Bias for European Equities and Higher Yields

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Momentum models reversed last week’s small losses, performing best in equities (+0.5% WoW) and rates (+0.7% WoW).
• A similar pattern is found over a three-month horizon (equities: +1.3%; rates: 0.0%; FX: -0.5%).
• Momentum models point towards further positive equity performance, with Europe top of the pack, while rates are expected to sell off. In FX, they turn net-bearish GBP, JPY and AUD (vs USD).

Latest Signals

Equity momentum models remain bullish with a bias for European equities (DAX and FTSE-100; Chart 1 and Table 1).

Momentum models are turning more bearish on US and UK rates with the three- and one-month lookback models flipping to signal sell, respectively.

FX momentum models are net-bearish GBP, JPY and AUD (vs USD; Chart 2 and Table 2). Meanwhile, EUR/SEK and USD/CAD net-bullish signalshave scaled back.

Model Performance

Momentum models (+0.1% WoW) reversed last week’s small losses, performing best in equities (+0.5%) and rates (+0.7%). They underperformed in FX (-0.4%). A similar pattern is found over a three-month horizon (equities: +1.3%; rates: 0.0%; FX: -0.5%).

Our Views

US data, including inflation, is catching eyes globally, printing stronger than many expected. While on the headline CPI proved in line, the details showed no signs of impending disinflation. Moreover, core goods inflation turned positive despite continued used vehicles price deflation, which could reflect that the improvement in global supply chains has run its course. Meanwhile, housing and core services did not slow. A 25 to 50bp increase in the terminal FFR in the March SEP appears likely.

Turning to Europe, Henry now expects the European Central Bank to hike to 3.75%. Markets remain anchored at a 3.5% terminal rate. He thinks next week’s data will prove sufficient to move market pricing. Elsewhere, he has outlined three possible geopolitical crises for 2023.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past three months, you buy, otherwise, you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)