Momentum Models Signal European Equities Outperformance

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 registered a positive return in FX (+0.1%) over the past week while they underperformed for rates and equities (-0.3%).
• The good news stops there; performance was poor over the past three months across rates (-2.7%), FX (-3.3%) and equities (-6.8%).
• Momentum model signals suggest European equities are set to outperform. Elsewhere, they remain bearish rates and flipped net-bullish on EUR/CHF.

Latest Signals

Equity momentum model signals suggest European outperformance as the 12-month lookback model for the DAX flipped to signal ‘buy’ (Chart 1 and Table 1).

Meanwhile, rates momentum models have remained net-bearish on US, Japan, German and UK rates.

Within FX, momentum models turned net-bullish on EUR/CHF as the one-month lookback model flipped to signal ‘buy’ (Chart 2 and Table 2).

Model Performance

For a second week running, momentum models performed best for FX (+0.1%) over the past week, while they registered negative weekly returns for rates and equities (-0.3%). Over the past three months, performance has been poor across the board (rates: -2.7%; FX: -3.3%; equities: -6.8%).

Our Views

Our favourite trades to start 2023 has been released! We have come up with seven themes spanning FX to rates to equities. Here they are:

• Rest of the world catch-up: sell USD vs EUR, JPY
• China dash for growth: short USD/CNH, long HIS
• UK rolls over: UK steepener
• Euro (bond) supply issues: sell BTP vs bund
• Aussie rebound: sell GBP/AUD
• Too much Swedish love: receive Swedish rates vs euro
• No time for tech: long SPX vs Nasdaq

Turning to central banks, Dominique continues to expect a 50bp hike from the Federal Reserve at the 1 February meeting – despite early calls for a 25bp hike (31bp priced). She agrees with the consensus of 30bp MoM for core CPI: when inflation is high, core and energy prices tend to become correlated. Oil prices are falling and pulling down core CPI. Bilal has released his trading guide for the US CPI release.

And in Europe, Henry is expecting 50bp hikes from the European Central Bank and Bank of England – though the former to be a hawkish hike and the latter to be a dovish – while Ben expects a 25bp hike from Norges Bank in March.

Finally, Ben expects the Bank of Canada to follow the Reserve Bank of Australia and deliver a 25bp hike of their own, but believes the risks are skewed to the upside, not a pause.

*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.

(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.)