-warranted model value for the S&P500 up 5.24% over the last month.
Spx
That improvement in macro conditions has not been mirrored by the market. Hence the S&P500 now screens as over one standard deviation cheap on our metrics.

The case for lagged policy effects and a recession haven't gone away. Indeed, there are mounting signs that economists are capitulating on recession forecasts just as deeper cracks open up.

It is still all about Goldilocks or Bust. For now, Goldilocks still has the edge but beware a shift in volatility from the interest rate market.
Hs 2009 25 Hubble
12.09.2023
Credit > Inflation. Regime shift for US equities?
In some quarters there are arguments that the inflation debate is losing significance. The bigger macro theme is the unfolding tightening of credit conditions.

That is partly right. The slow motion credit crunch is indeed critical but it is premature to argue inflation's importance has dwindled in any way.

Qi's macro factor sensitivity data can provide a real-time demonstration of what matters most. Inflation and credit are both critical, and it is Technology that is most reliant on a Goldilocks mix of reflation plus easy credit.
See more
When a blue chip commentator like Yardeni Research ponders whether the recent New York Fed survey of consumers carries an important message, it is worth taking note.

They noted that inflation expectations are subdued but fears about the availability of credit continue to move higher. The conclusion might therefore be the inflation debate is losing traction; the bigger risk for financial markets are credit conditions.
Img 1139
To a degree this is backed up by FactSet's observation that inflation is becoming less frequently mentioned in earnings calls. They note that 296 companies cited "inflation" during Q2 earnings calls - the fourth consecutive quarterly decline and the lowest number of mentions since Q2 2021.

This is where Qi's factor sensitivities come into their own. We capture the independent relationships between asset prices and a host of macro factors. By tracking these historical patterns we can observe how key macro drivers ebb and flow in terms of importance. In effect, how macro regimes shift.

Below we take the eleven S&P500 GICS Level 1 sectors and their relationship with US inflation expectations.
Newplot
The clear standout is US Technology. All three tech sectors (Tech itself XLK, Communication Services XLC and Consumer Discretionary XLY) have seen strong increases in their sensitivity to inflation, and sensitivity now sits near recent highs. Sectors with a more value and cyclical bias are comparatively insensitive.

So, while respecting the commentary from CFOs during the most recent earnings season, on our metrics it is too early for investors to think inflation no longer matters. Tech, the clear of US equity markets, is reliant on reflation.

Yes, strong inflation that induces policy tightening is a negative for risky assets; but it's the policy reaction equities fear, not reflation itself. Put another way, deflation is a bigger evil.
Newplot 1
We then repeat the exercise looking at sensitivity to corporate credit spreads and the same pattern is repeated. It is tech (XLK, XLC, XLY) that screens as the most reliant on credit spreads remaining tight. The other sectors also want a well behaved credit market; it is just that sensitivities are notably less.
Newplot 2
The clear pattern therefore is that Technology is beholden to Goldilocks. It is most reliant on rising inflation expectations (sensitivity is at it's highest levels since the pandemic) and tight credit spreads (sensitivity is at the wide end of the ranges).

Goldilocks or bust.
Oil Markets
04.09.2023
Crude oil at 10mth highs
- what does it mean for you?
Crude's rally is starting to attract attention. Most equity analysis immediately focuses on XLE, but how are managers supposed to marry a macro story like energy with their fundamental stock picks?

Different parts of the equity market have very different relationships with crude oil. It is essential these are understood.

The chart below takes a look across global equity indices in developed and emerging markets and maps sensitivity to WTI. The y-axis shows the percentage gain/loss in each equity market for a one standard deviation shift in WTI in isolation.
See more
There is a clear geographical split with the Americas the clear beneficiary of higher oil prices. NASDAQ, S&P500 and Brazil's IBOV have all seen sensitivity to crude rise sharply. To a lesser extent TOPIX also benefits.
Wti
Some may query those results, especially Japan as a net oil importer. For now, we think this reflects oil's role as a proxy for risk appetite. Some of the gains in crude come from tight supply conditions; but, from the demand side, there are growing hopes global growth will achieve a soft landing.

But if current patterns show US equities enjoying a Goldilocks relationship with energy markets, the same cannot be said for Europe or China. Neither the DAX or CAC enjoy the same positive sensitivity.

The Shanghai Composite, where macro explains 75% of price action, has recently seen sensitivity flip into negative territory - higher oil is threatening to become a drag.

Moving away from indices to single names, stock pickers can use Qi's Optimise Trade Selection function to screen their holdings for sensitivity to crude oil.

Below we show the results from screening across the S&P500 to find the winners and losers from this energy move.
Wtiusstockben
The beneficiaries include a bias to consumer cyclical names - Tesla, Amazon, Carnival, Live Nation.

Carnival stands out. It enjoys a 3.1% gain when crude rallies by one standard deviation. And it screens as cheap to aggregate macro conditions.

Once again, the current pattern is Goldilocks - higher oil is not (yet) a tax on consumption, rather a sign of healthy risk appetite.

The five most vulnerable US stocks are a more eclectic mix. Unlike the retailers cited above, ETSY and Estee Lauder don't enjoy the same positive relationship with energy markets.
Wtiusstockssuffer
Economic orthodoxy states rising crude oil acts as a tax on consumers and businesses. But US exceptionalism means that, for some at least, bad news can be seen as good news. Put another way, crude has yet to rise to that trigger point where it becomes a drag and, for now, Goldilocks trumps Bust.

The equivalent search across Euro Stoxx 600 stocks flips the script back to more conventional results and again highlights how, in Europe, bad news is bad news.

German power generator Uniper screens as the biggest beneficiary from rising crude oil; and it is slightly cheap to macro conditions.

Meanwhile fashion retailer Zalando stands out as amongst the companies that suffers from higher oil and is slightly rich to Qi model fair value.

Measure your own holdings to get visibility on whether your portfolio see's bad news as a headwind or a tailwind.
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