Momentum Models Increase Equity Bullishness and US Rates Bearishness

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 fourth consecutive week of positive returns, led by equities (+0.9% WoW).
• However, performance remains poor over a three-month horizon. FX momentum models (+0.2%) are the only to deliver a positive return over the period.
• Since our last update, momentum models are more bullish on equities and more bearish on US rates. Meanwhile, they flipped net-bearish on EUR and CAD (vs USD).

Latest Signals

Equity momentum models are net-bullish having flipped fully bullish on the DAX and slightly bullish on the FTSE-100 (Chart 1 and Table 1). They remained fully bullish on the S&P 500 and the Nikkei.

Meanwhile, rates momentum model signals turned more bearish on US rates and bunds. They remained bullish on JGBs and bearish on Gilts.

Within FX, momentum models flipped bearish on EUR/USD, though we took profit on our tactical short EUR/USD position (Chart 2 and Table 2). They also became more bullish on EUR/NOK and USD/CAD, and pared AUD/USD bearishness.

Model Performance

Momentum models have recorded four consecutive weeks of positive returns, gaining a further +0.3% WoW. Equity momentum models (+0.9% WoW) remained the leader with rates momentum models (+0.4% WoW) following behind. FX momentum models (-0.1% WoW) weighed on average performance. However, there is a contrasting backdrop over the past three months. FX momentum models (+0.2%) are the only to deliver positive returns over the period (equity (-1.4%), rates (-2.3%)).

Our Views

We had two surprise 25bp hikes from the Reserve Bank of Australia and Bank of Canada – we leaned for a pause. Attention next week will turn to the Federal Reserve (Fed; Wednesday), European Central Bank (ECB; Thursday) and Bank of Japan (BoJ; Friday).

Markets are pricing a 35% chance of a June FOMC 25bp hike. However, Dominique expects a pause, despite expecting two hikes by end-2023. Moreover, she expects no change to the medium dot as it seems too early for the FOMC to admit that inflation will remain above the end-2023 Summary of Economic Projections (SEP) forecast.

The other two meetings should prove more straightforward in terms of policy decisions. Markets are aligned with Henry on expecting a 25bp ECB hike while a change to the BoJ YCC isn’t expected just yet.

*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.)