Momentum Models Turn Bearish US Rates

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Equity momentum model performance was buoyant (+0.8% WoW) compared to rates (-0.3% WoW) and FX (-0.4%) models.
• A similar pattern is found over a three-month horizon (equities: +0.6%; rates: -2.6%; FX: -0.1%).
• Momentum models point towards further positive equity performance, with Europe top of the pack, while rates are expected to sell off. In FX, they are no longer net-bullish EUR.

Latest Signals

Equity momentum models remain bullish equities with the strongest bullish signals in Europe (DAX and FTSE-100; Chart 1 and Table 1).

Momentum models are bearish rates after turning net-bearish on the US five- and 10-year, long bond and gilts (Chart 1).

Momentum models are no longer net-bullish EUR, turning net-bearish EURUSD and EURCHF (Chart 2 and Table 2). Momentum models also turned net-bearish GBP, NZD and CAD (vs USD).

Model Performance

Momentum models (-0.1% WoW) touched lower over the past week after a strong week in equities (+0.8%) was outweighed by a poor showing in rates (-0.3%) and FX (-0.4%; Charts 3, 4 and 5). A similar pattern is found over a three-month horizon (equities: +0.6%; rates: -2.6%; FX: -0.1%).

Our Views

The forthcoming nomination of the next BOJ governor and likely further widening of the Yield Curve Control (YCC) band have significant implications for global interest rates this year. And with those come an impact on the Japanese yen and rest of Asia FX. BOJ’s surprise move on 20 December to widen the YCC band from +/-25bps to +/-50bps saw JPY strengthen almost 4% on the day. CNH, TWD, KRW, TBH and SGD also strengthened on the day of the BOJ move. INR was the exception.

Japan’s likely continued monetary policy tightening in the coming months comes as other major central banks are nearing the end of their hiking cycles. The Fed downshifted to a 25bp hike at the 1 February FOMC meeting, and Chair Powell adopted a dovish tone. Rate hikes are also nearing an end in the UK, with the Bank of England hiking by another 50bps on 2 February while signalling that little more is to come. The ECB, meanwhile, remained hawkish with the policy rate at a lower 2.5% versus the BoE’s 4.0% and Fed’s 4.5%.

The dollar dropped to a 10-month low after the recent Fed meeting, and equities and broader risk assets rallied, with Asia FX a clear beneficiary. A narrower yield gap between the JGBs and USTs should support a stronger yen. Meanwhile, further ECB hikes should support the EUR. And overall, further convergence within DM monetary policy should weigh on the USD to the benefit of Asia FX.

Turning to commodities, we published a bullish call on oil, outlining why it could rise to $120/bbl in 2023 — this is a longer term call, with Brent flat to down recently.

*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.)