Momentum Models Heavily Bearish on USTs, JGBs, Bunds and Gilts

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 are supportive of our hawkish views for both the Federal Reserve and European Central Bank. They also support Ben’s view that there is little reason to turn short EUR/SEK yet.

Summary

• Rates momentum models (+1.3% WoW) outperformed FX (+0.7% WoW) and equity momentum models (-0.2% WoW) over the past week.
• They are the top performer over a three-month time frame (+3.0%), too. Equity momentum models (+2.8%) are also up over the period while FX models aren’t (-0.2%).
• Since our last update, momentum models have shifted bullish on the Nikkei, less bearish on Bunds, and heavily bullish on USD/JPY and EUR/SEK.

Latest Signals

Equity momentum models are shifting bearish, as they turned heavily bearish on the FTSE-100 and pared Nikkei bullishness (Chart 1). A move towards 4,200 would make our equity momentum turn bearish on the S&P 500.

Meanwhile, rates momentum models have returned heavily bearish on bunds and gilts and remain likewise on US rates. Meanwhile, our PCA model has flagged 13 trades.

Turning to FX, momentum models have flipped bullish on EUR/NOK with it now trading north of 11.50. Otherwise, signals remain the same with strongest conviction on being bullish USD/JPY, EUR/SEK – Ben sees no reason to turn short EUR/SEK – and bearish AUD/USD and NZD/USD – Ben recently outlined reasons to be bearish AUD.

Model Performance

Rates momentum models (+1.3% WoW) proved best performing over the past week and past three months (+3.0%). FX momentum models delivered a positive return over the past week (+0.7% WoW) but struggled over the longer period (-0.2%), while the opposute was true for equity momentum models (-0.2% WoW; +2.8% over three months).

*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.)