Momentum Models Bearish S&P 500, GBP and AUD to Start 2023

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 registered a positive return in FX (+0.1% WoW) over the past week while the underperformed for equities (-0.1% WoW) and rates (-0.9% WoW).
• The good news stops there; performance was poor over the past three months across rates (-0.9%), equities (-3.4%) and FX (-3.7%).
• Since our last updates, momentum models have turned net-bearish on the S&P 500, Nikkei, GBP/USD and AUD/USD, and net-bullish on EUR/SEK.

Latest Signals

Before the holidays, they were net-bullish across the board. Now, equity momentum models are net-bearish on the S&P 500 and Nikkei (Chart 1 and Table 1). They remain net-bullish on European equities.

Meanwhile, rates momentum models have remained net-bearish on US, Japan, German and UK rates.

Within FX, momentum models are now net-bearish GBP/USD and AUD/USD, and net-bullish EUR/SEK (Chart 2 and Table 2). They remain net-bullish EUR/USD and net-bearish USD/JPY.

Model Performance

Momentum models performed best for FX (+0.1% WoW) over the past week, while they registered negative weekly returns for equities (-0.1% WoW) and rates (-0.9% WoW). Over the past three months performance has been relatively poor, with momentum models for rates (-0.4%), equities (-3.4%) and FX (-3.7%) all down.

Our Views

Before the break, the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) all hiked by 50bps. The Fed’s move proved, on balance, hawkish. Dominique expects another 50bp hike to follow at the February FOMC and a further increase in the terminal FFR in the March SEP.

And in Europe, the adjoining forecast revision seemed hawkish suggesting work needed to continue at pace, something President Christine Lagarde echoed in her presser. Henry expects another 50bp hike on 2 February and a 3.5% terminal rate.

Across the channel, the BoE were decidedly more dovish adding to Henry’s conviction that the BoE remain overpriced. Going forward, he is watching for a sharp turn in the labour market as people are forced to return to the labour force.

Turning to our trades, we continue to like the China re-opening trade and have turned short USD/CNH (target: 6.75), which joins our existing long Hang Seng (target: 21,000) position. Elsewhere, we took profit on our short German 10Y (closed: +0.9%) trade, though we wish to re-enter the trade, and remain short USD/CLP (target: 820), long THB/TWD (target: 92), while we continue to look for MYR 1s5s to flatten (target: -10bps).

*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.)