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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.

17.01.2023

ERP at cycle lows – earnings risk has to be seen to be believed

Growth expectations trump financial conditions concern

Risky assets have rallied globally as expectations on growth have risen relative to expectations on tighter financial conditions – Goldilocks has made a return.

In the US, inflation is falling and while economic data is moderating we have the lowest unemployment rate of this cycle with average hourly earnings well off the peak.

Europe has benefited from falling gas prices. While China re-opening is also supporting global growth expectations.

US equity risk premium back to 2005-06 period when VIX averaged mid-teens.

From their October lows, MSCI China has risen 52% and DAX 26%. In the US, small caps +15% and the S&P500 is back at its 200d MA. VIX has breached 20% and now below its 2022 lows.

The equity risk premium has continued to decline to new cycle lows and where we were during in 2005-06 when VIX averaged in mid-teens territory. Evidently, the market has been quick to make the assertion monetary policy indigestion is unlikely.

11.01.2023

EURUSD - a roadmap

“European stocks’ outperformance has fundamental underpinnings” – Bloomberg.
“Goldman Sachs no longer expects recession in euro zone in 2023” – Reuters.

And so it begins. Lower energy prices and China’s re-opening are two of the key factors cited in a host of articles suggesting the narrative around Europe is shifting. For many this leads to the conclusion that long EURUSD is the right call for early 2023.

09.01.2023

Earnings Season

Q4 earnings season starts this week and analysts have been cutting estimates. FactSet show that over the last 3 months, consensus expectations for Q4 have fallen 6.5%.

It's normal for analysts to cut numbers ahead of time - it lowers the bar, making beats easier to achieve - but the reductions over Q3 and Q4 2022 were larger than normal.

Interestingly, recession fears have been increasingly priced into earnings estimates at a time when Now-Casting shows US GDP growth tracking around 2.0% annualised.

From a macro perspective, one of history's most anticipated recessions still isn't apparent in the hard data.

Marrying top down and bottom up analysis is never easy. Fortunately, Qi can at least let investors know when each skill set is required.

05.01.2023

Tactical Trading

Model confidence is high on Qi's Short Term models, underpinning the importance of tactical trading in January. Don't get suckered into early year consensus views.

Macro matters and there's little valuation edge currently. 2023 is shaping up to be all about macro, again! And, thus far, US equity indices are behaving as they should.

Watching ST model value moves will be critical.

03.01.2023

The best European recession trade?

Looking across Qi, one of the biggest moves in model over year-end came in European Fixed Income. Model value for the European 2s10s yield curve flattened aggressively and now sits at -60bp. That’s versus -31bp one month ago.

The actual market did not follow suit to the same degree; hence a large Fair Value Gap has opened up. On Qi, 2s10s sits 30bp too steep relative to prevailing macro conditions. That’s an extreme.

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23.12.2022

How to measure the BoJ policy shock

While there are some mitigations - dovish language, increased JGB purchases - this week's BoJ shift in policy stance was unambiguously hawkish. Any actual changes may be a slow burn, but the shift in intent was one of the biggest Central Bank pivots seen in a long time.

That much is evident from the market's reaction.

The chart below shows our Credit Impulse data for US, Europe, UK and Japan. It's effectively a Financial Conditions Index, all be it one that focuses on credit and liquidity, but does not include equities so has no wealth effect.

We refreshed most recently just prior to the December FOMC to show how US financial conditions had already risen back above the zero bound, i.e. relative to recent trend, the tightening of financial conditions had been unwound.

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19.12.2022

Between a rock and a hard place?

Qi model confidence in the S&P 500 continues to fall. Peaking in early October at 84% and trending lower since to 63% currently. Under the hood, this is likely a reflection of the shift in major drivers of the index.

Over this period, we have highlighted that this year’s strong negative relationship between bond yields and equities has shown signs of coming off its extremes. This is clear in the chart below showing that the negative sensitivity between real yields and the S&P 500 is becoming a less significant driver.

13.12.2022

Preventative medicine

2022 has been all about macro.

Before we close the book on this year and start thinking about 2023, twelve reminders - one from each month - of how the Qi framework has helped augment the traditional, bottom-up approach to equity investing.

The topics in the last two - for November and December - could become the dominant themes for investors in 2023.

January - an early warning

Qi's Vol Indicator often leads spikes in VIX and we saw that again at the start of 2022. Investors were given an early heads up that macro conditions were shifting and markets should brace for higher volatility.

12.12.2022

A narrow window

Bulls need renewed impetus from this week’s events with the investable window narrowing

1.) The negative dynamic between stocks and bonds yields is tentatively changing to its more normal stance.

There are tentative signs that the extreme negative relationship between bond yields and stocks peaked in early November. On a 3mth rolling basis, the correlation between the level of the S&P 500 and 10yr US bond yields reached a peak of -90% vs. -55% today.

Indeed over the last 4 weeks, stocks have moved lower (white line in the chart below) alongside lower bond yields (yellow line - inverted). In other words, investors instead of having FOMU are afraid more of being late to the game in the face of recession fears - the average of strategist’s 2023 forecasts for the S&P 500 is their most pessimistic call since 1999.

The change in the relationship between equities and bonds is important to define the length of this investable window – when further rallies in bonds do not help stocks it indicates that the equity market is now vulnerable to bad news.

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08.12.2022

Crude Oil

This latest down leg in WTI has taken it two standard deviations below trend on Qi metrics.

History shows it can go further. In April 2020, a Russia - Saudi Arabia dispute compounded Covid lockdowns & WTI futures briefly went negative. That was a six standard deviation event on Qi.

In Q4 2018, when the Fed was on autopilot with regards to rate hikes and risky assets feared a Powell policy error, WTI experienced a four standard deviation shock.

The 2015 lows (China devaluation shock, US oil production glut) was a similar size move.

So big macro shocks can have outsized impacts on the energy market. And a 2023 hard landing could certainly rival some of the above. But it is worth noting the magnitude of the move seen thus far.

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17.01.2023

ERP at cycle lows – earnings risk has to be seen to be believed

The market expects earnings expectations to trough this summer?

This leaves us with pondering the lagged effect of inflation and tighter financial conditions on corporate earnings. The rule of thumb is that stocks trough 6-9mths before earnings do.

If the market trough was October-22, the expectation is that earnings expectations will trough this summer.

12mth fwd EPS has seen so far a gradual 4% decline from its peak last summer.

This earnings season, companies have to guide this quarter for the year and historically the incentive has been to set the bar low enough so they can beat - the usual earnings playbook game.

Earnings season has only just commenced with the banks – corporate commentary will heat up over the next two weeks.

S&P500 LT model confidence has been falling (50%) reflecting this debate between hard / soft landing

On our LT model the S&P500 was cheap to model in mid-December but now back at model value.

On the LT model, the focus on economic growth peaked in December and has since drifted lower.

Financial conditions through USDCNH, credit spreads and Fed rate expectations are still dominant drivers for the Goldilocks view.

Tentative signs pockets of the equity market are moving somewhat ahead of macro-warranted valuations

Qi’s ST models have been exhibiting higher model confidence during this potential regime shift, with over-extensions more notable in consumer-centric sectors:

S&P500: ST model confidence is high at 86% - the index is at +0.8 sigma (+2.6% rich)
IWM: ST model confidence 67% at +1.5 sigma but also LT model confidence 73% and +0.6 sigma
XHB: ST model confidence 76%, +1.1 sigma (KB Homes warned recently of higher cancellation rates in orders)
XRT: ST model confidence 73%, +1.3 sigma
KBE: ST model confidence 58%, +1.4 sigma
HYG: ST model confidence 82%, +1.1 sigma
Copper: LT model confidence +83%, +0.8 sigma
DAX at model value on ST and LT models
Companies with high sales exposure to China – majority of names trade to rich to macro-warranted values

If earnings weakness had been the main fear in consensus outlooks, the next few weeks will be telling as we enter what has been a big area on the S&P500 of 4000-4100.

The question we are left with is whether the risk-reward here is attractive enough to bet on a soft landing. Investors will only benefit from for lower European gas prices or China re-opening for so long.

11.01.2023

EURUSD - a roadmap

On Qi, the market has already run slightly ahead of fundamentals. EURUSD screens as 0.7 std dev (1.9%) rich to model.

That is not a big Fair Value Gap by historical standards. But that begs the question what is level where the single currency’s rally starts to look overextended?

The table below shows the results of back-testing various Qi FVGs as sell signals for EURUSD and the answer is clear – the sweet spot is when the cross gets one sigma rich to model.

But remember Fair Value Gap alone is not the only variable we consider when it comes to acting on a signal.

What model value is doing is equally important. Currently it is trending higher; it has risen 3.3% over the last month for example suggesting overall macro conditions are indeed supportive of Euro appreciation.

A rich FVG simply shows the market has moved quicker than macro fundamentals - some of the good news has already been priced in.

It is only when model value has stopped rising that we have a divergence pattern and a rich FVG becomes an actionable signal. In effect, the market is rich and macro conditions have stalled.

Ideally when model value rolls over that signifies the macro environment has started to deteriorate. Combining that with a rich FVG gives us a bearish inflection signal.

The good news is while that sounds like a lot of moving parts for investors to follow, on the Qi portal it's all easily viewed on each model page.

PDF download

09.01.2023

Earnings Season

This list isn't exhaustive but includes most of the blue chip names reporting earnings this week. And of that list, the majority sit to the left of our 65% threshold for a macro regime.

For these stocks, it's business as usual for a stock picker. Company fundamentals matter more than the macro environment.

Five names though display high sensitivity to macro conditions. There are no big valuation gaps but a couple of observations:

Boston Scientific is only 2.1% cheap to model. But that's the first time it has screened as cheap to macro since late June.
All three financials have seen increases in macro-warranted model value early in the new year. Since Dec 30th Blackrock's target price is up 4.3%, Jefferies model value has risen 4.6% and JP Morgan is up 5.1%. Macro conditions are improving.
In contrast, model value for Albertsons is flat-lining. Unlike financials, aggregate macro conditions for this consumer staple stocks is treading water, awaiting the next clue on direction.

05.01.2023

Tactical Trading

We have been talking for some weeks now about regime change in US equities. 2022 was all about the Fed; 2023 looks like it could be more about the real economy.

Mainly that’s because sensitivities are shifting – less about real yields, more about economic growth & industrial metals.

But it’s also because model confidence is falling.

However, Qi's Short Term models for US equity indices are extraordinarily strong. Using a 4month rather than 12month look-back period, macro explains 97% of the variance in the Dow!

In fact, there are a number of interesting observations we can take from our Short Term models right now. This quick video looks at:

the "true" January effect - tactical versus strategic trading, and the need for patience
how equities are closely tracking macro patterns. 2023 is once again shaping up to be a macro-driven year!

19.12.2022

Between a rock and a hard place?

The challenge to come back into a strong macro regime has not been aided by last week’s hawkish central bank meetings – which has served to keep policy uncertainty high into 2023. This uncertainty will be reflected best in the sensitivity to corporate credit spreads, which remain a major driver of the index.

The prior observation that bad economic news is good news for the equities, allowing the Fed to take their foot off the financial conditions pedal, is shifting. Policy error fears are being reflected more in a greater focus on economic growth.

Qi’s sensitivity to economic growth and metals has been trending higher. If the central banks insist financial conditions need to remain tight, hard landing fears increase.

This leaves risky assets between a rock and a hard place given the resolve of both the Fed and ECB last week – weaker economic data raises the spectre of recession; stronger data raises the spectre of rates remaining higher for longer.

This likely keeps equities in a fat and flat range with bounces being sold into until the regime becomes clearer.

Qi shows stocks relative to bonds moved into undervalued territory over December – but this again a reflection of the changing dynamic and not a signal.

The relative undervaluation is precisely because bond yields and stocks have seen a more positive relationship over the last month – yields down and stocks down.

If growth fears move to the fore, the risk remains that model value remains under pressure.

The majority of GICS level 1 sectors saw spot prices move below Qi model prices by the end of last week. However, model values are showing waning momentum.

We warned on Energy trading rich in an insight note in late November – it has been the weakest sector over the last month. Energy now stands at -0.8 sigma to model value.

However, again we are wary of reading into this too much when it is the most sensitive sector to inflation expectations, alongside high sensitivity to EM FX / China re-opening.

13.12.2022

Preventative medicine

February - More downside for speculative tech

Unprofitable tech names were the first mover in this bear market but, by Feb, had stopped falling and were attempting to consolidate.

Not on Qi.

Model value kept trending lower thereby opening up a significant rich valuation on a host of spec tech plays - FINX, CLOU, FDN, GNOM, BBH & IGV (chart).

Original Qi insight - More downside for spec tech?

March - catch up

In mid-March, on Qi’s models SPY screened as 5% cheap and QQQ was 11% below where it ‘should’ have been. Both represented significant valuation gaps and a flag that US equity indices had sold off too aggressively relative to macro conditions.

Qi model value for QQQ rose throughout March peaking on the 29th by which time the valuation gap had narrowed from -11% to just -1%. Thereafter model value resumed its downtrend.

Original Qi insight - Catch up

April - Brazil

Structurally bullish, tactically wary was the headline in our Apr 6th observation. The iShares ETF tracking Brazil EWZ was 15% rich on our models.

Even as a country set to benefit from the impact of Russia/Ukraine’s conflict on commodity markets, the machine was telling asset allocators a lot of good news was priced.

Over the next month EWZ fell almost 21%.

Original Qi insight - Structurally bullish, tactically wary

May - Bottom up meets top down: Dick's Sporting Goods

May 23rd and earnings season. Walmart and Target have already spooked markets with anecdotal evidence about inflation eating away at margins. Several US Retailers re due to report.

Qi flags that Dicks Sporting Goods is 25% cheap to model. Yes this week is about company fundamentals but a quick macro overlay identifies DKS as having discounted a lot of bad news already. Over the next three weeks it rallies 13.3%

Original Qi insight - Bottom Up meets Top Down: US Retailers

June - SPY vs. GOVT

On June 16th, Qi showed the S&P500 was at an extreme level relative to bonds. This was on top of an uptick in Qi model value for SPX. We surmised that macro conditions were improving at the margin, that SPY was cheap to GOVT and that quarter and half year-end re-balancing flows were imminent.

Over the next 8 weeks SPX rallied over 17% and equities outperformed bonds.

Original Qi insight - SPY vs. GOVT

July - Value vs. Growth & the power of macro

Low bond yields fuelled the bull market in Tech & Growth plays. So says the common wisdom. Like most truisms there is a fair degree of truth in it. But is it just about rates? What about other macro drivers?

Factor leadership changes, regimes shift, only a machine can capture the underlying patterns in real time. A nice example of how even when an equity investor thinks they’re using a factor-based approach, they’re actually running macro risk.

Original Qi insight - Proof! What Value needs to outperform Growth

August - measuring macro in one chart

The red line shows Qi model confidence for the S&P500. In bottomed and turned higher early in July, highlighting that the macro environment was ripe for a bear market squeeze.

It peaked early in August. Jackson Hole and Powell’s hawkish speech was still three weeks away but the machine was already recognising that financial conditions were shifting under the surface, getting nervous that the Fed Chair would double down on the fight against inflation.

September - How to outperform tighter financial conditions

A real-life case study showing how Qi’s macro factor sensitivities can help equity investors tweak their portfolio to avoid macro landmines.

Step one: quantify the fund’s key macro exposures – in this instance, US 10y real yields and US High Yield credit spreads.
Step two: identify the 10 stocks most vulnerable to higher yields and wider credit spreads, and the 10 most resilient.
Step three: no need to divest core holdings, tweak the weights according to their macro factor sensitivity.

The result? Qi’s choice of resilient stocks outperforms the most vulnerable by 7%, and the S&P500 by 3% over the subsequent 3 weeks.

Original Qi insight - How to outperform tighter financial conditions

October - Credit Impulse

Stock pickers do not have time to closely monitor shifts in the macro landscape. Qi can be your eyes-and-ears.

Our Credit Impulse aggregates financial conditions into a single measure, capturing when liquidity is being tightened or loosened.

Snapped at the end of October, our Credit Impulse suggested a large amount of the Fed’s tightening in 2022 had been unwound.

Original Qi insight - Dovish pivot? Its already happened

November - US equities: a shift in factor leadership?

For most of 2022 the message from Qi has been simple – the Fed’s tightening of financial conditions is pushing macro conditions against US equity markets.

But over the course of Q4 that pattern started to change and new leadership started to emerge – tentative signs that the real economy could become more important than financial conditions. Presumably a reflection of the market pricing in peak Fed Funds around 5.0%, and now a greater focus on whether 2023 produces a hard or soft landing.

That could imply the reaction function of equities is shifting.

For much of the year, ‘bad news’ that stays the Fed’s hand in raising rates, was deemed ‘good news’. A focus on the real economy and fears of a recession could suggest equities will start to recognise bad news = bad news.

Original Qi insight - US equities - a shift in factor leadership?

December - a big 2023 reversal?

Qi’s model value for USDJPY fx fell 1.5% over November and is down 0.9% so far in December. A pause that refreshes the Dollar bull market, or a critical new trend for the new year?

The strength of the Dollar has been a huge factor for equities in 2022. How is an equity investor supposed to keep an eye on shifts in currency markets?

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