Momentum Flips Bearish US Fixed Income, Remains Bullish Global Equities

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 were down -0.4% over the past week, with equity models up 0.6% WoW, FX models down -0.7% WoW and rates models down -0.6% WoW.
• Momentum models are down over a three-month time frame, with rates models the best performing (-0.6%).

Market Implications

• Momentum models are very bullish GBP/USD – we see a bearish backdrop for GBP, and expect cable to struggle before it prospers.

Latest Signals

Equity momentum model signals are unchanged over the past week. S&P 500, DAX and FTSE signals are very bullish, while the Nikkei bias remains modestly bullish (Chart 1).

Rates momentum model signals shift materially – signals across the US curve have flipped from modestly bullish to bearish, most notably in the 5Y and 10Y maturities, whose biases are now very bearish. The US long bond signal is now modestly bearish. Signals in JGBs and Bunds have shifted from very bullish to modestly bullish, while the Gilts bias (modestly bearish) is unchanged (Chart 1). Dominique noted the Fed has turned more hawkish after stronger GDP and employment data, although this is unlikely to impact the central bank’s 2024 policy easing plans. Dom still expects the Fed to cut twice in 2024, roughly in line with current market pricing.

Turning to FX, momentum models’ biases shifted slightly – while USD/JPY and EUR/CHF signals remain unchanged (modestly bullish), as do GBP/USD (very bullish) and EUR/SEK (very bearish), EUR/USD and EUR/NOK signals have flipped from modestly bullish to modestly bearish. AUD/USD has shifted to modestly bullish from very bullish, NZD/USD has flipped to modestly bearish from very bullish, and USD/CAD has shifted from modestly bullish to very bullish (Chart 2).

Model Performance

• Momentum models were down -0.4% over the past week, with equity models up 0.6% WoW, FX models down -0.7% WoW and rates models down -0.6% WoW.

(Charts 1 and 2: blue bar is last week’s signal; orange bar is this week’s signal.)

(Charts 3 to 5: orange bars are average returns of CTA model over past three months by asset, black dot is change over the past week).

*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).

Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(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.)