Momentum Models Flip Bearish on US 10Y, Bunds, and Gilts

Summary

• Momentum models inched +0.1% higher over the past week, with equities offsetting a poor outing in FX and rates.
• Equity momentum models are the only positively performing model over a three-month timeframe (+3.7%). Rates (-1.1%) and FX models (-0.1%) have struggled.

Market Implications

• Momentum models are signalling US 5s10s steepening, a trade Mustafa has been holding since late September.

Latest Signals

Equity momentum models returned heavily bullish on the DAX as the one-month signal flipped to buy; the index is trading just shy of all-time highs (Chart 1; blue bar = last week’s signal, orange bar = this week’s signal). They remain heavily bullish on the Nikkei and S&P 500, too. However, John thinks the latter is due to trade in a tight range in coming weeks.

Rates momentum models flipped net short on the US 10Y, but remain net long on the US 5Y (aligning with Mustafa’s UST 5s10s steepener) and net short Bunds and Gilts. Henry’s PCA model is signalling 10s30s steepening in both.

Turning to FX, momentum models have returned to bullish USD/JPY – we see a building case to be long JPY. Meanwhile, they pared EUR/SEK bearishness – any upside will create a good entry point to the downside we expect during the G10 central bank cutting cycle (Chart 2; blue bar = last week’s signal, orange = this week’s signal). Elsewhere, the models remain heavily bullish on GBP/USD and EUR/CHF.

Model Performance

Momentum models edged +0.1% higher on the week as a triumphant outing in equities (+1.2% WoW) offset a poor showing in rates (-0.3% WoW) and FX (-0.1% WoW). A similar story emerged over the past three months (equities: +3.7%, rates: -0.1%, FX: -1.1%).

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.

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.

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