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1. XLF: Running Ahead of Macro Support

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XLF now sits 1.1σ (+3.35%) above Qi model value. That is down from yesterday’s 1.6σ,

but the sector remains rich versus macro.

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The narrative is still supportive: resilient growth, busier capital markets, stronger bank

earnings and rotation into cyclicals as markets lean toward a no-cut regime. But the

rally only really works if this is the benign version of higher rates: firm growth, stable

funding and no credit stress.

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Qi’s model is more demanding. Further upside needs tighter credit spreads, lower rate

vol and softer energy. That is where the confirmation is still missing. XLF is near fresh

one-year highs, but credit spreads and rate vol are not at fresh lows. Renewed US/Iran

tensions also keep energy - and therefore inflation risk, live.

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The valuation gap has narrowed, but not closed. History suggests gaps like this either

need fresh macro confirmation or mean-revert, with price usually the side that adjusts.

Bottom line: the earnings story remains constructive, but macro support is lagging. At

+1.1σ (+3.35%) rich, XLF still needs credit, rate vol and energy to cooperate. Without

that, upside looks harder to sustain.

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2. Sterling looks stretched

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The latest rally means in Trade Weighted Terms, Sterling is at its strongest levels in over

a year.

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For many, political risks are only growing with uncertainty around the policies of a likely

Burnham government plus Farage's by-election.

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On Qi, GBP screens as rich on every G7 across except versus AUD. For the bears

GBPNZD looks the most interesting. Of the crosses in a macro regime, its got the

biggest positive Fair Value Gap sitting at +1.3 σ (+1.4%).

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The gap has opened up because its only spot that's rallied. Qi model value has been

flat-lining for months. On Jan 1st macro fair value was 2.31; today it's 2.3125.

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So macro is neutral, valuations are rich & politics are messy. Add in high correlation

suggesting the mean reversion has occurred via the market re-pricing to Qi & this looks

a decent risk-reward opportunity for UK bears.

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3. Tech's Quiet Re-Rating

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June's rate scare and fresh nerves over AI capital spending knocked the tech complex

off its highs, and price has traded sideways since. Qi's model has not followed it down.

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Fair value has kept climbing through the turbulence, leaving XLK at −1.11σ (-10.6%)

cheap with model confidence at 68%. Macro is firmly in control of the tape.

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What looks like a puzzle is one backdrop read two ways. The firmer inflation pricing that

hit rate-sensitive tech in June is, in Qi's model, a support for fair value, and credit has

stayed benign throughout. The market read that mix as a threat to the multiple; the

model reads it as a tailwind. Price fell, fair value rose, and the gap is the distance

between those two readings.

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Historically, gaps of this size have closed toward fair value close to 88% of the time.

Q2 earnings are the next test. On the model, the risk-reward leans constructively

higher.

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