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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.
Adam Birkett 77Hmm5Tg N4 Unsplash
06.06.2023
Can you afford not to?
The role the "magnificent seven" mega cap tech stocks are playing in 2023's equity market performance is well known. The AI buzz and their safe haven status are the stories typically used to explain price action.

But note the chart below which shows Qi model confidence for the seven blue chip names. Investors need to be aware that there is a strong macro element to these companies right now.
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Sp500
31.05.2023
Have we arrived yet?
The S&P500 has been climbing the wall of worry since the SVB collapse – it has shrugged off regional bank failures, commercial real estate worries, an inevitable recession that seemingly never comes, weak China data, the lack of market breadth and crowdedness in the same ideas and then risks around the debt ceiling.

However, with the S&P500 threatening to breach its trading range, we should note the following: the dollar has started to strengthen as the priced rate cuts are unwound, the curve has resumed its bear flattening from its already inverted state, long-end real yields have risen and rate vol has moved higher. Yet US equities led by the Nasdaq 100 have made further gains over May.

As a point of reference, the S&P500 earnings yield less 10yr bond yield gap currently stands at 1.8% - the lowest since summer 2007. The level of the equity risk premium does not seem to recognise any risks.
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Orion Nebula 11107 1920
26.05.2023
Bullet proof
It's tough to argue with the superlatives surrounding Nvidia. The generative AI story does have the feel of a once-in-a-generation secular shift and the equity market will clearly be focused on picking the winners.

But is is worth checking in on the macro perspective and, in particular, the message from the bond market which has undergone a fairly sharp re-pricing. It's yet to embrace higher-for-longer as a theme for 2024, but the rate cuts priced over H2'23 have been removed.

The charts below show some of the macro inputs in our equity models in z-score terms, i.e. all shown in standard deviations from long term trend.

First up, 10y US real yields. The banking crisis saw real yields fall but, in the last few weeks the move higher in bond yields has taken them almost one standard deviation above trend.
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Simone Mascellari Xnn42Lsnv28 Unsplash Copy
25.05.2023
Irrational Complacency? Watch Europe
The Qi Vol Indicator now stands at 23.4, well above the threshold of 20 which historically has acted as a red flag for a risk off move in equity markets.

In "Caution warranted" we detailed how our indicator can lead markets and this week VIX has indeed risen from 16 to 20.

Sovereign CDS and US Treasury bills are displaying signs of stress, but overall the striking feature is that financial markets do not appear to be unduly concerned about the US debt ceiling impasse. That has prompted talk that the irrational exuberance of the 1990s has been replaced by irrational complacency.

Cue hundreds of sell-side research reports using 2011 as a template. For asset allocators looking to identify which of their holdings are most vulnerable, or looking for cheap protection trades you can use historical precedents.

But you can also Qi's AI framework to highlight which assets are currently most sensitive to measures of risk appetite like VIX or the gold/silver ratio.
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Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
22.05.2023
Caution warranted
The Qi Vol Indicator has risen sharply and now stands at 18.31.

Historically when the one month change in our Vol Indicator is greater than 20, markets have been vulnerable to a volatility event and "risk off" move.

The chart below shows our Vol Indicator versus VIX. There have been some false signals but there are numerous occasions when a spike in the Qi Vol Indicator has acted as an early warning for a big volatility event - "Volmageddon", the 2018 Powell 'policy error', Covid lockdowns etc
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17.05.2023
Growth vs Value, Chinese style
Investors love tech, hate the banks.

Such is the perceived wisdom amongst US equity investors. In China the opposite is true.

Tech shares have yet to recover from Beijing's regulatory backlash. Moreover, since the confirmation of Xi's third term, there has been a sense that the current political climate is one that favours State Owned Enterprises rather than private sector tech disruptors.

That could help explain why CXSE - the Wisdom Tree ETF that gives exposure to Chinese stocks but excludes SOEs - is cheap on Qi.
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Hs 2009 25 Hubble
15.05.2023
Macro > AI
The NASDAQ is back in a macro regime. Qi model confidence is back above our 65% threshold for the first time in 5 months.

Understanding macro was critical for US tech stocks for most of 2022 but the regime changed in October and by January model confidence fell as low as 28% - US technology was more a function of the hype around generative AI than macro fundamentals.
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Pexels Sam Willis 3934512
09.05.2023
Go East!
After strong Q1 GDP numbers, more recent Chinese economic data have underwhelmed. The great 2023 re-opening trade has not delivered for international investors.

To be fair, maybe it's simply changed shape. Buying commodities and resource stocks may not have worked, but buying European luxury goods has.

Alternatively, maybe the average Western investor needs to take a more nuanced view of the opportunities in Asia. Yes the size of the Chinese economy dominates the region but there are individual stories unfolding.

Consider the chart below which shows Qi's macro-warranted model value for a number of ETFs tracking Asian equity indices.
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04.05.2023
Is S&P500 multiple expansion now over?
Inflation is moderating alongside falling short-end rates pricing in rate cuts over H2.

• If the fixed income market is correct, a recession is on the horizon and this is a warning for stocks.

• If the fixed income market is wrong and data remains fine, interest rate expectations would need to move higher.

• Both of these paths would put downward pressure on equity multiples, putting greater onus on earnings growth to come through, which in turn makes for a low Sharpe market backdrop.

Chairman Powell this week pointed to the strength in labour markets with no recession a more likely scenario. He reiterated that “the process of getting inflation back down to 2 percent has a long way to go,” and did not expect cuts this year. He did not rule out a June hike but said they would be now be more data dependent.

His assessment would be more consistent with the second scenario above. If his assessment is wrong, it would be because the credit crunch is intensifying and the labour market is weakening. Both scenarios put pressure on the PE multiple.

This conclusion is consistent with the observation that the S&P 500 PE multiples had contracted 8 out of the last 10 episodes after the Fed’s last rate hike and subsequent first rate cut. At that late stage of the business cycle, any further gains came from earnings growth with market introspection on the appropriate PE multiple already looking forward to what is next. The higher the Misery (inflation plus unemployment rate), the larger the PE contraction
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Anna Anikina Ath9Gmakfpe Unsplash
04.05.2023
Jay Powell is watching credit
- shouldn't you be too?
In the minutes of the March FOMC meeting, the Fed explicitly acknowledged that the banking crisis and subsequent tightening of credit conditions, was having the same effect as rate hikes.

In last night's press conference, Chair Powell effectively signalled the Fed were in watch-&-wait mode. And that a key feature of their new data dependency is to watch and assess the impact of tighter credit conditions.

The message is pretty unequivocal - watch credit. Next week's Fed Senior Loan Office Survey was already a hugely important data point. Even more so now.

But otherwise, how is an equity investor supposed to 1.) easily keep track of all the moving parts of the credit market, 2.) measure their impact on the stocks, sector, ETFs that they care about?

Qi's Optimise Trade Selection function.
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Adam Birkett 77Hmm5Tg N4 Unsplash
06.06.2023
Can you afford not to?
The role the "magnificent seven" mega cap tech stocks are playing in 2023's equity market performance is well known. The AI buzz and their safe haven status are the stories typically used to explain price action.

But note the chart below which shows Qi model confidence for the seven blue chip names. Investors need to be aware that there is a strong macro element to these companies right now.
See more
Newplot
Looking at the chart we can see:
  • Nvidia is the only stock that remained in a strong macro regime over the last year. All the others started 2023 with a strong idiosyncratic component.
  • There are two who still remain in micro rather than macro regimes. Amazon model confidence stands at 52% but even here that has increased 21% in the last two weeks. Tesla is the laggard - 36% model confidence, up 'just' 16% over the last two weeks.
  • Five of these mega cap tech names are back above our 65% threshold for a macro regime - for the first time since Q4'22 macro fundamentals have strong explanatory power.
The good news is macro momentum is still positive. Qi macro-warranted model value continues to trend higher.

The book-ends are Apple where mode value is 'only' up 9.9% over the last month; through to Nvidia where, again over the last month, macro conditions have improved to the tune of 34.9% and Meta, up 32.6%.

The bad news is a fair degree of this good news is in the price. All screen as rich to macro conditions; most modestly so but this time the outliers are Amazon (1.7 std dev or 16.5% rich to model) and Google (+1.8 std dev, +13.5%).

AI will continue to dominate the headlines. Similarly, the success of the Pro Vision product launch is a huge issue for Apple.

Bottom up company fundamentals remain critical. But investors cannot afford to ignore the macro perspective.

Long positions in US mega cap tech stocks means you are running long global economic growth, short rate volatility and have an implicit yield curve steepening bias. Are those risks you're aware of and managing?
Sp500
31.05.2023
Have we arrived yet?
The S&P500 has been climbing the wall of worry since the SVB collapse – it has shrugged off regional bank failures, commercial real estate worries, an inevitable recession that seemingly never comes, weak China data, the lack of market breadth and crowdedness in the same ideas and then risks around the debt ceiling.

However, with the S&P500 threatening to breach its trading range, we should note the following: the dollar has started to strengthen as the priced rate cuts are unwound, the curve has resumed its bear flattening from its already inverted state, long-end real yields have risen and rate vol has moved higher. Yet US equities led by the Nasdaq 100 have made further gains over May.

As a point of reference, the S&P500 earnings yield less 10yr bond yield gap currently stands at 1.8% - the lowest since summer 2007. The level of the equity risk premium does not seem to recognise any risks.
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Spx Erp
Ordinarily, if the investor mindset shifts to “higher rates for longer”, it would put downward pressure on equity multiples, placing greater onus on earnings growth, making for a poor Sharpe backdrop. Yet the excitement on AI has so far masked this concern at the index level.

In markets, the phrase travel and arrive is used once the wall of the worry has been climbed and seemingly good news is already discounted. What does the machine suggest? The S&P500 is well explained on both Qi’s short term and long term models at 74% and 85%, respectively. The model value average on both models is ~4100 which put current spot on the rich side. However, what is particularly notable is that the S&P500 Qi model value has flat-lined and edged lower since the 3rd week of May.
Sp Valuation 2
Qi is clear on what equities need to see in the current regime to keep grinding higher: For the S&P 500 - lower rate vol, a weaker dollar, strong GDP growth, stronger metals, a steeper 5s30s curve and tighter credit spreads – Goldilocks? And so far in May we have seen weaker metals, higher rate vol, flatter 5s30s and a stronger dollar.
Sp Valuation 1
A similar pattern has emerged for the Nasdaq 100. Model value has been treading water and to move higher we need to see lower rate vol, a weaker dollar, higher GDP growth and metals – the same as for the S&P500. Several commentators have pointed out how resilient the NDX has been in the face of higher 10yr real yields. According to Qi, real yields are not currently a major driver of the index. Rather, lower rate vol and a weaker dollar are. And it is to these drivers where NDX looks over-extended of late. Now there are also concerns the need for the government to rebuild its TGA could drain Federal bank reserves. With the Nasdaq 100 now back to the 61.8% retracement of its 2021-22 sell-off, there is little room for error.

Have we arrived yet?
Ndx Vs Bank Reserves
Evgeni Tcherkasski Bfbhwj4Qafo Unsplash
22.05.2023
Caution warranted
The Qi Vol Indicator has risen sharply and now stands at 18.31.

Historically when the one month change in our Vol Indicator is greater than 20, markets have been vulnerable to a volatility event and "risk off" move.

The chart below shows our Vol Indicator versus VIX. There have been some false signals but there are numerous occasions when a spike in the Qi Vol Indicator has acted as an early warning for a big volatility event - "Volmageddon", the 2018 Powell 'policy error', Covid lockdowns etc
See more
Vi
The full methodology for our Vol Indicator can be found here but in essence it's a way to measure when financial markets have become divorced from macro fundamentals.

Put another way, it is when price action is being driven by positioning, sentiment, geopolitics and other factors.

These drivers are inherently more volatile relative to macro variables. Hence sharp falls in macro explanatory power / sharp rises in these other conditions, can equate to uncertain trading conditions.

In investment terms it means it's time to think about playing defence.

And right now our model is flashing an amber warning light. A move over 20 would see amber turn to red.
Hs 2009 25 Hubble
15.05.2023
Macro > AI
The NASDAQ is back in a macro regime. Qi model confidence is back above our 65% threshold for the first time in 5 months.

Understanding macro was critical for US tech stocks for most of 2022 but the regime changed in October and by January model confidence fell as low as 28% - US technology was more a function of the hype around generative AI than macro fundamentals.
See more
Ndx1
The AI buzz is unlikely to go away. It has the potential to be a genuine game changer and investors will always be searching for the winners and losers.

But now investors need to be aware that it is no longer the only game in town.

What does the new regime look like?
Ndx2
Most financial commentary will argue that low bond yields are the primary driver of Growth plays. Qi largely agrees with this but with an important nuance.

It is not the level of 10y yields. Measuring the independent patterns of association shows the NASDAQ is currently completely insensitive to real rates.

Instead it is rate volatility and the shape of the yield curve that matter more.

Rate volatility is the single biggest driver accounting for around a quarter of the model's explanatory power. Qi employs swaption vol rather than bond vol but basically the fall in the MOVE is a big positive for tech stocks.

Similarly the shape of the 5s30s yield curve has become the biggest positive driver. A steeper curve is consistent with a NASDAQ rally.

Model value has rise strongly in the last month, driven primarily by these two factors.
Ndx3
The other big theme in this new regime is a desire for reflation. NASDAQ wants stronger commodities, tracking GDP growth and rising inflation expectations.

The attribution chat above shows the fall in these factors recently has been a headwind for macro-warranted model value. But, thus far, the move in the bond market has more than offset them.

What about valuation?
Ndx4
NDX screens as 1.1 standard deviations (6.4%) rich to macro fair value. The buzz around AI means a lot of good news is priced in. But critically model value is trending higher. It has risen 1.67% in the last month. Macro momentum is improving for US technology.

The bottom line is Qi would not portray current levels as an attractive entry point. But to turn outright bearish would require the red line above to roll over. Given Qi identifies the key drivers we are now forewarned on potential risk scenarios.

* a spike in rate vol - US debt ceiling impasse? - would be a clear bearish catalyst.

* ditto deflation and renewed yield curve flattening

Finally, what about risk aversion and the argument mega cap tech stocks are safe haven assets? Does that negate the risks above?

On current patterns, the NASDAQ has very little sensitivity to VIX. That might provide some relief in a 'risk off' move. But risk aversion is not (yet) a positive driver. It is, however, for Apple and Meta and given their importance this will require close monitoring.

Net-net, keep a close eye on Qi model value which will aggregate all these crosswinds into a single snapshot of overall macro momentum.
04.05.2023
Is S&P500 multiple expansion now over?
Inflation is moderating alongside falling short-end rates pricing in rate cuts over H2.

• If the fixed income market is correct, a recession is on the horizon and this is a warning for stocks.

• If the fixed income market is wrong and data remains fine, interest rate expectations would need to move higher.

• Both of these paths would put downward pressure on equity multiples, putting greater onus on earnings growth to come through, which in turn makes for a low Sharpe market backdrop.

Chairman Powell this week pointed to the strength in labour markets with no recession a more likely scenario. He reiterated that “the process of getting inflation back down to 2 percent has a long way to go,” and did not expect cuts this year. He did not rule out a June hike but said they would be now be more data dependent.

His assessment would be more consistent with the second scenario above. If his assessment is wrong, it would be because the credit crunch is intensifying and the labour market is weakening. Both scenarios put pressure on the PE multiple.

This conclusion is consistent with the observation that the S&P 500 PE multiples had contracted 8 out of the last 10 episodes after the Fed’s last rate hike and subsequent first rate cut. At that late stage of the business cycle, any further gains came from earnings growth with market introspection on the appropriate PE multiple already looking forward to what is next. The higher the Misery (inflation plus unemployment rate), the larger the PE contraction
See more
Screenshot 2023 05 04 143952
This should also be considered in light of the fact that the SPX 12mth fwd PE is trading close to post GFC highs and the S&P 500 equity risk premium close to post GFC lows.

On earnings, the surprising aspect of this earnings season was the ability of companies to pass on higher costs and protect their margins. On a medium term basis, one would not think that could last with falling CPI putting pressure on nominal top-lines alongside higher labour costs.

After the last hike in June 2006 we had to wait over 14mths for first rate cut in September 2007 – the backdrop was different then with earnings growth over that period exceptionally strong.

What does Qi show? SPX model value has been flatlining over the last month. It wants stronger GDP growth, tighter credit, lower rate vol and a weaker dollar.
Screenshot 2023 05 04 143716
With a focus on credit conditions, the senior loan officer’s survey is released on 8th May. The current US mortgage spread to 30yr yields is already indicating conditions moved tighter.

Bottom-line, the risk-reward suggests there are good reasons to respect the top of the current SPX range.
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