Momentum Models Flip Bearish Equities, Remain Bearish USD/JPY

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 down 0.5% over the past week, with equity models down 2.8% WoW, FX models flat WoW and rates models up 0.2% WoW.
• All momentum models are down over a three-month timeframe, with FX models the best performing (-1.2%).

Market Implications

• Momentum models have flipped from bullish to bearish equities, while also remaining modestly bearish USD/JPY – we expect USD/JPY could decline further unless market risk aversion subsides, with the peak-to-trough-move (~11%) in the recent selloff only ranking 12^th in the all-time list of USD/JPY unwinds.

Latest Signals

Equity momentum model signals have shifted from bullish to bearish this week. Last week, momentum models were modestly bullish the S&P 500, Nikkei and FTSE, and very bullish the DAX, and are now modestly bearish across all these futures contracts (Chart 1).

Rates momentum model signals, by contrast, are little changed from last week – momentum signals in the US 5Y, 10Y and long bond futures are unchanged (all modestly bullish). Meanwhile, the JGB signal has flipped from modestly bearish to very bullish, gilts are less bullish, and bunds are unchanged at max bullish. Dominique now expects the Fed to cut 25bp in September (and 50bp if inflation continues slowing or the labour market weakens further – not her base case).

Turning to FX, momentum models’ views have shifted slightly – the most notable was the flip in GBP/USD from very bullish to very bearish. Elsewhere, signals in USD/JPY, EUR/CHF and EUR/SEK remain modestly bearish, while signals in USD/CAD and EUR/NOK remain very bullish. The signal in EUR/USD flipped from slightly bullish to slightly bearish, and AUD/USD and NZD/USD signals also shifted, from very bearish to slightly bearish.

Model Performance

• Momentum models were down 0.5% over the past week, with equity models down 2.8% WoW, FX models flat WoW and rates models up 0.2% 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.)