Momentum Models Slip as FX and Rates 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 0.4% over the past week, with FX and rates underperforming equities. Stocks were +0.9% WoW, FX was -0.2% WoW and fixed income was -1.5% WoW.
• FX momentum models are the best-performing over a three-month timeframe (+1.1%).

Market Implications

• Momentum models have flipped from bullish to bearish GBP/USD – we see value in fading GBP strength, as the currency approaches the top of its range on a trade-weighted basis.

Latest Signals

Equity momentum model signals have shifted slightly over the past week. The S&P 500 signal is unchanged at very bullish, with the Nikkei signal becoming more bullish, and the DAX and FTSE biases becoming less bullish (Chart 1).

Rates momentum models tacked less bearishly across US instruments and UK gilts but remain very bearish JGBs and German bunds. Dominique expects the Fed to keep its easing bias next week, but convey a shallower easing cycle, with the 2024 median dot to show only one cut and the long-term dot to increase.

Turning to FX, momentum models’ views have also shifted slightly – flipping bullish to bearish GBP/USD, bearish to bullish NZD/USD, and less bullish EUR/CHF. The remaining signals are unchanged: EUR/USD (bearish), USD/JPY (bullish), AUD/USD (bullish) and USD/CAD (bullish). Ben still favours downside in AUD/NZD.

Model Performance

Momentum models were down 0.4% over the past week as bonds (-1.5% WoW) and FX (-0.2% WoW) underperformed equities (+0.9% WoW). FX momentum models are the best-performing over the past three months (+1.1%), followed by rates (flat) and equities (-0.3%).

(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).

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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.)