Momentum Models Continue to Expect FTSE-100 Underperformance

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Market Implications

• Momentum models are supportive of our hawkish views for both the Federal Reserve and European Central Bank. They also support Ben’s view that there is little reason to turn short EUR/SEK yet.

Summary

• Equity momentum models (+0.3% WoW) outperformed FX (-0.3% WoW) and rates momentum models (-0.6% WoW) over the past week.
• Equity and rate momentum models are the best performing models over a three-month time frame (+2.2%). Meanwhile, FX momentum models (-0.9%) struggled.
• Momentum models continue to signal FTSE-100 underperformance, higher global yields, and for USD/JPY and EUR/SEK to trade higher and for AUD/USD and NZD/USD to trade lower.

Latest Signals

Equity momentum models expect FTSE-100 underperformance with the models heavily bearish on the British index but bullish on the S&P 500, Nikkei and the Dax (Chart 1). A move above 7,500 is needed for equity momentum models to begin to show buy signals on the FTSE-100.

Meanwhile, rates momentum models remain heavily bearish. A less bearish set of signals would come if the US 5Y crossed below 4.00%, the US 10Y below 3.75%, bunds (RX1) below 2.15%, and gilts (G 1) below 4.60%. Turning to our other rates models, our rates PCA model has flagged 10 trades while we have extended the model to STIR.

Turning to FX, momentum models show strongest conviction in being bullish USD/JPY and EUR/SEK – Ben sees no reason to turn short EUR/SEK – and bearish AUD/USD and NZD/USD.

Model Performance

Equity momentum models (+0.3% WoW) proved the only positive performer over the past week. It also registered the joint best returns over the past three months (+2.2%), matching rates momentum models over the period (WoW: -0.6%; 3M: +2.2%). FX momentum models continued to underperform (WoW: -0.3%; 3M: -0.9%).

*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.)