Momentum Models Deliver Strong Returns Over Past Week

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 have registered strong returns (+2.0%) over the past week.
• They have performed best in rates over the past three months (+7.8%), though, stripping out gilts, FX comes out on top over the period (+4.6%).
• Momentum models have turned bearish on Japan (Nikkei and JGBs) and strongly bearish on EUR/CHF.

Latest Signals

Equity momentum models returned strongly bearish on the Nikkei as the three-month lookback model flipped to signal ‘sell’ (Chart 1 and Table 1).

Momentum models have returned slightly bearish on JGBs, the one-month lookback model flipped to signal ‘sell’. They remain strongly bearish on US rates, bunds, and long gilts.

Within FX, momentum models have turned strongly bearish on EUR/CHF with the one-month lookback model having flipped to signal ‘sell’ (Chart 2 and Table 2).

Model Performance

Momentum models have registered positive returns over the past week across equities, rates (except JGBs), and FX. The largest returns came for the strongly bearish gilts (+6.0% WoW), S&P 500 (+5.6% WoW), and AUD/USD (+3.3% WoW) models (Charts 3, 4, and 5). Meanwhile, over a three-month horizon, momentum models have performed best in rates (+7.8%). However, removing the gilts momentum model, FX momentum models come out on top over the past three months (+4.6%).

Our Views

The market is yet to take its eyes off the Federal Reserve (Fed); Dominique is expecting today’s US CPI will do little to budge its focus. Further afield, Dominique remains resolute in her expectations for a 75bp hike from the Fed in November. Indeed, there is a case for another 75bp in December, with September FOMC minutes revealing a Fed pivot is not coming soon. Elsewhere, Henry expects the MPC will underdeliver on the market’s very hawkish November BoE positioning.

Turning to FX, we remain comfortably short EUR/USD (target: 0.90). Remaining in Europe, Ben believes that it is not quite time to be short EUR/NOK and, instead, finds value in being tactically short NOK/SEK. We have also kept a stern eye on AUD. We have been short AUD/USD and AUD/CAD, but now AUD/JPY could be heading lower.

*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.)