Momentum Models Flag US Rates to Underperform JGBs

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 back our view to be long 10Y JGBs vs 10Y USTs (target: -400bps) and long EUR/CHF. They also back our bias to expect European equities to underperform US equities.
• They disagree with our view for GBP/CAD to trade lower over the next six months.

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, for USD/JPY and EUR/SEK to trade higher, and for AUD/USD and NZD/USD to trade lower.

Latest Signals

Equity momentum models shifted bearish on DAX but remained bullish on the S&P 500 and Nikkei (Chart 1). This aligns with Viresh’s bias for European equities to underperform US equities. The S&P 500 needs to trade above year highs to become strongly bullish while the DAX has to trade to year lows to become strongly bearish.

Meanwhile, rates momentum models eased their bearishness on JGBs. This aligns with Mustafa and Henry’s view that there is value being long 10Y JGBs vs 10Y USTs (target: -400bps). Turning to our other rates models, Henry reintroduced the AUD swap curve to his DM Rates PCA Model and found strong dislocation, centered around the 5Y swap rate being too low, 15Y too high and 30Y too low.

Turning to FX, momentum models are heavily bullish USD/JPY, GBP/USD, EUR/SEK and USD/CAD – which implies they are heavily bullish GBP/CAD, in contrast with Ben’s medium-term view. They are also heavily bearish AUD/USD and NZD/USD.

Model Performance

FX momentum models (+0.2% WoW) proved the only positive performer over the past week. However, it registered the worst returns over the past three months (-0.6%). Over the long horizon, rates momentum models performed best (+2.1%) followed by equity momentum models (+1.2%).

*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.)