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Momentum Models Support Positioning for Dovish BoE
- By Bilal Hafeez and Ben Ford
- 2 min read
When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.
Market Implications
- Momentum models support Henry’s view that there remains room for relative BoE dovishness versus the ECB and the Fed, which he likes via a 2s10s GBP/EUR box and by being short 1Y1Y US OIS vs 1Y1Y SONIA.
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When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.
Market Implications
- Momentum models support Henry’s view that there remains room for relative BoE dovishness versus the ECB and the Fed, which he likes via a 2s10s GBP/EUR box and by being short 1Y1Y US OIS vs 1Y1Y SONIA.
Summary
- Momentum models were flat over the past week as gains in rates (+0.4% WoW) were offset by losses in equities (-0.3% WoW) and FX (-0.1% WoW).
- Performance over the past three months remains marginally positive (+1.0%), due to strong equity momentum model performance (+5.2%).
- Since our last update, momentum models have turned heavily bearish on rates and EUR/CHF, and pared EUR/USD bullishness.
Latest Signals
Equity momentum models remain unchanged, they are heavily bullish on the S&P 500 and DAX with outperformance signalled against the Nikkei (bullish) and the FTSE-100 (bearish); Chart 1.
Meanwhile, rates momentum models shifted less bearish on gilts ahead of today’s BoE decision – Henry correctly called for a 25bp hike. Otherwise, they remain heavily bearish on US rates, JGBs, and bunds.
Turning to FX, momentum models are less convinced of a EUR/CHF demise, in line with Ben’s view that EUR/CHF could trade higher over the coming months (Chart 2). Instead, they expect the $-bloc to suffer (vs USD).
Model Performance
Rates momentum models (+1.4% WoW) remained the only ones to deliver a positive return over the past week, led by the sell off in US long bonds (+3.2% WoW). Our other rates models are flagging a rise in the EUR 5s10s30s fly while our discretionary views are mentioned below.
Equity (-0.4% WoW) and FX momentum models (-0.3% WoW) delivered negative returns over the past week. In FX, our FX carry models have had far greater success, with our Carry:Mom 1M up +19.6% YTD. As it stands, they support Bert’s view to remain in the LatAm FX carry trade and support Ben’s view that EUR/CHF could trade higher in the coming months.
Returns remained marginally positive over the past three months (+0.2%) due to strong equity momentum model returns (+4.4%) while rates (+2.6%) are also a positive.
Our Views
In the US, markets seem to have long forgotten the July FOMC meeting (Dominique’s review) and have, instead, switched focus to US Treasury funding needs (Q3: $521bn) which has come alongside the Fitch downgrade. However, Dominique notes the Fitch downgrade is unlikely to have a lasting market impact. Further afield, she claims a soft landing is possible, but only with luck. As it stands, she believes the Fed will have to resume hikes sometime around mid-2024 but sees the current oil price as a risk that this could happen even sooner.
And, staying on oil, Viresh notes that Brent crude remains well supported above $80/bbl That is because US oil production has now peaked, and will likely decline slowly over the next six to eight months, which will boost OPEC+ market power as Saudi Arabia extends production cuts. At the same time, markets pricing out a recession cuts off the left tail. Opening up the right tail requires further Chinese demand, which he went through in detail last 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 3 months, you buy, otherwise, you sell (note I use excess returns).