Equity Momentum Models Outperform as USD Turns Lower

Summary

• Momentum models (-0.3% WoW) added to last week’s losses, although equity momentum models provided a bright spot (+0.3%). Meanwhile, FX (-0.7%) led declines.
• Rates momentum models are the best-performing models over a three-month timeframe (+0.8%). FX (-0.5%) and equity (-0.9%) struggled.

Market Implications

• Momentum models remain bullish on Gilts, in line with Henry’s view to be long Gilts vs OATs. They also flipped bearish on GBP/USD; Ben and Richard expect GBP underperform in G10 FX.

Latest Signals

Equity momentum models flipped bullish on the S&P 500 and DAX, which join the already bullish Nikkei signals (Chart 1). They remain bearish on the FTSE-100.

Meanwhile, rates momentum models have pared UST and JGB bearishness, though Mustafa notes that history is a poor guide for potential Federal Reserve cuts. He expects the US 10Y to fluctuate between 4.5-5.0%, with a good possibility of breaking that upper bound. Across the pond, signals remain bullish on Gilts. Henry sees best value in receiving near-term-dated SONIA swaps and long 10Y Gilts (FX-hedged) versus 10Y OATs.

Turning to FX, momentum models have turned bullish on GBP/USD and heavily bullish on EUR/CHF – Ben and Richard remain heavily bearish on GBP and bearish on CHF. Meanwhile, they flipped bullish on risk-sensitive currencies (AUD, NZD and SEK) as risk appetite improved – Ben still expects EUR/SEK to trade north of 12 before its likely descent in H2 2024 and has also outlined his plan to turn long NOK/SEK. Lastly, they remain heavily bullish USD/JPY, though we note that the MoF will likely get their way.

Model Performance

Momentum models (-0.3% WoW) continued to underperform driven by FX (-0.7% WoW), caused by a sharp change in USD and risk. Rates momentum models were flat while they gained +0.3% WoW in equities. Over the past three months, rates momentum models remain the only positive performer (+0.8%).

(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.)