Japanese Market Moves Provide Pain for Momentum Models

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 progressed +0.5% WoW having stumbled for the first time in seven weeks in last week’s report.
• Performance over the past three months remains positive with equities driving the average return higher (+5.9%).
• Since our last update, momentum models have flipped slightly bearish on the FTSE-100, become slightly less bullish on JGBs, and now signal EUR/CHF downside as well as NZD/USD upside.

Latest Signals

Equity momentum models moved less bullish on Nikkei and DAX, and moved max short on the FTSE (Chart 1 and Table 1). Equity momentum models remain fully bullish on the S&P 500.

Meanwhile, rates momentum models flipped bearish on JGBs. They remain fully bearish across the US curve, as well as in bunds and gilts.

There was a lot of movement in the FX momentum model. EUR/USD and NZD/USD moved less bullish, in contrast to USD/JPY and EUR/SEK, which moved max long. EUR/CHF moved less bearish, while AUD/USD dropped to fully bearish. While EUR/NOK flipped from slightly bearish to slightly bullish (Chart 2 and Table 2).

Model Performance

There was some mixed performance among the models, with weakness led by moves in Japanese markets, while strength was seen in EZ/UK.

In equities, while most models were modestly positive, the Nikkei (-4.2% WoW) provided a big drag on overall performance. In bonds, the models were slightly up in Europe, but slightly down in the US and Japan.

Across FX, the USD/JPY was the biggest loser (-4.2% WoW), while EUR/USD (+2.5%) and GBP/USD (+2.2%) provided some offset.

Our Views

In the US, Dominique sees the recent CPI miss as having reflected base-effects and the fall in energy prices. She sees the strength in underlying inflation continuing to support two more Fed hikes this year. Her  expectation is that the Fed will prioritise its unemployment target. This should allow term premia to creep back into the curve and we see value being long Bunds vs USTs.

Turning to Europe, Henry continues to see value in positioning for 6M fwd 1Y EUR OIS rising further (as rate currently priced 2024 cuts are priced out). He sees the supply picture supporting Bunds through the year, with the expectation that the Finanzagentur will be able to reduce issuance plan again ahead. For the BoE, he now sees there being good risk-reward to go long the short-end.

Shifting to Asia, Bert expects CNH’s underperformance to continue, but not to break through last year’s highs. Instead, he sees value in using CNH as a funder with long IDR/CNH his preferred expression in Asia.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 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.)