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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.
Orion Nebula 11107 1920
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.
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Brendan Church Pkef6Tt3C08 Unsplash
19.01.2024
Qi Stock Spotlight - The Disconnect
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.
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11.01.2024
Qi Stock Spotlight -
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
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Weightless 60632
08.01.2024
Qi Industry Spotlight: Pre-CPI Check-Up
The jury is still out on the path for financial conditions – will the Fed move fast, slow or hold steady? This concern is reflected in high Qi macro sensitivities across risky assets.

Navigating the complex landscape of 2024 demands real-time insights of what is driving the asset universe today and the agility to respond when mispricing emerges. Qi’s suite of real-time macro factor betas, spanning thousands of instruments, provides this clarity.

With the December CPI release this Thursday we do a Qi dive across the S&P500 GICS industry groups. Most industries favor ongoing disinflation with accommodative financial conditions. However, beneath the surface lie nuanced distinctions.

Semiconductors & Banks emerge top in terms of sensitivity to inflation and financial conditions. Biotech, Consumer Services, Real Estate, Capital Goods also feature high on the ranking. At the other end of the spectrum: Staples, Utilities, Energy.
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Pexels Miriam Espacio 110854
08.01.2024
Qi Stock Spotlight - Unveiling winners & losers in a soft landing scenario
We dissected Qi’s S&P500 models, unveiling the top 30 winners and losers in a soft landing scenario.

Qi’s models rank stocks based on their exposure to growth expectations, HY credit spreads, Fed QT Expectations and USD TWI. A deep dive into the vulnerability of the top 30 winners reveals a 40% outperformance over the past year, contingent on the growth/inflation trade-off improving.

Sector breakdown? Financials and Consumer Discretionary are soft landing enthusiasts, while Consumer Staples and Utilities take a more cautious stance.
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Nasa Hi5Dx2Obas Unsplash
04.01.2024
Qi Market Spotlight - Nothing lasts forever
Qi’s macro sensitivities to GDP Nowcast and high yield credit spreads stand at one year highs.

These sensitivities have accelerated higher through Nov / Dec, leaving Qi’s macro beta impulse at multi-year range highs.

In other words, the resilience of risky assets will be tested if macro factors do not continue to move in their favour.

Our studies suggest a large dislocation between the overbought S&P 500 index and our measure of the macro beta impulse is vulnerable to re-convergence.
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Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
02.01.2024
Qi Sector Spotlight - US Financials: The Great Escape?
A core tenet of the proverbial soft landing thesis – where inflation converges back to target without breaking the labour market – is a broadening of the bull market outside of the Technology sector. Indeed, the rapid easing in financial conditions has coincided with the equal-weighted S&P500 outperforming the market-cap weighted index into year-end.

The biggest contributor to that equal-weighted index outperformance is the Financials sector – rallying ~20% from close to 1yr lows at the end of October to 1yr highs in just 2mths. This has been reflected in sharp multiple expansion – the 12mth fwd PE for the XLF ETF now sits closer to 10yr highs than 10yr lows before the rally. Earnings estimate now need to follow suit. See the charts below.
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12.12.2023
Navigating Market Hopes vs. Fears into 2024
The SPX Macro Beta Impulse indicates whether Qi’s macro factor sensitivities to the S&P 500 - e.g. credit spreads, commodities, interest rates etc - are rising or falling, i.e. the beta.

We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.

The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.

By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.
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Logo Eye With Space 1
05.12.2023
Quant Insight's Macro 2024 Outlook
A selection of just some of the charts and observations from our LinkedIn live event looking back at 2023 and the outlook for 2024.
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Pexels Miriam Espacio 110854
05.12.2023
Finessing the second wave
of the AI revolution
Nvidia is the poster child of the AI trade but despite a 200% plus gain in 2023, it appears to have lost some momentum. In contrast, software names have had a strong run - the sector has rallied almost 20% since the October lows.

There is a narrative that the AI revolution is evolving. The early winners (chip makers) are giving way to a new set of beneficiaries - the software companies that will help develop the necessary infrastructure. 

On Qi, IGV (the iShares ETF tracking Expanded Tech Software) is in regime with a strong valuation story. Outright, versus semiconductors (SOXX) and versus the broader market (SPY) it screens as rich versus prevailing macro conditions.

Even if you believe in a rotation in the AI winners, these do not look the optimal levels to be chasing software.
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Brendan Church Pkef6Tt3C08 Unsplash
19.01.2024
Qi Stock Spotlight - The Disconnect
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.
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
China1China2
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.
China3
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.
China4Newplot 10
Weightless 60632
08.01.2024
Qi Industry Spotlight: Pre-CPI Check-Up
The jury is still out on the path for financial conditions – will the Fed move fast, slow or hold steady? This concern is reflected in high Qi macro sensitivities across risky assets.

Navigating the complex landscape of 2024 demands real-time insights of what is driving the asset universe today and the agility to respond when mispricing emerges. Qi’s suite of real-time macro factor betas, spanning thousands of instruments, provides this clarity.

With the December CPI release this Thursday we do a Qi dive across the S&P500 GICS industry groups. Most industries favor ongoing disinflation with accommodative financial conditions. However, beneath the surface lie nuanced distinctions.

Semiconductors & Banks emerge top in terms of sensitivity to inflation and financial conditions. Biotech, Consumer Services, Real Estate, Capital Goods also feature high on the ranking. At the other end of the spectrum: Staples, Utilities, Energy.
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Akk
These conclusions are consistent with our recent screen of stock winners & losers in a soft landing scenario, where we screened sensitivities to growth expectations rather than inflation expectations.

The backbone is Qi’s macro factor sensitivity data across all S&P 500 stocks. From this data, we ran the following screen:
  • Removed stocks where Qi’s model RSq was less than 65%, ensuring a high degree of macro explanatory power
  • Ranked the remaining ~350 stocks by their total exposure to US inflation expectations and their exposure to HY credit spreads, Fed QT expectations and USD TWI (proxy for financial conditions)
  • Aggregated these stocks by industry group, revealing the average sensitivity to these macro drivers
The result is the scatterplot above (click on chart above for a larger image).

The arrow highlights that the direction of travel for beneficiaries of disinflation and easier financial conditions is from the bottom-right to top-left. Specifically, Semiconductors are the most sensitive to inflation expectations and Banks to financial conditions.

Below is an alternative representation ranking the industries by their total exposure to these two drivers.
Cpiindustry2
Leveraging the granularity of Qi’s data, we have the ability to also pinpoint exposures to the stock level in addition to any mispricing given the prevailing macro backdrop.

For an in-depth exploration of our screening process, from sectors to industries to individual stock analyses, feel free to reach out to the Qi team.
Nasa Hi5Dx2Obas Unsplash
04.01.2024
Qi Market Spotlight - Nothing lasts forever
Qi’s macro sensitivities to GDP Nowcast and high yield credit spreads stand at one year highs.

These sensitivities have accelerated higher through Nov / Dec, leaving Qi’s macro beta impulse at multi-year range highs.

In other words, the resilience of risky assets will be tested if macro factors do not continue to move in their favour.

Our studies suggest a large dislocation between the overbought S&P 500 index and our measure of the macro beta impulse is vulnerable to re-convergence.
See more
The S&P500’s Qi factor sensitivity to growth (GDP Nowcast, copper) and financial conditions (Fed QT expectations, HY credit spreads) to SPX stands at 1yr highs. Equities are increasingly reliant on what we saw late last year to continue. This picture is similar for other major indices. The Nasdaq 100 sensitivity to HY credit spreads and economic growth is also both at 1yrs highs – the two biggest drivers of the index.
Newplot 3
The Qi S&P500 macro beta impulse is defined as the sum of the 4wk change in absolute sensitivities across all our macro factors, based on ST models. We plot that against the percentage deviation of the S&P500 from its 50d MA and invert that axis. See the chart below.

The premise is simple - as the gradient of macro factor sensitivities accelerates, the beta of the market to macro factors is rising. That is fine when the macro backdrop is moving in your favour but ordinarily Mr. Market struggles to digest the macro gyrations.
Ak
Note the dislocation that occurred over the most recent 8wk rally – the improving growth / inflation trade-off supported by the Fed “pivot” saw macro drivers move in favour of Qi’s models. The Beta Impulse rose but this time around S&P500 model price momentum was rising alongside this.

This backdrop creates vulnerability as the impulse rises ever further. Over the last few years, there appears to be a natural limit beyond which the beta impulse has peaked (ex-Covid). This is marked by the red line. Periods where have seen such as dislocation between price action and the beta impulse tend to re-converge, marked in the chart

Consider the Qi short term model of the S&P 500 – 93% model explanatory power and the model price starting to show signs of fatigue. We view model price as offering a true / less noisy representation of the market value than the spot price. Has the improvement in the growth / inflation trade-off already been priced?
Aka
12.12.2023
Navigating Market Hopes vs. Fears into 2024
The SPX Macro Beta Impulse indicates whether Qi’s macro factor sensitivities to the S&P 500 - e.g. credit spreads, commodities, interest rates etc - are rising or falling, i.e. the beta.

We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.

The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.

By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.
See more
Ak1
In contrast, 2023 was about the improving growth / inflation trade-off aka Goldilocks, in the face of the naysayers calling for a hard landing after the fastest Fed tightening we had see in recent years.

During a disinflationary period, the fear of a late business cycle and the lagged impacts of policy is what matters for risk-off more than financial conditions. The S&P 500 in 2023 has an inverse relationship to its beta to growth relative to financial conditions. See the second chart below.
Ak2
This should not surprise. If the economic backdrop was benign, investors will not be worried about growth i.e. sensitivities will remain relatively muted. When growth fears rise, the beta to growth will rise relative to other factors.

Today, under the hood, since early December the beta to growth has started to rise relative to financial conditions – how much tighter do we really expect credit spreads to get from here? In other words, the second chart suggests equities look rich relative to the growth / inflation trade-off – a similar level of confidence was also seen in late July. The bar is set high. Thus we would argue the market is trading on hope rather than fear into 2024.
Ak3
Next year, the outlook is more poised on a knife-edge in our view. Street strategists simply extrapolate the last 3mth price action into their annual outlooks. The length of the runway for stocks will be dictated again by the growth / inflation trade-off and Qi offers the tools to expose this.
Pexels Miriam Espacio 110854
05.12.2023
Finessing the second wave
of the AI revolution
Nvidia is the poster child of the AI trade but despite a 200% plus gain in 2023, it appears to have lost some momentum. In contrast, software names have had a strong run - the sector has rallied almost 20% since the October lows.

There is a narrative that the AI revolution is evolving. The early winners (chip makers) are giving way to a new set of beneficiaries - the software companies that will help develop the necessary infrastructure. 

On Qi, IGV (the iShares ETF tracking Expanded Tech Software) is in regime with a strong valuation story. Outright, versus semiconductors (SOXX) and versus the broader market (SPY) it screens as rich versus prevailing macro conditions.

Even if you believe in a rotation in the AI winners, these do not look the optimal levels to be chasing software.
See more
Igv
Qi's model for IGV has 79% confidence. This latest regime started at the beginning of May and confidence has been pretty stable since then.

On current patterns, the Software sector is dominated by a desire for reflation, rate volatility to remain contained and credit spreads to tighten. Software loves Goldilocks.

The Fair Value Gap is +1.1 standard deviations which currently translates into IGV standing 7.8% rich to overall macro conditions. In short, and from a pure macro perspective, a fair amount of good news is in the price.
Igv Soxx
The chart above shows IGV relative to semiconductors. The white line is the spot price of the IGV/SOXX ratio; the red line is Qi's macro-warranted model value for the pair. 

Once again IGV wants reflation. Higher inflation expectations are consistent with Software outperforming Semis. The recent fall in inflation expectations are the biggest reason for the 3% fall in Qi model value over the last month.

That decline in model fair value stands in sharp contrast to the recent spate of IGV outperformance. Hence a 8.7% rich valuation on Qi.
Igv Spy
And finally we show Software versus the broader market by modelling the IGV/SPY ratio.

The desire for reflation is there again but this time other factors have worked to offset the drag from falling inflation expectations. The net result is macro momentum has eeked out a 0.9% gain on the month. 

And once again, the recent rally in IGV has outstripped where aggregate macro conditions say it 'should' trade. Software screens as 6.5% rich relative to the S&P500 on Qi.

This is not to dispute the idea that the second wave of the AI revolution could provide a huge benefit to software stocks. The AI theme is not going away in 2024.

It is a warning that, should the mood of the market turn down, then IGV looks vulnerable from a tactical perspective. More specifically any scenario that speaks to sticky inflation, rising bond vol and wider credit spreads poses a risk.

Even bottom-up or thematic investors should know that, with Payrolls on Friday and the Fed meeting next Wednesday, the macro angle needs to be factored in.
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