Momentum Model Turns Bullish on S&P 500 but Remains Bearish US Rates

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 flat over the week as gains in equities (+0.1% WoW) were offset by rates and FX (-0.1% WoW).
• Over the past three months, they have performed best for rates (+4.7%), marginally positive for FX (+0.7%), while they have underperformed for equities (-2.9%).
• Only four of our momentum models have extreme signals while they turned bullish on the S&P 500.

Latest Signals

Momentum models turned bullish on the S&P 500 and extremely bullish on Nikkei and FTSE-100 (Chart 1 and Table 1). It would take the S&P 500 falling back through 4,008 for the model to return bearish.

Rates momentum model signals are unchanged. They remain bearish on US rates, Bunds and long Gilts.

Within FX, momentum models are relatively mixed (Chart 2 and Table 2). They are extremely bullish on EUR/NOK. Other signals saw momentum models turn bullish on EUR/CHF and bearish on NZD/USD.

Model Performance

Momentum models were flat over the past week as the gain in equities (+0.1% WoW) was offset by rates and FX (-0.1% WoW).

Over the past three months, momentum models are being carried by rates (+4.7%) while they have also performed well for FX (+0.7%). They underperformed for equities (-2.9%).

Our Views

November Fed minutes were digested with a dovish twist as markets concentrated on the possibility of ‘a slowing in the pace of increase’. The pivot, however, need not be in December; Dominique expects a slower pace of hikes at the February meeting. Even if they do slow in December, we continue to think the market has underpriced the Fed terminal rate. As a result, we think there is a risk for further 2s10s inversion – we entered an (equal-duration weighted) 2s10s flattener (target: -100bps). It also means the Fed remains underpriced vs the Bank of Canada.

Markets are mispriced in Europe too. Henry expects another 75bp European Central Bank hike on 15 December – there is value in paying short-end EUR swaps – while he believes the Bank of England (BoE) will not be able to hike as the market expects – there is value in positioning for a lower BoE terminal rate, alongside gilts curve steepening. This is supported by his previous analysis of rate rises on UK mortgages, and UK business. However, he has noted that there is a near-term risk of more hawkish pricing.

Turning to FX, we close our short GBP/CHF trade but remain short USD/CLP, adding to long SGD/CNH and long THB/TWD.

*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.

(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.)