Momentum Models Flip Short on GBP and NZD

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 delivered a second consecutive week of positive returns, led by equities (+0.8% WoW).
• However, performance remains poor over a three-month horizon. The models we track have lost -1.0%, on average. Equity momentum models (-2.4%) have fared worst.
• Since our last update, momentum models have returned net-bearish on US rates and bunds, and net-bullish on the S&P 500. Meanwhile, they have turned net-bearish on GBP/USD and bearish on NZD/USD.

Latest Signals

Equity momentum models flipped net-bullish on the S&P 500. Otherwise, they remain net-bullish on the DAX, bullish on the Nikkei and bearish on the FTSE-100 (Chart 1 and Table 1).

Meanwhile, rates momentum models are net-bearish on US rates, bunds and gilts but remain bullish on JGBs.

Within FX, momentum models flipped net-bearish on GBP/USD despite a big beat in April inflation, turned increasingly bullish on EUR/SEK – we target 12 by yearend, and flipped bearish on NZD/USD following a dovish RBNZ May hike (Chart 2 and Table 2).

Model Performance

Momentum models continued to deliver positive returns, gaining 0.5% WoW. Equity momentum models (+0.8% WoW) led the pack with FX momentum models (+0.5% WoW) and rate momentum models (+0.2% WoW) following behind. However, over the past three months, performance remains poor; FX momentum models (+0.2%) are the only to deliver positive returns over the past three months.

Our Views

The dreaded X-date is nearing. But it doesn’t mean the Fed will default is forthcoming (as long as the US stays current on its debt service payments). Past Fed transcripts and Congressional inquiries show that in previous debt ceiling standoffs, the Treasury was planning to prioritize debt service payments. It is likely to do so this time around. The Fed sees a failed Treasury auction as the greatest risk to financial stability associated with the X-date and is likely to do whatever it takes to prevent it, including pausing QE.

Across the pond, UK YoY headline inflation is back into single figures (+8.7%), but core (6.8%) and services inflation (+6.9%) provided a strong offsetting hawkish surprise. Looking forward, Henry believes that while positioning for BoE dovishness has been (and continues to be) a painful experience, we would caution that a holistic view on data should be taken, rather than overweighting single outturns.

*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.)