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14.03.2024
Qi MacroVantage
#1 European equities - momentum waning?
#2 AUDJPY - an efficient hawkish BoJ play
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights
#4 Software > Semiconductors
#5 Long Brazil - IBOV
#6 Long Brazil - Real
#2 AUDJPY - an efficient hawkish BoJ play
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights
#4 Software > Semiconductors
#5 Long Brazil - IBOV
#6 Long Brazil - Real
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06.03.2024
Qi Market Pulse - Vol Check
Qi is capturing some clues suggesting equity markets could be on the cusp of a potential regime shift. Is complacency about to give way to risk aversion?
Clue 1: Qi’s Vol Indicator has jumped 20 points higher in the last month. 2023 was a tricky year for this alternative fear gauge but, over history, it has provided an early flag for several big "risk off" moves.
Clue 2: The acceleration in S&P 500 Qi sensitivity to risk aversion rose to multi-year highs into mid-February, as VIX descended below 13. This augurs caution.
Clue 3: Subsequently the S&P500 Qi sensitivity to risk aversion turned positive at the start of March. Again, this augurs caution.
Premium content, for a full analysis sign up to a month of insightsClue 1: Qi’s Vol Indicator has jumped 20 points higher in the last month. 2023 was a tricky year for this alternative fear gauge but, over history, it has provided an early flag for several big "risk off" moves.
Clue 2: The acceleration in S&P 500 Qi sensitivity to risk aversion rose to multi-year highs into mid-February, as VIX descended below 13. This augurs caution.
Clue 3: Subsequently the S&P500 Qi sensitivity to risk aversion turned positive at the start of March. Again, this augurs caution.
05.03.2024
Qi Market Pulse: Value in Value?
Despite US bond yields moving higher ytd, the S&P500 is making fresh highs – The Qi sensitivity of the S&P500 to financial conditions is tentatively fading, as consensus GDP forecasts have marched higher.
The strongest major index globally is not the Nasdaq, but the Nikkei 225 with Europe’s performance almost on par with the US. In the last month, the CSI 300 has rallied almost 10%. IF this is a sign of a better global growth backdrop, will broadening market breadth come with a Value tilt?
Where does Qi find a Value tilt? Despite the S&P500 at new highs, cyclicals relative to defensives are not screening as macro-rich in this backdrop. At the sector level, Healthcare, Utilities and Staples all trades as rich to macro warranted fair value. However, Banks and Energy trade at a discount.
Value vs. Growth itself is trading at a particularly large discount: Value trades 2 standard deviations cheap to Growth within the S&P500.
At the global level, the Nikkei and Euro Stoxx 50 are now trading rich to their Qi model fair value, but model price momentum has been strong. It is Brazil’s Ibovespa which screens as the cheapest index globally today.
The strongest major index globally is not the Nasdaq, but the Nikkei 225 with Europe’s performance almost on par with the US. In the last month, the CSI 300 has rallied almost 10%. IF this is a sign of a better global growth backdrop, will broadening market breadth come with a Value tilt?
Where does Qi find a Value tilt? Despite the S&P500 at new highs, cyclicals relative to defensives are not screening as macro-rich in this backdrop. At the sector level, Healthcare, Utilities and Staples all trades as rich to macro warranted fair value. However, Banks and Energy trade at a discount.
Value vs. Growth itself is trading at a particularly large discount: Value trades 2 standard deviations cheap to Growth within the S&P500.
At the global level, the Nikkei and Euro Stoxx 50 are now trading rich to their Qi model fair value, but model price momentum has been strong. It is Brazil’s Ibovespa which screens as the cheapest index globally today.
See more
20.02.2024
Qi Stock Spotlight: Is the porridge too hot? Screening Inflation Sensitivities
Following the hotter than expected January CPI report and the cyclical upturn we have seen in global manufacturing (global PMI back at 50), are we reaching an inflection point in the disinflation narrative?
If we are in a market regime where there will remain a structural concern on inflation, the positive correlation between equities and bond prices will be hard to shake off.
Using Qi’s analytics, relative beneficiaries from inflation re-acceleration are dominated by Energy; relative losers are dominated by Financials and Real Estate.
Screening with Qi, the relative performance of the 20 biggest inflation winners vs. 20 biggest losers peaked in Oct-23, and have since underperformed by 27%. The former group also stands at an average Qi fair value gap of -0.7 sigma. The latter at +0.6 sigma.
If we are in a market regime where there will remain a structural concern on inflation, the positive correlation between equities and bond prices will be hard to shake off.
Using Qi’s analytics, relative beneficiaries from inflation re-acceleration are dominated by Energy; relative losers are dominated by Financials and Real Estate.
Screening with Qi, the relative performance of the 20 biggest inflation winners vs. 20 biggest losers peaked in Oct-23, and have since underperformed by 27%. The former group also stands at an average Qi fair value gap of -0.7 sigma. The latter at +0.6 sigma.
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13.02.2024
Qi Market Spotlight: Look Up!
Be fearful when others are greedy? The S&P 500 has posted the best 3mth risk adjusted returns since the tech bubble
Through the Qi lens there are signs that crowded trades are increasingly vulnerable
The S&P 500 sensitivity to risk appetite is becoming extended - questioning whether prevailing market momentum can be sustained
The S&P 500 screens rich to US Treasuries while bond vol is also screening macro-cheap
Styles synonymous with the current Goldilocks narrative, Momentum & Growth, are trading macro-rich also. By definition, Momentum performance reflects the returns of the most popular trades. When momentum is extended, it would deem views are crowded
Through the Qi lens there are signs that crowded trades are increasingly vulnerable
The S&P 500 sensitivity to risk appetite is becoming extended - questioning whether prevailing market momentum can be sustained
The S&P 500 screens rich to US Treasuries while bond vol is also screening macro-cheap
Styles synonymous with the current Goldilocks narrative, Momentum & Growth, are trading macro-rich also. By definition, Momentum performance reflects the returns of the most popular trades. When momentum is extended, it would deem views are crowded
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06.02.2024
Qi Market Spotlight: Are risky assets calling Powell's bluff?
The S&P500 Qi sensitivity to financial conditions remains high. However, equities appear to be calling Powell’s bluff, believing the path to cuts is merely delayed and real yields will have to decline substantially.
Financial conditions are still the top driver of US stocks. Qi says good news is not yet deemed good news given the “higher for longer” risks from a “no landing” scenario. After a ~20% equity rally from the October lows, views are more crowded and valuations higher.
Sectors most sensitive to looser financial conditions: Autos, Consumer Durables & Apparel, Biotech, Banks, Real Estate, Financial Services and Semiconductors.
Among these, Autos, Financial Services, Biotech and Consumer Services are also trading rich to Qi’s macro-warranted model value; we highlight an equity basket already pricing in lower real yields.
While banks are sensitive to financial conditions, after the NYCB news, KRE is now trading ~1 standard deviation cheap to Qi model value - 6th percentile since 2009.
Download the PDF for the full article
Premium content, for a full analysis sign up to a month of insightsFinancial conditions are still the top driver of US stocks. Qi says good news is not yet deemed good news given the “higher for longer” risks from a “no landing” scenario. After a ~20% equity rally from the October lows, views are more crowded and valuations higher.
Sectors most sensitive to looser financial conditions: Autos, Consumer Durables & Apparel, Biotech, Banks, Real Estate, Financial Services and Semiconductors.
Among these, Autos, Financial Services, Biotech and Consumer Services are also trading rich to Qi’s macro-warranted model value; we highlight an equity basket already pricing in lower real yields.
While banks are sensitive to financial conditions, after the NYCB news, KRE is now trading ~1 standard deviation cheap to Qi model value - 6th percentile since 2009.
Download the PDF for the full article
25.01.2024
Qi Sector Spotlight: US Materials - Hunting for Value
The investment case for China rests on the view that policy makers have hit the panic button coupled with an anemic foreign investor allocation to the region.
Qi’s macro-warranted valuation signal on FXI was supportive of a tradeable bounce: Into the RRR cut news, Qi’s FVG rose above -1 sigma (i.e. 1 sigma below its macro warranted fair value according to Qi’s model). Consider the chart below – over the last 2yrs, risk/reward has been to fade when FXI hits +1 sigma but to consider adding risk when rising through -1 sigma. The chart plots Qi’s FVG against the FXI spot price.
Download the PDF for the full article
Qi’s macro-warranted valuation signal on FXI was supportive of a tradeable bounce: Into the RRR cut news, Qi’s FVG rose above -1 sigma (i.e. 1 sigma below its macro warranted fair value according to Qi’s model). Consider the chart below – over the last 2yrs, risk/reward has been to fade when FXI hits +1 sigma but to consider adding risk when rising through -1 sigma. The chart plots Qi’s FVG against the FXI spot price.
Download the PDF for the full article
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25.01.2024
Qi scenario spotlight - what happens to stocks if the Fed taper QT?
The market remains fixated on the debate surrounding Fed rate cuts - is the first cut as soon as March? Will there be three or five reductions in 2024?
But interest rates are only one weapon in the Fed's monetary policy toolbox.
Quantitative Tightening is their other big weapon to restrict demand and fight inflation. And recent comments in the FOMC Minutes & from various Fed Governors have floated the idea that the Fed's stance on QT could soon shift.
Premium content, for a full analysis sign up to a month of insightsBut interest rates are only one weapon in the Fed's monetary policy toolbox.
Quantitative Tightening is their other big weapon to restrict demand and fight inflation. And recent comments in the FOMC Minutes & from various Fed Governors have floated the idea that the Fed's stance on QT could soon shift.
19.01.2024
Qi Stock Spotlight - The Disconnect
between China Risk & DM equities
between China Risk & DM equities
* Qi analysis reveals a stark disconnect between China sentiment and DM risky assets.
* Qi has screened European & US stocks most sensitive to China growth expectations. On both sides of the Pond, these stocks have propelled higher since late Autumn, diverging from Chinese equities which have fallen to 5yr lows.
* Why? Clearly domestic growth relative to domestic financial conditions have mattered more. This is another example of how well DM equities have priced the soft landing narrative – there is little margin for error.
* Qi has created a China exposure basket, designed to track China growth expectations as proxied through USDCNY, out-of-sample.
* An opportunity to be Long FXI / Short Qi’s China exposure basket? Qi shows the current divergence is an opportune entry point if you believe the risk of inflation accelerating is higher than the market is pricing.
* Qi has screened European & US stocks most sensitive to China growth expectations. On both sides of the Pond, these stocks have propelled higher since late Autumn, diverging from Chinese equities which have fallen to 5yr lows.
* Why? Clearly domestic growth relative to domestic financial conditions have mattered more. This is another example of how well DM equities have priced the soft landing narrative – there is little margin for error.
* Qi has created a China exposure basket, designed to track China growth expectations as proxied through USDCNY, out-of-sample.
* An opportunity to be Long FXI / Short Qi’s China exposure basket? Qi shows the current divergence is an opportune entry point if you believe the risk of inflation accelerating is higher than the market is pricing.
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11.01.2024
Qi Stock Spotlight -
Will Q4 earnings season support animal spirits?
Will Q4 earnings season support animal spirits?
Qi’s models suggest a Q4 earnings season that is more likely to penalise misses than reward beats
No surprise that the overwhelming majority of S&P500 Industry Groups would benefit from a macro backdrop of improving growth expectations alongside disinflation. The most exposed from our screen are Autos, Semis, Biotech, Banks, Consumer Services & Software
However, we show that into this season, the average stock is trading rich to its Qi macro-warranted valuation across the majority of these industry groups
Mapping Qi’s fair value gaps (FVG) vs. exposure to the growth / inflation trade-off, Banks, Transportation and Biotech would seem the most vulnerable on an earnings misstep and Software the least
We apply this framework to make distinctions at the stock level - names that have above average exposure to Goldilocks but are most extended on Qi’s FVG – RF, DFS, PSA, TMO, LUV, CMA, C, CFG; names that have above average exposure but cheapest on Qi’s FVG – UBER, PCAR, PTC, AMAT, FFIV, RHI, INTU, ACN
Premium content, for a full analysis sign up to a month of insightsNo surprise that the overwhelming majority of S&P500 Industry Groups would benefit from a macro backdrop of improving growth expectations alongside disinflation. The most exposed from our screen are Autos, Semis, Biotech, Banks, Consumer Services & Software
However, we show that into this season, the average stock is trading rich to its Qi macro-warranted valuation across the majority of these industry groups
Mapping Qi’s fair value gaps (FVG) vs. exposure to the growth / inflation trade-off, Banks, Transportation and Biotech would seem the most vulnerable on an earnings misstep and Software the least
We apply this framework to make distinctions at the stock level - names that have above average exposure to Goldilocks but are most extended on Qi’s FVG – RF, DFS, PSA, TMO, LUV, CMA, C, CFG; names that have above average exposure but cheapest on Qi’s FVG – UBER, PCAR, PTC, AMAT, FFIV, RHI, INTU, ACN
14.03.2024
Qi MacroVantage
#1 European equities - momentum waning?
#2 AUDJPY - an efficient hawkish BoJ play
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights
#4 Software > Semiconductors
#5 Long Brazil - IBOV
#6 Long Brazil - Real
#2 AUDJPY - an efficient hawkish BoJ play
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights
#4 Software > Semiconductors
#5 Long Brazil - IBOV
#6 Long Brazil - Real
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# 1 European equities - momentum waning?
Looking under the hood of European equity markets we note that Autos are 1.8 sigma rich to Utilities. This RV pair has been a reasonable barometer of risky asset sentiment.
Auto's outperformed in the 2020/21 post Covid rally, and again over the last few months since the Fed's policy pivot. A higher SXAP / SX6P ratio moved in lockstep with rallying Euro Stoxx 600. Until the end of last month.
Looking under the hood of European equity markets we note that Autos are 1.8 sigma rich to Utilities. This RV pair has been a reasonable barometer of risky asset sentiment.
Auto's outperformed in the 2020/21 post Covid rally, and again over the last few months since the Fed's policy pivot. A higher SXAP / SX6P ratio moved in lockstep with rallying Euro Stoxx 600. Until the end of last month.
If the early signs of Utilities outperforming gathers momentum, that could serve as an early warning sign for broader caution.
The chart above shows the high correlation between this RV pair's FVG and spot price relative. The table below shows the historical efficacy of using a +1.5 sigma FVG as a sell signal - an 87.5% hit rate.
The chart above shows the high correlation between this RV pair's FVG and spot price relative. The table below shows the historical efficacy of using a +1.5 sigma FVG as a sell signal - an 87.5% hit rate.
#2 AUDJPY - an efficient hawkish BoJ play
Screening Yen G10 crosses in Qi reveals AUDJPY as the biggest outlier. It's in regime (69% model confidence) and is 0.8 sigma (1.26%) rich to macro-warranted fair value.
History shows the FVG can become very (3 sigma) extended. But, that said, right now it looks the most efficient way to express Yen upside if you believe next week's BoJ produces a hawkish surprise.
Screening Yen G10 crosses in Qi reveals AUDJPY as the biggest outlier. It's in regime (69% model confidence) and is 0.8 sigma (1.26%) rich to macro-warranted fair value.
History shows the FVG can become very (3 sigma) extended. But, that said, right now it looks the most efficient way to express Yen upside if you believe next week's BoJ produces a hawkish surprise.
The AUDJPY fx cross is often viewed as a barometer for broader risk appetite - a high beta China play versus a safe haven asset.
How could lower AUDJPY influence equity markets? One impact could be an end to the Nikkei's spectacular run of outperformance.
How could lower AUDJPY influence equity markets? One impact could be an end to the Nikkei's spectacular run of outperformance.
#3 Qi's L/S equity tracker pricing HY credit spreads back at post-Covid tights
Qi’s out of sample equity tracker for HY credit spreads is back at its 2021 lows.
This basket by construction has a strong defensives vs. cyclicals bias. This has aligned closely with HY credit spreads which can be seen as a good proxy for risky appetite.
With this basket pricing credit spreads at its tights, any vulnerability to the prevailing growth optimism would likely see this basket start to turn.
Qi’s out of sample equity tracker for HY credit spreads is back at its 2021 lows.
This basket by construction has a strong defensives vs. cyclicals bias. This has aligned closely with HY credit spreads which can be seen as a good proxy for risky appetite.
With this basket pricing credit spreads at its tights, any vulnerability to the prevailing growth optimism would likely see this basket start to turn.
#4 Software > Semiconductors
A comparatively protected RV pair trade that speaks to the anti-momentum theme.
IGV, the iShares Expanded Tech Software ETF is 1.9 sigma cheap relative to SOXX, the iShares Semiconductor ETF.
A comparatively protected RV pair trade that speaks to the anti-momentum theme.
IGV, the iShares Expanded Tech Software ETF is 1.9 sigma cheap relative to SOXX, the iShares Semiconductor ETF.
#5 Long Brazil - IBOV
Last week's "Value in Value" insight flagged Brazil's Ibovespa as an efficient Value catch-up play.
Recent history shows a fairly tight relationship between Qi's FVG and the spot price. Conviction levels are aided by decent back test results.
Last week's "Value in Value" insight flagged Brazil's Ibovespa as an efficient Value catch-up play.
Recent history shows a fairly tight relationship between Qi's FVG and the spot price. Conviction levels are aided by decent back test results.
#6 Long Brazil - Real
This week we also note that Qi has USDBRL as 1.4 std dev (2.4%) rich to macro conditions.
The pattern shows more of a "drift" than a sharp divergence. However, it is notable that Qi's macro-warranted model value is threatening to make new lows. A stronger Real would be supportive to Brazilian equities.
This week we also note that Qi has USDBRL as 1.4 std dev (2.4%) rich to macro conditions.
The pattern shows more of a "drift" than a sharp divergence. However, it is notable that Qi's macro-warranted model value is threatening to make new lows. A stronger Real would be supportive to Brazilian equities.
05.03.2024
Qi Market Pulse: Value in Value?
Despite US bond yields moving higher ytd, the S&P500 is making fresh highs – The Qi sensitivity of the S&P500 to financial conditions is tentatively fading, as consensus GDP forecasts have marched higher.
The strongest major index globally is not the Nasdaq, but the Nikkei 225 with Europe’s performance almost on par with the US. In the last month, the CSI 300 has rallied almost 10%. IF this is a sign of a better global growth backdrop, will broadening market breadth come with a Value tilt?
Where does Qi find a Value tilt? Despite the S&P500 at new highs, cyclicals relative to defensives are not screening as macro-rich in this backdrop. At the sector level, Healthcare, Utilities and Staples all trades as rich to macro warranted fair value. However, Banks and Energy trade at a discount.
Value vs. Growth itself is trading at a particularly large discount: Value trades 2 standard deviations cheap to Growth within the S&P500.
At the global level, the Nikkei and Euro Stoxx 50 are now trading rich to their Qi model fair value, but model price momentum has been strong. It is Brazil’s Ibovespa which screens as the cheapest index globally today.
The strongest major index globally is not the Nasdaq, but the Nikkei 225 with Europe’s performance almost on par with the US. In the last month, the CSI 300 has rallied almost 10%. IF this is a sign of a better global growth backdrop, will broadening market breadth come with a Value tilt?
Where does Qi find a Value tilt? Despite the S&P500 at new highs, cyclicals relative to defensives are not screening as macro-rich in this backdrop. At the sector level, Healthcare, Utilities and Staples all trades as rich to macro warranted fair value. However, Banks and Energy trade at a discount.
Value vs. Growth itself is trading at a particularly large discount: Value trades 2 standard deviations cheap to Growth within the S&P500.
At the global level, the Nikkei and Euro Stoxx 50 are now trading rich to their Qi model fair value, but model price momentum has been strong. It is Brazil’s Ibovespa which screens as the cheapest index globally today.
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- A value tilt is emerging at the global index level: Equities have benefited from a backdrop of firm growth – reflected in the fact that as bond yields have moved higher so has the S&P500 ytd. This is true even if we exclude the Mag 7. It is notable that particularly over the last month, global growth optimism has risen. The best global indices over the last month in order are the CSI 300, Nikkei, Euro Stoxx 50, Nasdaq and then S&P500. Below we show the 4wk % change in the Qi model price across the major DM indices – the point is that this is not being led by the Nasdaq.
- S&P500 sensitivity to financial conditions is fading: From Qi’s perspective, model price momentum for the index has remained strong. Secondly, the sensitivity of the S&P500 to financial conditions is tentatively fading, as economic data surprises and consensus GDP forecasts have marched higher. Below, we show the 4wk change in S&P500 financial condition sensitivity i.e. the beta impulse, rolling over during the last month.
- Despite the overall market at highs, there is more value in select cyclicals than defensives: Among the more expensive sectors in the S&P500, relative to their Qi macro-warranted model, are Staples, Utilities and Healthcare. Staples and Utilities have also seen their Qi model value move lower over the last month. See the quadrant chart below where we compare the Qi FVG across the US sectors to model price momentum over the last month.
- Staples, Utilities, Healthcare screen macro-rich, but Energy and Banks screen macro-cheap: Under the hood, Qi is saying that defensive sectors are expensive but there is emerging value in the value-orientated sectors of Energy and Banks. Within Energy, we show the FVG vs. spot price of OIH (Oil Services) below, trading at -1 sigma. Regional banks have been treading water of late relative to the broader market. We have persistently highlighted the regional banks as the MOST SENSITIVE to inflation expectations. Perhaps better to wait for the next CPI release, but if we get calmer prints it is perhaps THE biggest beneficiary
- The Value style itself is trading at a particularly large discount to growth: Perhaps this is not surprising given the excitement and expected earnings growth from AI beneficiaries / tech. However, the Invesco S&P500 Pure Value ETF is trading at -2.1. sigma relative to the Invesco Pure Growth ETF. This discount is particularly large relative to recent history. The point is this, if you believe in better global cyclical news, more breadth beyond the mega-cap techs will more likely be seen in the value space.
- At the global level, where is there value? Brazil: The IBOV screens as 1-sigma cheap to Qi macro-warranted value. While, EWZ vs. EEM screens at -1.4 sigma. Major drivers of the IBOV are higher commodity prices, higher inflation expectations, a stronger dollar and strength in global GDP. Both outright and RV vs. EEM look like interesting entry levels given the relationship between Qi fair value gap and the spot price in recent years.
20.02.2024
Qi Stock Spotlight: Is the porridge too hot? Screening Inflation Sensitivities
Following the hotter than expected January CPI report and the cyclical upturn we have seen in global manufacturing (global PMI back at 50), are we reaching an inflection point in the disinflation narrative?
If we are in a market regime where there will remain a structural concern on inflation, the positive correlation between equities and bond prices will be hard to shake off.
Using Qi’s analytics, relative beneficiaries from inflation re-acceleration are dominated by Energy; relative losers are dominated by Financials and Real Estate.
Screening with Qi, the relative performance of the 20 biggest inflation winners vs. 20 biggest losers peaked in Oct-23, and have since underperformed by 27%. The former group also stands at an average Qi fair value gap of -0.7 sigma. The latter at +0.6 sigma.
If we are in a market regime where there will remain a structural concern on inflation, the positive correlation between equities and bond prices will be hard to shake off.
Using Qi’s analytics, relative beneficiaries from inflation re-acceleration are dominated by Energy; relative losers are dominated by Financials and Real Estate.
Screening with Qi, the relative performance of the 20 biggest inflation winners vs. 20 biggest losers peaked in Oct-23, and have since underperformed by 27%. The former group also stands at an average Qi fair value gap of -0.7 sigma. The latter at +0.6 sigma.
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- Recent data has raised concerns on whether the battle against inflation has truly been won : It is now the second straight month that core and headline CPI has come in hotter than expected. January core services less shelter inflation saw the biggest MoM jump since September 2022; ISM Services Prices Paid has jumped to 64; and the NFIB small business survey on compensation plans remains elevated. When the global manufacturing PMI is back at 50, alongside easing financial conditions, together these portend the possibility that inflation may be finding a base.
- Today, the average S&P500 stock has a negative sensitivity to long term inflation expectations – no surprise, given that the disinflation narrative and financial conditions have been at the heart of the “everything rally" over the last 4mths. Below, we show the SPY Qi sensitivity to US inflation expectations (% change for a 1 standard deviation move higher in the macro driver) – still firmly negative.
- The positive correlation between equities and bonds will be a hard one to shake off . While we have NVDA earnings ahead of us and there is medium term excitement on the productivity gains AI could bring, today Qi suggests we are still in a market regime where there is a structural concern on inflation.
- Qi shows the biggest winners from higher inflation are dominated by Energy; the biggest losers Real Estate, Financials, Utilities. See the first chart below where we compare the sensitivity to inflation expectations to the Qi fair value gap (sigma deviation between spot and model price) for the GICs Level 1 sectors. Aside from noting the relative winners from inflation, we also note that today most sectors are trading macro-rich. The second chart show the Qi FVG for the RV pair XLE vs. XLF, overlaid with the spot price. The XLE / XLF pair is not yet especially cheap but one to keep on the radar. Bear in mind, across the major sectors it is Financials which have seen the largest PE expansion from the October market lows i.e. they have been one of the biggest beneficiaries from the disinflation narrative.
- Extending this to the stock level, the relative performance of the 20 biggest inflation winners vs. 20 biggest losers has been stabilizing over the last month, after a steep correction: We showcase the Qi screen below – identifying those S&P 500 stocks with the largest positive and negative sensitivities to inflation, respectively.
- The chart shows the equal-weighted performance of those names. The winners have underperformed the losers by 27% from their peak. What makes all this more interesting is that inflation winners are 0.6 standard deviations cheap to Qi’s macro model while losers are 0.7 standard deviations expensive. There is an expected edge on both sides if inflation keeps nudging higher.
13.02.2024
Qi Market Spotlight: Look Up!
Be fearful when others are greedy? The S&P 500 has posted the best 3mth risk adjusted returns since the tech bubble
Through the Qi lens there are signs that crowded trades are increasingly vulnerable
The S&P 500 sensitivity to risk appetite is becoming extended - questioning whether prevailing market momentum can be sustained
The S&P 500 screens rich to US Treasuries while bond vol is also screening macro-cheap
Styles synonymous with the current Goldilocks narrative, Momentum & Growth, are trading macro-rich also. By definition, Momentum performance reflects the returns of the most popular trades. When momentum is extended, it would deem views are crowded
Through the Qi lens there are signs that crowded trades are increasingly vulnerable
The S&P 500 sensitivity to risk appetite is becoming extended - questioning whether prevailing market momentum can be sustained
The S&P 500 screens rich to US Treasuries while bond vol is also screening macro-cheap
Styles synonymous with the current Goldilocks narrative, Momentum & Growth, are trading macro-rich also. By definition, Momentum performance reflects the returns of the most popular trades. When momentum is extended, it would deem views are crowded
See more
1/ The sensitivity to risk appetite macro drivers has accelerated sharply - what can go wrong?
Qi identifies an asset’s sensitivities to a large macro driver information set. Broadly, these macro drivers can be bucketed into financial conditions (e.g. credit spreads, real rates, USD TWI), growth expectations (e.g. GDP Nowcast, metals, energy) and risk appetite (e.g. VIX, gold / silver ratio).
Below, we show the 4wk change in those bucket sensitivities for the S&P 500 – we refer to these 4wk changes as the market’s macro beta impulse to these specific drivers. This highlights the focus on financial conditions but what has caught our eye this week is the increasing attention to risk appetite.
Qi identifies an asset’s sensitivities to a large macro driver information set. Broadly, these macro drivers can be bucketed into financial conditions (e.g. credit spreads, real rates, USD TWI), growth expectations (e.g. GDP Nowcast, metals, energy) and risk appetite (e.g. VIX, gold / silver ratio).
Below, we show the 4wk change in those bucket sensitivities for the S&P 500 – we refer to these 4wk changes as the market’s macro beta impulse to these specific drivers. This highlights the focus on financial conditions but what has caught our eye this week is the increasing attention to risk appetite.
The sensitivity to risk appetite has accelerated as VIX has descended below 13. Reliance on low equity volatility rises as the market accelerates. However, as this reaches close to multi-year highs, the premise presumably is that everyone is close to “all in” on the prevailing narrative.
The charts below plots the sensitivity to risk appetite vs. the S&P 500 and to VIX itself (sensitivity inverted on rhs axis). The simple point is that when sensitivity to risk appetite is becoming extended, it questions whether prevailing market momentum can be sustained. Perhaps no surprise, after the best 3mth risk adjusted return since the tech bubble.
The charts below plots the sensitivity to risk appetite vs. the S&P 500 and to VIX itself (sensitivity inverted on rhs axis). The simple point is that when sensitivity to risk appetite is becoming extended, it questions whether prevailing market momentum can be sustained. Perhaps no surprise, after the best 3mth risk adjusted return since the tech bubble.
2/ Equities screening rich to bonds & bond vol screening cheap
Below we show Qi’s model value vs. spot for the SPY ETF relative to the GOVT ETF (iShares US Treasury Bond ETF). The second chart shows the current dislocation in terms of the fair value gap vs. the spot price (+1.2 sigma).
Of late, commentators have noted that the correlations between equities and bond prices have started to wane i.e. growth is deemed strong so the level of rates matters less. However, Qi has picked up on that dislocation, arguing in the short term, the move looks over-extended.
Below we show Qi’s model value vs. spot for the SPY ETF relative to the GOVT ETF (iShares US Treasury Bond ETF). The second chart shows the current dislocation in terms of the fair value gap vs. the spot price (+1.2 sigma).
Of late, commentators have noted that the correlations between equities and bond prices have started to wane i.e. growth is deemed strong so the level of rates matters less. However, Qi has picked up on that dislocation, arguing in the short term, the move looks over-extended.
In contrast, treasury bond vol as proxied by VXTLT is screening below its Qi macro-warranted value (-0.8 sigma):
3/ Styles synonymous with the current Goldilocks narrative, Momentum & Growth, macro rich also
First, consider the VFMO Vanguard US Momentum Factor ETF. The biggest macro driver for Momentum has been financial conditions – a weaker dollar, lower real rates, tighter credit spreads. Below see Qi’s macro model value vs. spot and secondly against the GS Financial conditions index. The third shows the same dislocation but in FVG terms.
First, consider the VFMO Vanguard US Momentum Factor ETF. The biggest macro driver for Momentum has been financial conditions – a weaker dollar, lower real rates, tighter credit spreads. Below see Qi’s macro model value vs. spot and secondly against the GS Financial conditions index. The third shows the same dislocation but in FVG terms.
Secondly, consider similar charts for growth (RPG Invesco Pure US Growth ETF) or long duration plays like Biotech (IBB iShares BioTech). Similar drivers, but the over-extension is concerning.
By definition, Momentum performance reflects the returns of the most popular trades. When momentum is extended, it would deem views are crowded.
By definition, Momentum performance reflects the returns of the most popular trades. When momentum is extended, it would deem views are crowded.
25.01.2024
Qi Sector Spotlight: US Materials - Hunting for Value
The investment case for China rests on the view that policy makers have hit the panic button coupled with an anemic foreign investor allocation to the region.
Qi’s macro-warranted valuation signal on FXI was supportive of a tradeable bounce: Into the RRR cut news, Qi’s FVG rose above -1 sigma (i.e. 1 sigma below its macro warranted fair value according to Qi’s model). Consider the chart below – over the last 2yrs, risk/reward has been to fade when FXI hits +1 sigma but to consider adding risk when rising through -1 sigma. The chart plots Qi’s FVG against the FXI spot price.
Download the PDF for the full article
Qi’s macro-warranted valuation signal on FXI was supportive of a tradeable bounce: Into the RRR cut news, Qi’s FVG rose above -1 sigma (i.e. 1 sigma below its macro warranted fair value according to Qi’s model). Consider the chart below – over the last 2yrs, risk/reward has been to fade when FXI hits +1 sigma but to consider adding risk when rising through -1 sigma. The chart plots Qi’s FVG against the FXI spot price.
Download the PDF for the full article
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19.01.2024
Qi Stock Spotlight - The Disconnect
between China Risk & DM equities
between China Risk & DM equities
* Qi analysis reveals a stark disconnect between China sentiment and DM risky assets.
* Qi has screened European & US stocks most sensitive to China growth expectations. On both sides of the Pond, these stocks have propelled higher since late Autumn, diverging from Chinese equities which have fallen to 5yr lows.
* Why? Clearly domestic growth relative to domestic financial conditions have mattered more. This is another example of how well DM equities have priced the soft landing narrative – there is little margin for error.
* Qi has created a China exposure basket, designed to track China growth expectations as proxied through USDCNY, out-of-sample.
* An opportunity to be Long FXI / Short Qi’s China exposure basket? Qi shows the current divergence is an opportune entry point if you believe the risk of inflation accelerating is higher than the market is pricing.
* Qi has screened European & US stocks most sensitive to China growth expectations. On both sides of the Pond, these stocks have propelled higher since late Autumn, diverging from Chinese equities which have fallen to 5yr lows.
* Why? Clearly domestic growth relative to domestic financial conditions have mattered more. This is another example of how well DM equities have priced the soft landing narrative – there is little margin for error.
* Qi has created a China exposure basket, designed to track China growth expectations as proxied through USDCNY, out-of-sample.
* An opportunity to be Long FXI / Short Qi’s China exposure basket? Qi shows the current divergence is an opportune entry point if you believe the risk of inflation accelerating is higher than the market is pricing.
See more
Chinese equities have been in the red for 3 consecutive years – unprecedented in modern history. Valuation is never enough – decisive and effective policy delivery is needed alongside an exit from deflation. While China deflation may be welcomed by the world, Qi analysis shows a glaring disconnect between China sentiment and DM risky assets.
Qi screened European and US equities most sensitive to China growth expectations. Qi provides macro driver sensitivity exposure, for a large factor information set, across the global single stock universe. We use this data to identify names most exposed to China. This is defined as the sensitivity to China GDP (+ve), Copper (+ve), Iron Ore (+ve), China 5y CDS (-ve), USDCNY (-ve) and VXEEM (-ve).
The performance of the 30 most exposed relative to the 30 least exposed in both regions is shown below. Note this is based on the prevailing sensitivities of stocks today – the names are fixed with no rebalancing. At any one time, risky assets are driven by a host of moving macro drivers, making a static screen somewhat naïve (see more details below).
However, the charts below make a simple point – DM equities exposed to China trade rich relative to the underlying Chinese equity market. This should not surprise, given the domestic growth / inflation focus. However, this is another example showcasing the reliance on a soft landing narrative
Qi screened European and US equities most sensitive to China growth expectations. Qi provides macro driver sensitivity exposure, for a large factor information set, across the global single stock universe. We use this data to identify names most exposed to China. This is defined as the sensitivity to China GDP (+ve), Copper (+ve), Iron Ore (+ve), China 5y CDS (-ve), USDCNY (-ve) and VXEEM (-ve).
The performance of the 30 most exposed relative to the 30 least exposed in both regions is shown below. Note this is based on the prevailing sensitivities of stocks today – the names are fixed with no rebalancing. At any one time, risky assets are driven by a host of moving macro drivers, making a static screen somewhat naïve (see more details below).
However, the charts below make a simple point – DM equities exposed to China trade rich relative to the underlying Chinese equity market. This should not surprise, given the domestic growth / inflation focus. However, this is another example showcasing the reliance on a soft landing narrative
Qi has created a China exposure L/S equity basket using the S&P500 universe. This uses Qi’s proprietary optimisation process which looks at all the possible combinations of stocks and their weights that minimize the tracking error to the macro factor in question. This is run out-of-sample for a month, until the next monthly rebalance.
Qi baskets are available to trade via Goldman Sachs. Specifically, the chart below shows the performance of the GSQICFXS / GSQICFXL ratio.
Qi baskets are available to trade via Goldman Sachs. Specifically, the chart below shows the performance of the GSQICFXS / GSQICFXL ratio.
The divergence in performance between the Qi L/S Basket and the CSI 300 (indeed also FXI) has extended since Q4 last year. Is now the time to play for re-convergence i.e. for a US investor to be long FXI and short China exposed US equities?
To provide clues Qi shows that the biggest driver of US equities outperformance over China today is inflation expectations: US wants disinflation to continue / China is looking for a way out of deflation. The sensitivity to inflation expectations for the ratio SPY / FXI is shown below.
In other words, for investors who are more concerned from here about inflation acceleration risk than China risk, this may present a timely mean-reversion opportunity. More details on this basket is available on request.
To provide clues Qi shows that the biggest driver of US equities outperformance over China today is inflation expectations: US wants disinflation to continue / China is looking for a way out of deflation. The sensitivity to inflation expectations for the ratio SPY / FXI is shown below.
In other words, for investors who are more concerned from here about inflation acceleration risk than China risk, this may present a timely mean-reversion opportunity. More details on this basket is available on request.