Momentum Models Slip as Fixed Income and FX Underperform Equities

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 were down 0.1% over the past week, with a positive performance in equities unable to offset negative FX and fixed income returns. Equities were +0.9% WoW, FX was -0.4% WoW and fixed income was -0.3% WoW.
• Equity momentum models remain the best-performing model over a three-month timeframe (+3.2%).

Market Implications

• Momentum models remain very bullish USD/JPY – we argue the Japanese MoF has plenty of ammo to push back against JPY weakness.

Latest Signals

Equity momentum models have shifted slightly, with the S&P 500 and Nikkei biases becoming more bullish. DAX and FTSE biases remain very bullish (Chart 1).

Rates momentum models are less bearish the US 5-year, and German bunds and have flipped from very bearish to very bullish UK gilts. After this week’s US inflation and retail sales data, Dominique still expects no 2024 cuts and the June dot plot to show only one to two 2024 cuts, against three in the March plot.

Turning to FX, momentum models’ views have shifted slightly – they have flipped from bearish to bullish in EUR/USD, GBP/USD and NZD/USD. They became more bullish AUD/USD and flipped from bullish to bearish ERU/NOK. Ben favours downside in AUD/NZD.

Model Performance

Momentum models were down 0.1% over the past week as bonds (-0.3% WoW) and FX (-0.4% WoW) underperformed equities (+0.9% WoW). Equities momentum models are still the best-performing over the past three months (+3.2%), with rates (+0.5%) and FX (+0.7%) also positive over this period.

(Charts 1 and 2: blue bar is last week’s signal; orange bar is this week’s signal.)

(Charts 3 to 5: orange bars are average returns of CTA model over past three months by asset, black dot is change over the past week).

*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).

.

Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(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.)