1.       Stocksalready discounting further tightening in US HY credit?

Qioffers macro tracking equity baskets (tradeable with Goldman Sachs). We usemachine learning to identify a selection of stocks and their weights, which arethen traded out of sample for a month and then re-balanced to keep adapting tomarket conditions. We offer a long / short pair to track HY credit spreads(GSQIHYLL (long leg) / GSQIHYLS (short leg).

Thefirst chart below shows the Qi credit tracker pair vs. HY credit spreads. Theformer appears to discounting ~360bps HY spreads vs. spot of 391bps.

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Similarly,the second chart show only the short leg vs. the inverse of HY credit spreads(i.e. you profit from shorting the basket when HY spreads widen). This is alsodiscounting ~350bps HY spreads.

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Theconclusion is that the easy reset in vol has been done. Despite the hopium onChina / US talks next week, a lot is already priced. Even if China tariffs arereduced to 60%, it will still hurt the growth / inflation tradeoff.

Ifat 6000 SPX zero recession odds are priced and at 4500, a 25% decline, 100%recession odds then today ~20% recession odds are priced. It gets harder fromhere – that China does not give in easily is a distinct possibility.

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2.     EFA – the easy vol reset has been done

The Dollar denominated EFA ETF (MSCI EAFEindex which represents DM in RoW) is today at new all-time highs. Last week, wesaid Japanese equities in Dollar terms was looking over-extended. Qi shows EFAat +1.65 sigma above its macro-warranted fair value. This level of Fair Value Gapis close to record highs. Whilst spot has made new highs, the Qi model valuefor this ETF has not.

Markets have come a long way given depressedpositioning alongside the view that incremental tariff news will be positive.There will also be hope next week of a deal between the US & China.However, even tariffs on China back at 60% (which is where expectations wereduring Trump’s presidential campaign) and 10% elsewhere will hurt. We may endup with a dose of “travel & arrive”. Meanwhile, European earnings seasonhas failed to drive earnings expectations higher – it has been all about PEexpansion (no longer cheap vs. history), not earnings delivery.

3.       USD-Asiaon the move I

Asia accounts formore than half the US's trade deficit. That fact alone supports the ideaDollar-Asia is entering a new multi-year re-pricing. There were already manybelievers in the idea of lower USDJPY, but does the two-day 10% move in USDTWDor the HKMA announcement about diversifying into non-US assets add fuel to thefire?

Positioningand macro suggest these are not the best levels to chase USDJPY downside. Firstconsider the latest Commitments of Traders data – speculators are running thebiggest net Yen long in history.

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Second,USDJPY sits 1.3 sigma (4.2%) below Qi’s macro-warranted model value.Aggregating across rate differentials, shifts in respective 5s30s yield curves,spikes & subsequent retracements in VIX & credit spreads, model valueis flat-lining. Macro conditions have not vindicated the latest downtick,instead suggesting the cross should trade near 150.

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