Momentum Models Remain Bullish Bonds, Now Signal FTSE Underperformance

Summary

• Momentum models declined 0.5% over the past week as the recent rate and equity bid reversed. FX models also underperformed.
• Equity momentum models are the only positive performing model over a three-month timeframe (+1.4%). Rates (-1.2%) and FX models (-0.8%) have struggled.

Market Implications

• Momentum models remain bullish on bonds. Our PCA model sees bullishness best placed in the 10Y tenors.
• In FX, momentum models have performed poorly. As a result, we take little notice of their signals and continue to expect 2024 to be about value trades.

Latest Signals

Equity momentum models flipped bearish on the FTSE-100 – the index has slipped below the 7,700 mark, a level that has proven hard to break above over the past nine months (Chart 1). Elsewhere, they turned less bearish on the DAX.

Rates momentum models pared JGB and Bund bullishness, taking them to similar levels as USTs and Gilts. Our PCA model sees bullishness best placed in the 10Y tenors, flagging 2s10s flattening, 10s30s steepening, and 5s10s30s decline across multiple regions.

Turning to FX, momentum models pared EUR/USD bullishness and USD/CAD bearishness (Chart 2). They also remain heavily bullish GBP/USD, and heavily bearish EUR/CHF and EUR/SEK. However, recent performance has proven poor. Instead, for 2024, we think trades will be better placed in value reversals as yield spreads compress.

Model Performance

Momentum models fell 0.5% on the week with all asset classes registering a loss. Equity momentum models fared worst (-1.0% WoW), although are up over the past 3M (+1.4%). FX momentum models (-0.7% WoW) performed second worst with rates the least bad (-0.4% WoW).

*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).

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.)