Momentum Models Eke Out Tiny Gain as Equities Outperform Rates and FX

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 up 0.1% over the past week, with equity models up 1.2% WoW, rates down 0.1% WoW, and FX down 0.3% WoW.
• Momentum models are down in aggregate over a three-month timeframe, with equity models the best performing (+1.2%).

Market Implications

• Momentum models have flipped from very bearish to modestly bullish EUR/USD and remain slightly bullish AUD/USD and slightly bearish NZD/USD – this week we published a G10 FX note flagging potential tops in EUR/USD and AUD/NZD.

Latest Signals

Equity momentum model signals are unchanged from the previous week. The S&P 500 and Nikkei biases remain very bullish, with the DAX and FTSE signals remaining slightly bullish (Chart 1).

Rates momentum models have shifted a bit – momentum signals in the US 5y and 10y flipped from slightly bearish to slightly bullish, while remaining slightly bearish the US long bond. The JGB signal is unchanged (very bearish), bunds have shifted from slightly bearish to slightly bullish, while gilts are less bearish than last week. Dominique wrote that although US growth is slowing, mainly due to a consumption slowdown, the slowdown is likely to self-correct as tax payments normalise and businesses’ economic outlook remains sanguine. We have initiated a tactical short position in the January 2025 Fed Funds contract.

Turning to FX, momentum models’ views have shifted slightly as in rates – in addition to the EUR/USD flip outlined above, GBP/USD has also flipped, from slightly bearish to slightly bullish. EUR/CHF is more bullish, and EUR/NOK flipped from slightly bullish to very bearish. EUR/SEK (slightly bearish), AUD/USD (slightly bullish), NZD/USD (slightly bearish) and USD/CAD (slightly bearish) are unchanged.

Model Performance

• Momentum models were up 0.1% over the past week, with equity models up 1.2% WoW, rates down 0.1% WoW, and FX down 0.3% 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.)