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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.
19.09.2023
Equity investors - you're watching
the wrong part of the bond market
Last year, macro tourists looked at the bond market and latched onto the inverted yield curve and its role as a lead indicator for recessions.

More recently the headlines have followed the back up in bond yields.

Both can be important, but they are not the critical indicator for equities right now. Interest rate volatility is the one to watch.

There's lots of focus on the depressed levels of VIX currently. Understandable, some of the stats are striking.
See more
Hs 2009 25 Hubble
12.09.2023
Credit > Inflation. Regime shift for US equities?
In some quarters there are arguments that the inflation debate is losing significance. The bigger macro theme is the unfolding tightening of credit conditions.

That is partly right. The slow motion credit crunch is indeed critical but it is premature to argue inflation's importance has dwindled in any way.

Qi's macro factor sensitivity data can provide a real-time demonstration of what matters most. Inflation and credit are both critical, and it is Technology that is most reliant on a Goldilocks mix of reflation plus easy credit.
See more
Oil Markets
04.09.2023
Crude oil at 10mth highs
- what does it mean for you?
Crude's rally is starting to attract attention. Most equity analysis immediately focuses on XLE, but how are managers supposed to marry a macro story like energy with their fundamental stock picks?

Different parts of the equity market have very different relationships with crude oil. It is essential these are understood.

The chart below takes a look across global equity indices in developed and emerging markets and maps sensitivity to WTI. The y-axis shows the percentage gain/loss in each equity market for a one standard deviation shift in WTI in isolation.
See more
Goldilocks Or Bust
30.08.2023
Goldilocks or Bust
The tug of war between Goldilocks or Bust remains the dominant narrative for global investors. This week Goldilocks has enjoyed a boost but, away from short term news flow, what's the cross asset picture of macro conditions and what's being priced?

Credit looks Goldilocks biggest cheerleader. And therefore most vulnerable if Payrolls print soft and recession fears escalate.

European sector rotation plays offer opportunities for hard and soft landing proponents alike.
See more
Brian Matangelo W Lc86 Nvia Unsplash
15.08.2023
China sales exposure
Another set of poor Chinese economic data. Another underwhelming policy response.

From the market's perspective the biggest reaction came in bonds (yields at 2020 lows) and FX (Yuan hits the weakest level to the Dollar in 9 months).

For equity markets it remains Goldilocks or bust. The weak economic data is, to varying degrees, reflected in the price. The hope for a big fiscal package to stimulate demand remains bubbling under the surface.

So, in the meantime, we're left measuring what is discounted at these levels.

* Which Western companies with heavy sales exposure to China are rich or cheap?

* Which Asian equity indices are being dragged down by China; which can benefit?
See more
Hans Eiskonen Wn57Csq7Vzi Unsplash
08.08.2023
Beware a summer vol spike
VIX has been below 20 for four months now, but there are tentative signs that equity volatility may be on the rise. Seasonal patterns certainly point that way.

Given the latest positional surveys suggest CTAs and vol targeting strategies are running long risk, it is imperative equity managers have a good handle on which of their holdings are most vulnerable to "risk off".
See more
03.08.2023
The beta chase has likely run it's course
The S&P500 is up +20% for the year and the 12mth fwd PE multiple is back at 20x - expanding aggressively as CPI / hard landing fears are priced out.

At 20x we are at the 90th percentile of this valuation measure since 2003, notable when the risk free rate is 5.5%.

Read our analysis on Earnings expectations, Growth expectations, Financial conditions and Risk appetite.
See more
01.08.2023
White Paper: Introducing Macro Factors
Understanding and applying the importance of macro factors
See more
Aaron Burden Nxt5Prob 7U Unsplash
01.08.2023
Don't fight the US consumer
Amongst all this week's earnings, a key focus will be parsing company reports for clues on the health of the US consumer. Recent macro data (GDP, PCE, consumer confidence) have all suggested the consumer is in rude health.

Will that picture be endorsed by anecdotes from the retailers, hotels, cruise liners, casinos and car hire companies who report this week?

Given prevailing macro conditions, which consumer stocks offer best value for an ongoing catch-up trade for equity bulls?

Conversely, for the bears where are the tail risks which threaten to upend the party?
See more
Daoudi Aissa Pe1Ol9Olc4O Unsplash
26.07.2023
Capitulation!
In the absence of a recession, bears looking for equity downside have been forced to revise their forecasts higher.

Sometimes, such widespread capitulation has some tactical signal power - reflecting the idea most shorts have now covered and positioning is cleaner.

We flag now because Qi's new economic growth basket gives equity investors a way to use liquid US single stocks to track now-casting's US GDP.

That basket, now available on Bloomberg, has some interesting messages when compared with cyclical indicators like Economic Data surprise indices and ISM new order - inventories.
See more
Close
19.09.2023
Equity investors - you're watching
the wrong part of the bond market
Last year, macro tourists looked at the bond market and latched onto the inverted yield curve and its role as a lead indicator for recessions.

More recently the headlines have followed the back up in bond yields.

Both can be important, but they are not the critical indicator for equities right now. Interest rate volatility is the one to watch.

There's lots of focus on the depressed levels of VIX currently. Understandable, some of the stats are striking.
See more
  • last Thursday VIX closed at 12.8, a new low in the post-Pandemic era
  • in fact, VIX has only closed < 13 on 75 occasions over the last 5years
  • VIX has now spent over 125 days trading below the 200 day Moving Average
  • its been over 120 trading days since VIX posted consecutive closes over the 20 level - the longest such streak since 2017
Less well publicised is that the most popular indicator of interest rate volatility - the MOVE index - closed at its lowest level since Mar 2022 on Friday.
Cb Qt Expecs
Qi employs swaption (instead of US Treasury) volatility but they capture the same story. Higher volatility in the rates market tends to be associated with periods of stress. Obvious culprits in recent years have been monetary policy fears - the 2013 Taper Tantrum, the 2022 inflation fight.

Traditionally, higher rate vol is a headwind for risky assets like equities. So the chart above showing the collapse in rate vol in z-score terms in the US, Europe and UK is good news.

Why should equity investors care about this relatively obscure part of capital markets? Because Qi's models show that falling rate volatility is critical right now.

More important, in fact, than the level of bond yields. The chart below shows the percentage shift in the S&P500 for a one standard deviation shock higher in both 10y US real yields and US rate vol. Remember every other macro factor is held constant each time to show the true, independent impact of each factor shift on SPX.
Ylds Vs Vol
Real yields were the story in 2022. As the Fed abandoned transitory and embarked on an aggressive rate hike campaign, real yields became the main transmission channel by which policy tightening impacted the equity market.

At its peak, a one standard deviation rise in real yields equated to a 1% fall in the S&P500. Today sensitivity is close to zero.

Meanwhile in 2023 the story has been the rising importance of interest rate vol which Qi labels 'FED QT Expectations'. It has moved in the opposite direction. S&P500 sensitivity was effectively zero over H2 2022, but factor leadership has changed and it has become a highly prominent driver.
Spx Attribution
That can also be seen in the attribution chart above. Other bond market signals like the level of real yields or shape of the yield curve have had little effect on S&P500 model value over the last month.

Instead low rate vol, tight credit spreads and the rally in crude oil have been instrumental in moving macro-warranted model value for the S&P500 up 5.24% over the last month.
Spx
That improvement in macro conditions has not been mirrored by the market. Hence the S&P500 now screens as over one standard deviation cheap on our metrics.

The case for lagged policy effects and a recession haven't gone away. Indeed, there are mounting signs that economists are capitulating on recession forecasts just as deeper cracks open up.

It is still all about Goldilocks or Bust. For now, Goldilocks still has the edge but beware a shift in volatility from the interest rate market.
Hs 2009 25 Hubble
12.09.2023
Credit > Inflation. Regime shift for US equities?
In some quarters there are arguments that the inflation debate is losing significance. The bigger macro theme is the unfolding tightening of credit conditions.

That is partly right. The slow motion credit crunch is indeed critical but it is premature to argue inflation's importance has dwindled in any way.

Qi's macro factor sensitivity data can provide a real-time demonstration of what matters most. Inflation and credit are both critical, and it is Technology that is most reliant on a Goldilocks mix of reflation plus easy credit.
See more
When a blue chip commentator like Yardeni Research ponders whether the recent New York Fed survey of consumers carries an important message, it is worth taking note.

They noted that inflation expectations are subdued but fears about the availability of credit continue to move higher. The conclusion might therefore be the inflation debate is losing traction; the bigger risk for financial markets are credit conditions.
Img 1139
To a degree this is backed up by FactSet's observation that inflation is becoming less frequently mentioned in earnings calls. They note that 296 companies cited "inflation" during Q2 earnings calls - the fourth consecutive quarterly decline and the lowest number of mentions since Q2 2021.

This is where Qi's factor sensitivities come into their own. We capture the independent relationships between asset prices and a host of macro factors. By tracking these historical patterns we can observe how key macro drivers ebb and flow in terms of importance. In effect, how macro regimes shift.

Below we take the eleven S&P500 GICS Level 1 sectors and their relationship with US inflation expectations.
Newplot
The clear standout is US Technology. All three tech sectors (Tech itself XLK, Communication Services XLC and Consumer Discretionary XLY) have seen strong increases in their sensitivity to inflation, and sensitivity now sits near recent highs. Sectors with a more value and cyclical bias are comparatively insensitive.

So, while respecting the commentary from CFOs during the most recent earnings season, on our metrics it is too early for investors to think inflation no longer matters. Tech, the clear of US equity markets, is reliant on reflation.

Yes, strong inflation that induces policy tightening is a negative for risky assets; but it's the policy reaction equities fear, not reflation itself. Put another way, deflation is a bigger evil.
Newplot 1
We then repeat the exercise looking at sensitivity to corporate credit spreads and the same pattern is repeated. It is tech (XLK, XLC, XLY) that screens as the most reliant on credit spreads remaining tight. The other sectors also want a well behaved credit market; it is just that sensitivities are notably less.
Newplot 2
The clear pattern therefore is that Technology is beholden to Goldilocks. It is most reliant on rising inflation expectations (sensitivity is at it's highest levels since the pandemic) and tight credit spreads (sensitivity is at the wide end of the ranges).

Goldilocks or bust.
Oil Markets
04.09.2023
Crude oil at 10mth highs
- what does it mean for you?
Crude's rally is starting to attract attention. Most equity analysis immediately focuses on XLE, but how are managers supposed to marry a macro story like energy with their fundamental stock picks?

Different parts of the equity market have very different relationships with crude oil. It is essential these are understood.

The chart below takes a look across global equity indices in developed and emerging markets and maps sensitivity to WTI. The y-axis shows the percentage gain/loss in each equity market for a one standard deviation shift in WTI in isolation.
See more
There is a clear geographical split with the Americas the clear beneficiary of higher oil prices. NASDAQ, S&P500 and Brazil's IBOV have all seen sensitivity to crude rise sharply. To a lesser extent TOPIX also benefits.
Wti
Some may query those results, especially Japan as a net oil importer. For now, we think this reflects oil's role as a proxy for risk appetite. Some of the gains in crude come from tight supply conditions; but, from the demand side, there are growing hopes global growth will achieve a soft landing.

But if current patterns show US equities enjoying a Goldilocks relationship with energy markets, the same cannot be said for Europe or China. Neither the DAX or CAC enjoy the same positive sensitivity.

The Shanghai Composite, where macro explains 75% of price action, has recently seen sensitivity flip into negative territory - higher oil is threatening to become a drag.

Moving away from indices to single names, stock pickers can use Qi's Optimise Trade Selection function to screen their holdings for sensitivity to crude oil.

Below we show the results from screening across the S&P500 to find the winners and losers from this energy move.
Wtiusstockben
The beneficiaries include a bias to consumer cyclical names - Tesla, Amazon, Carnival, Live Nation.

Carnival stands out. It enjoys a 3.1% gain when crude rallies by one standard deviation. And it screens as cheap to aggregate macro conditions.

Once again, the current pattern is Goldilocks - higher oil is not (yet) a tax on consumption, rather a sign of healthy risk appetite.

The five most vulnerable US stocks are a more eclectic mix. Unlike the retailers cited above, ETSY and Estee Lauder don't enjoy the same positive relationship with energy markets.
Wtiusstockssuffer
Economic orthodoxy states rising crude oil acts as a tax on consumers and businesses. But US exceptionalism means that, for some at least, bad news can be seen as good news. Put another way, crude has yet to rise to that trigger point where it becomes a drag and, for now, Goldilocks trumps Bust.

The equivalent search across Euro Stoxx 600 stocks flips the script back to more conventional results and again highlights how, in Europe, bad news is bad news.

German power generator Uniper screens as the biggest beneficiary from rising crude oil; and it is slightly cheap to macro conditions.

Meanwhile fashion retailer Zalando stands out as amongst the companies that suffers from higher oil and is slightly rich to Qi model fair value.

Measure your own holdings to get visibility on whether your portfolio see's bad news as a headwind or a tailwind.
Goldilocks Or Bust
30.08.2023
Goldilocks or Bust
The tug of war between Goldilocks or Bust remains the dominant narrative for global investors. This week Goldilocks has enjoyed a boost but, away from short term news flow, what's the cross asset picture of macro conditions and what's being priced?

Credit looks Goldilocks biggest cheerleader. And therefore most vulnerable if Payrolls print soft and recession fears escalate.

European sector rotation plays offer opportunities for hard and soft landing proponents alike.
See more
The soft landing narrative has had good news this week - signs of a softening in the robust US labour market; no fiscal bazooka but incremental policy easing in China; bond yields reverse lower pulling the Dollar down.

But the dilemma facing investors remains sharply unchanged - Goldilocks or Bust is alive and well. And it's at times like these that all market participants, not just contrarians, should consider their tail risks. While Goldilocks prevails today, what are markets are pricing in terms of recession risk?

The Watchlist below is not exhaustive but includes a number of securities across asset classes that would typically be viewed as cyclical in nature. So which markets are pricing the Goldilocks scenario, and which are pricing elevated fears of a hard landing?
Recession Watch
  • The clear standout is credit. Whether US or European, whether Investment Grade or High Yield, spreads screen as too tight on Qi's models. The Fair Value Gaps are modest (around half a standard deviation only) but macro explanatory power is high and the message is unequivocal - credit is not priced for any uptick in recession fears.Our US Investment Grade credit spread model is shown below.
  • Elsewhere in Fixed Income, government bond yields - both nominal & breakevens - are in line with macro conditions.
  • The equity picture is mixed, but overall global equities are largely bang in line with aggregate macro conditions. The biggest valuation outliers both appear in Europe.
  • If you're team Goldilocks, European Autos look a comparatively cheap cyclical play versus their defensive Health Care peers - SXDP is nearly 6.0% rich to SXAP.
  • If you fear a recession, European Banks are 2.6% rich to Utilities SX7P vs. SX6P.
  • US equity indices are all modestly cheap to overall macro conditions but IWM is the only one with any meaningful valuation gap. Given the higher proportion of unprofitable companies more sensitive to interest rates, it is no surprise to see the Russell 2000 screens as 2.7% below macro-warranted fair value. Even more noticeable, macro momentum is turning up for SPY, QQQ and IWM.
  • The FX market seems biased to trading defensively with the Dollar somewhat rich; most notably USDSEK which we use as a proxy for high beta Europe & market fears around the housing sector.
Us Ig
Again, this is not a definitive list of cyclical assets. Our Recession Watch Watchlist is available off-the-shelf, or create your own customised list in the Qi portal and, with one easy eyeball, you have the ability to quickly monitor where markets are pricing Goldilocks and where a potential Bust is gaining traction.

#macromadeeasy
Brian Matangelo W Lc86 Nvia Unsplash
15.08.2023
China sales exposure
Another set of poor Chinese economic data. Another underwhelming policy response.

From the market's perspective the biggest reaction came in bonds (yields at 2020 lows) and FX (Yuan hits the weakest level to the Dollar in 9 months).

For equity markets it remains Goldilocks or bust. The weak economic data is, to varying degrees, reflected in the price. The hope for a big fiscal package to stimulate demand remains bubbling under the surface.

So, in the meantime, we're left measuring what is discounted at these levels.

* Which Western companies with heavy sales exposure to China are rich or cheap?

* Which Asian equity indices are being dragged down by China; which can benefit?
See more
Hans Eiskonen Wn57Csq7Vzi Unsplash
08.08.2023
Beware a summer vol spike
VIX has been below 20 for four months now, but there are tentative signs that equity volatility may be on the rise. Seasonal patterns certainly point that way.

Given the latest positional surveys suggest CTAs and vol targeting strategies are running long risk, it is imperative equity managers have a good handle on which of their holdings are most vulnerable to "risk off".
See more
03.08.2023
The beta chase has likely run it's course
The S&P500 is up +20% for the year and the 12mth fwd PE multiple is back at 20x - expanding aggressively as CPI / hard landing fears are priced out.

At 20x we are at the 90th percentile of this valuation measure since 2003, notable when the risk free rate is 5.5%.

Read our analysis on Earnings expectations, Growth expectations, Financial conditions and Risk appetite.
See more
01.08.2023
White Paper: Introducing Macro Factors
Understanding and applying the importance of macro factors
See more
Aaron Burden Nxt5Prob 7U Unsplash
01.08.2023
Don't fight the US consumer
Amongst all this week's earnings, a key focus will be parsing company reports for clues on the health of the US consumer. Recent macro data (GDP, PCE, consumer confidence) have all suggested the consumer is in rude health.

Will that picture be endorsed by anecdotes from the retailers, hotels, cruise liners, casinos and car hire companies who report this week?

Given prevailing macro conditions, which consumer stocks offer best value for an ongoing catch-up trade for equity bulls?

Conversely, for the bears where are the tail risks which threaten to upend the party?
See more
Daoudi Aissa Pe1Ol9Olc4O Unsplash
26.07.2023
Capitulation!
In the absence of a recession, bears looking for equity downside have been forced to revise their forecasts higher.

Sometimes, such widespread capitulation has some tactical signal power - reflecting the idea most shorts have now covered and positioning is cleaner.

We flag now because Qi's new economic growth basket gives equity investors a way to use liquid US single stocks to track now-casting's US GDP.

That basket, now available on Bloomberg, has some interesting messages when compared with cyclical indicators like Economic Data surprise indices and ISM new order - inventories.
See more
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