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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.
09.03.2022
What a choice!
The ECB meet tomorrow; the Fed next week. Both face an unenviable choice.
Their ability to engineer a soft landing was already fraught but now the Ukrainian conflict & its impact on energy & food makes it nigh on impossible. In reality they will consider multiple variables but the difficulty they face is encapsulated in these two charts.
Firstly, inflation expectations are at multi-year highs. Europe especially. Hence the need to normalise monetary policy.
Premium content, for a full analysis sign up to a month of insightsTheir ability to engineer a soft landing was already fraught but now the Ukrainian conflict & its impact on energy & food makes it nigh on impossible. In reality they will consider multiple variables but the difficulty they face is encapsulated in these two charts.
Firstly, inflation expectations are at multi-year highs. Europe especially. Hence the need to normalise monetary policy.
08.03.2022
Catching knives
The price action is horrible & there are multiple reasons to fear the outlook deteriorates further before improving. Catching knives is therefore an apt description.
However, macro shocks produce winners as well as losers &, amongst the sell-off, two ETFs are interesting.
However, macro shocks produce winners as well as losers &, amongst the sell-off, two ETFs are interesting.
See more
07.03.2022
Crude Oil - winners & losers
What are the implications of a ban on Russian crude oil?
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What next for Value?
RETINA™ has fired out a bearish valuation signal on Value vs Growth in the US.
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Beware a Dollar squeeze
There is an argument that sanctions represent a fundamental game changer. One that could erode the Dollar’s unique reserve currency status.
Even proponents of that view would concede it is a long term story. In the near term, safe haven demand plus a Fed determined to tighten policy to combat inflation presents a potential risk scenario. One that has many fearing a Dollar funding squeeze.
Qi captures potential for money market stress via cross-currency basis swaps. The ease (or lack of) with which non-US institutions can fund themselves in Dollars can provide an early warning sign of systemic liquidity issues.
Even proponents of that view would concede it is a long term story. In the near term, safe haven demand plus a Fed determined to tighten policy to combat inflation presents a potential risk scenario. One that has many fearing a Dollar funding squeeze.
Qi captures potential for money market stress via cross-currency basis swaps. The ease (or lack of) with which non-US institutions can fund themselves in Dollars can provide an early warning sign of systemic liquidity issues.
See more
02.03.2022
Worried about stagflation?
There are a couple of standouts on Qi’s Tactical Asset Allocation quadrant for global equity markets.
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Watch European Financials
Europe is generally perceived to be most at risk from any sanctions fall-out. And European financials are at the epicentre of that fear.
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Navigating the inflation trade
The impact on energy & grain prices will be a key transmission channel from the Russian/Ukraine conflict to financial markets.
The striking feature of the Q4 2021 inflation scare was how sanguine the bond market reaction was. Inflation expectations – measured by inflation swaps – spiked aggressively but then equally quickly unwound.
In the chart below, Qi’s z-score measure for US inflation expectations experienced a 3 standard deviation shock but then reverted to trend.
The striking feature of the Q4 2021 inflation scare was how sanguine the bond market reaction was. Inflation expectations – measured by inflation swaps – spiked aggressively but then equally quickly unwound.
In the chart below, Qi’s z-score measure for US inflation expectations experienced a 3 standard deviation shock but then reverted to trend.
See more
25.02.2022
SPY, QQQ, IWM
- Macro Attribution
- Macro Attribution
Even after yesterday's bounce, Qi shows both the S&P500 and NASDAQ around one standard deviation cheap to macro. In contrast, the Russell 2000 is modestly rich versus model fair value.
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Prisoners of Geography
It is no surprise that the Russian MOEX is the standout in our watchlist of Global Equity indices. The conflict has taken it 5.2 standard deviations below macro fair value.
But otherwise the striking feature in the list below is the split between Developed & Emerging markets. The 10 markets cheapest to macro are all DM, mainly European.
Presumably reflecting where the armed conflict is taking place, & a snap reaction from markets based on which Western economies potentially suffer from sanctions almost as much as their Russian targets.
But otherwise the striking feature in the list below is the split between Developed & Emerging markets. The 10 markets cheapest to macro are all DM, mainly European.
Presumably reflecting where the armed conflict is taking place, & a snap reaction from markets based on which Western economies potentially suffer from sanctions almost as much as their Russian targets.
See more
08.03.2022
Catching knives
The price action is horrible & there are multiple reasons to fear the outlook deteriorates further before improving. Catching knives is therefore an apt description.
However, macro shocks produce winners as well as losers &, amongst the sell-off, two ETFs are interesting.
However, macro shocks produce winners as well as losers &, amongst the sell-off, two ETFs are interesting.
See more
Global X’s ETF for Lithium LIT is now 1.4 sigma (14.3%) cheap to macro model value. Historically oil shocks sow the seeds for the next round of innovation &, for those who can afford a long run view, electric vehicle related plays would seem to fall into that category.
Global X also have an ETF for cyber security, BUG – already a critical theme & one which is playing an increasingly significant role in geopolitical disputes.
LIT has only been in regime & this cheap to macro five times since 2009. For BUG, valuation is not cheap, rather it has fallen from rich territory back to macro fair value.
Finally, it is worth noting the macro regimes of these models. They are still equities so suffer from spikes in risk aversion & wider credit spreads, but sensitivity is less than many peers.
Moreover, both display stagflation characteristics - they have positive sensitivity to inflation expectations, but negative sensitivity to global growth. Given stagflation is a clear risk in the mind of many, these could be useful assets to track.
LIT has only been in regime & this cheap to macro five times since 2009. For BUG, valuation is not cheap, rather it has fallen from rich territory back to macro fair value.
Finally, it is worth noting the macro regimes of these models. They are still equities so suffer from spikes in risk aversion & wider credit spreads, but sensitivity is less than many peers.
Moreover, both display stagflation characteristics - they have positive sensitivity to inflation expectations, but negative sensitivity to global growth. Given stagflation is a clear risk in the mind of many, these could be useful assets to track.
02.03.2022
Beware a Dollar squeeze
There is an argument that sanctions represent a fundamental game changer. One that could erode the Dollar’s unique reserve currency status.
Even proponents of that view would concede it is a long term story. In the near term, safe haven demand plus a Fed determined to tighten policy to combat inflation presents a potential risk scenario. One that has many fearing a Dollar funding squeeze.
Qi captures potential for money market stress via cross-currency basis swaps. The ease (or lack of) with which non-US institutions can fund themselves in Dollars can provide an early warning sign of systemic liquidity issues.
Even proponents of that view would concede it is a long term story. In the near term, safe haven demand plus a Fed determined to tighten policy to combat inflation presents a potential risk scenario. One that has many fearing a Dollar funding squeeze.
Qi captures potential for money market stress via cross-currency basis swaps. The ease (or lack of) with which non-US institutions can fund themselves in Dollars can provide an early warning sign of systemic liquidity issues.
See more
The chart shows those FX pairs in regime ranked by their sensitivity to Dollar liquidity (cross-currency basis swaps). A positive (negative) relationship means tighter $ funding levels move that currency cross lower (higher), every other factor held constant.
USDZAR & USDCLP both display strong negative sensitivity. All else equal, a Dollar liquidity squeeze drives Dollar fx higher versus the Rand & Peso. Moreover, both pairs screen as cheap making them efficient EM expressions should a funding scare take hold.
AUDUSD has $ liquidity as a top positive driver (the Aussie will suffer if money market stress continues), & it is rich to model.
For all three models, risk aversion & metal prices dominate. Higher metals offer an offset each time but, should funding stress evolve & prompt a broad 'risk off' move, these currencies look vulnerable.
At model fair value there is no valuation edge but EURUSD is interesting. Sensitivity to Dollar liquidity has increased fourfold since the start of the year & it has now replaced real yield differentials as the main macro driver.
Again, if you fear the fall-out from sanctions could cause liquidity issues, EURUSD is a key variable to track as money market stress spreads through the system.
USDZAR & USDCLP both display strong negative sensitivity. All else equal, a Dollar liquidity squeeze drives Dollar fx higher versus the Rand & Peso. Moreover, both pairs screen as cheap making them efficient EM expressions should a funding scare take hold.
AUDUSD has $ liquidity as a top positive driver (the Aussie will suffer if money market stress continues), & it is rich to model.
For all three models, risk aversion & metal prices dominate. Higher metals offer an offset each time but, should funding stress evolve & prompt a broad 'risk off' move, these currencies look vulnerable.
At model fair value there is no valuation edge but EURUSD is interesting. Sensitivity to Dollar liquidity has increased fourfold since the start of the year & it has now replaced real yield differentials as the main macro driver.
Again, if you fear the fall-out from sanctions could cause liquidity issues, EURUSD is a key variable to track as money market stress spreads through the system.
28.02.2022
Navigating the inflation trade
The impact on energy & grain prices will be a key transmission channel from the Russian/Ukraine conflict to financial markets.
The striking feature of the Q4 2021 inflation scare was how sanguine the bond market reaction was. Inflation expectations – measured by inflation swaps – spiked aggressively but then equally quickly unwound.
In the chart below, Qi’s z-score measure for US inflation expectations experienced a 3 standard deviation shock but then reverted to trend.
The striking feature of the Q4 2021 inflation scare was how sanguine the bond market reaction was. Inflation expectations – measured by inflation swaps – spiked aggressively but then equally quickly unwound.
In the chart below, Qi’s z-score measure for US inflation expectations experienced a 3 standard deviation shock but then reverted to trend.
See more
The Ukraine conflict has now prompted another surge in inflation, but it is critical to understand the nuances.
The initial market reaction saw short term (2y - purple line) inflation expectations spike – they are now 2 standard deviations above trend. But longer term (10y - red line) expectations remained relatively contained. It was a classic commodity supply shock. Near term price pressures but limited impact for the longer term inflation picture.
That spike is starting to filter out the curve. Inflation fears are showing signs of potentially becoming entrenched. Arguably that diminishes the room for manoeuvre for Central Banks juggling the growth shock from the conflict.
Macro investors will watch the shape of the TIPs break-even curve as a critical gauge of how the markets view the inflation outlook. For equity funds less in tune with macro factor shifts, the Qi portal can provide a way to track both the underlying move in inflation & which securities are most sensitive.
The initial market reaction saw short term (2y - purple line) inflation expectations spike – they are now 2 standard deviations above trend. But longer term (10y - red line) expectations remained relatively contained. It was a classic commodity supply shock. Near term price pressures but limited impact for the longer term inflation picture.
That spike is starting to filter out the curve. Inflation fears are showing signs of potentially becoming entrenched. Arguably that diminishes the room for manoeuvre for Central Banks juggling the growth shock from the conflict.
Macro investors will watch the shape of the TIPs break-even curve as a critical gauge of how the markets view the inflation outlook. For equity funds less in tune with macro factor shifts, the Qi portal can provide a way to track both the underlying move in inflation & which securities are most sensitive.
24.02.2022
Prisoners of Geography
It is no surprise that the Russian MOEX is the standout in our watchlist of Global Equity indices. The conflict has taken it 5.2 standard deviations below macro fair value.
But otherwise the striking feature in the list below is the split between Developed & Emerging markets. The 10 markets cheapest to macro are all DM, mainly European.
Presumably reflecting where the armed conflict is taking place, & a snap reaction from markets based on which Western economies potentially suffer from sanctions almost as much as their Russian targets.
But otherwise the striking feature in the list below is the split between Developed & Emerging markets. The 10 markets cheapest to macro are all DM, mainly European.
Presumably reflecting where the armed conflict is taking place, & a snap reaction from markets based on which Western economies potentially suffer from sanctions almost as much as their Russian targets.
See more
The 10 richest models have a strong EM bias. South Africa EZA & Brazil could represent their status as commodity plays. Note macro model value is moving sideways rather than trending lower.
The three rich DM markets include Singapore EWS & South Korea EWY where presumably geographical distance helps.
Greece is not in regime but, to date, macro model value had not been declining. Mainly because it’s less reliant on low VIX versus other EU indices, & the fact it’s comfortable with rising real rates.
This is not to advocate new longs or shorts during incredibly uncertain times. But it does provide a framework to consider where, in macro terms, markets have moved to discount events in Ukraine. Strikingly, certain EM plays, & in the US small rather than large caps, are seemingly regarded as the safer place to hide.
The three rich DM markets include Singapore EWS & South Korea EWY where presumably geographical distance helps.
Greece is not in regime but, to date, macro model value had not been declining. Mainly because it’s less reliant on low VIX versus other EU indices, & the fact it’s comfortable with rising real rates.
This is not to advocate new longs or shorts during incredibly uncertain times. But it does provide a framework to consider where, in macro terms, markets have moved to discount events in Ukraine. Strikingly, certain EM plays, & in the US small rather than large caps, are seemingly regarded as the safer place to hide.