Momentum Models Tread Water Amid the Banking Crisis

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 (-0.5% WoW) are yet to recover, performing worst in equities (-1.0%), then FX (-0.6%) and rates (-0.1%). They have struggled through 2023.
• Overall returns were marginally better in the FX carry strategies we follow.
• Momentum models have pared S&P 500 bearishness and turned net-bullish on rates, EUR, JPY and GBP.

Latest Signals

Equity momentum models are optimistic on the Nikkei and DAX and net-bullish on S&P 500 (Chart 1 and Table 1). They remain bearish on the FTSE-100.

Momentum models favour US 5s10s flattening as they turn net-bearish on the US 5Y and remain net-bullish on the US 10Y. Elsewhere, they have turned bullish on JGBs and net-bearish on bunds.

In line with signalled lower JGBs yields, FX momentum models have returned bearish JPY (Chart 2 and Table 2). They have also turned net-bearish EUR/CHF and bearish NZD/USD.

Model Performance

Momentum models (0.0% WoW) did little over the past week, an improvement on recent run of losses they have incurred. Momentum models for rates (+0.1%) were the only real bright spot; they were flat across equities (0.0%) and down in FX (-0.2%).

Our Views

The banking crisis remains atop everybody’s mind. Central bank speakers mention it in every speech they give while investors continue to scan for banks at risk. It has scrambled bank valuations and therefore created an opportunity for investors. As it stands,  John thinks the SVB crisis appears to have passed, but the problems that sunk SVB – underwater bonds and loss of deposits – are widespread. Sam’s latest Deep Dive put the risks into context while guest author John Welch believes the monetary reaction to the failure of region banks, starting with SVB, looks like that experienced in many Emerging Market countries. As a result, there is risk of fiscal dominance.

*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).

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.

Photo Credit: depositphotos.com

(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.)