Momentum Models Flip Long Rates

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Equity momentum models (+0.5% WoW) snapped out of their losing streak, though FX momentum models (-0.2%) were slightly down, as were rates momentum models (-0.5%).
• Performance has been poor over the past three months across equities (-3.2%), rates (-2.8%) and FX (-1.6%).
• Momentum model signals suggest equities should continue to perform, while JGBs should underperform US rates, bunds and long gilts. Elsewhere, they turned net-bullish on GBP/USD and NZD/USD, and net-bearish on EUR/CHF.

Latest Signals

Equity momentum models have returned net-bullish across all models (Chart 1 and Table 1). This is despite the 12-month lookback model for DAX flipping to signal ‘sell’.

Meanwhile, momentum models have turned net-bullish on most rates, with JGBs proving the only exception; it has turned less bearish than previous though (Chart 1).

Within FX, momentum models have turned net-bullish on GBP/USD and NZD/USD, both are trading a touch under December highs, and net-bearish on EUR/CHF as the pair retreated below parity (Chart 2 and Table 2).

Model Performance

Equity momentum models (+0.5% WoW) snapped out of their losing streak, though FX momentum models (-0.2%) were slightly down, as were rates momentum models (-0.5%). Over the past three months, performance has been poor across the board (equities: -3.2%; rates: -2.8%; FX: -1.6%).

Our Views

Things are changing. Hot US data is fading, at least for now. In the US, markets had been celebrating last Thursday’s inflation data while they were able to pare their expectations for the Federal Reserve (Fed) as retail sales disappointed. However, Dominique warns to not read too much into the headline news and continues to expect a 50bp hike at the 1 February FOMC meeting.

The status quo is being challenged in Europe, too. Recent anonymous dovish comments from European Central Bank (ECB) policymakers suggest they may step down to 25bp hikes by March. However, Henry expects this sentiment will continue to be refuted by the main ECB speakers. Therefore, in the core EGBs, while net duration supply should be elevated, the potential weakness in the short-end should dominate. More broadly, he remains bearish EGBs.

And in the UK, while this week’s inflation and labour market data failed to provide the dovish momentum Henry had hoped for, he continues to expect the Bank of England (BoE) to provide a dovish pivot at their February meeting (when they update their forecasts). Therefore, he continues to expect UK 2s10s steepening (target: 70bp), aided by heavy gilt duration supply.

Elsewhere, Norges Bank left the policy rate at 2.75% and signalled they could likely hike in March, as Ben expected. While he expects a 25bp hike, he notes the risk is to the downside with forward-looking indicators pointing to a faster slowing of the economy than forecasted.

Finally, Ben expects the Bank of Canada to follow the Reserve Bank of Australia and deliver a 25bp hike of their own, but believes the risks are skewed to the upside for the American neighbour, not a pause.

*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.)