Momentum Models Increase US Rates Bullishness and EUR/CHF 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 produced another week of flat returns (0.0% WoW), with large positive returns being offset by other underperforming models.
• Overall returns have proven far better in the FX carry strategies we follow.
• Bullish equity momentum model signals have moderated while momentum models have turned bullish on the US 5Y, CHF (vs EUR), and pared AUD and NZD net-bearishness (vs USD).

Latest Signals

Bullish equity momentum model signals have moderated, with the one-month lookback models for the Nikkei and DAX flipping to signal sell (Chart 1 and Table 1). They remain bearish on the FTSE-100.

Momentum models flipped net-bullish on the US 5Y, pared JGB bullishness and flipped net-bearish on Gilts. They remain net-bullish elsewhere on US rates and net-bearish on bunds.

Despite signalling higher European yields, momentum models have turned more bearish EUR/CHF, which is testing 0.98 – a level that has proven hard to break through 2023 (Chart 2 and Table 2). Elsewhere, they pared AUD and NZD (vs USD) bearishness as the one-month lookback models flipped to signal ‘buy’.

Model Performance

Momentum models (0.0% WoW) delivered a second week of flat returns, as positive and negative returns offset each other. Momentum models performed best on the Nikkei (bullish +0.9%), US long bonds (bullish: +1.0%), and EUR/NOK (bullish: +0.9%) over the period. However, performance over the past three months (-1.8%) leaves much to be desired.

Our Views

Worry over the banking crisis is receding, yet it remains an item on the watchlist. According to Dominique, the latest deposit data is reflecting quantitative tightening (QT) – the deposit flight has mainly been from large banks because institutional investors involved in QT hold their deposits at larger, rather than small, banks. Receding fears have helped markets withdraw their overly dovish central bank expectations. However, a return to the trough appears more likely than a return to the peak. Even if the banking crisis passes, there are at least three other risks remaining in the financial system.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past three 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.)