Momentum Models Turn Net-Bullish on EUR and GBP

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 delivered a third consecutive week of positive returns, led by equities (+0.8% WoW).
• However, performance remains poor over a three-month horizon. The models we track have lost -1.4%, on average. Rates momentum models (-2.9%) have fared worst.
• Since our last update, momentum models have turned bullish on the S&P 500, flipped net-bearish on the DAX, remained net-bearish on US rates, and flipped net-bullish on EUR and GBP (vs USD).

Latest Signals

Equity momentum models suggest European indices are to underperform as they turn bullish on the S&P 500 and flip net-bearish on the DAX (Chart 1 and Table 1). They remain bullish on the Nikkei.

Meanwhile, rates momentum model signals were unchanged. They remain net-bearish US rates and bunds, bearish gilts, and bullish JGBs.

Within FX, momentum models flipped net-bullish on EUR and GBP (vs USD). However, we retain our tactical short EUR/USD position. Elsewhere, they pared EUR/NOK bullishness, remaining bullish EUR/SEK in line with our bearish SEK view. They also turned net-short USD/CAD (Chart 2 and Table 2).

Model Performance

Momentum models delivered a third consecutive week of positive returns, gaining +0.3% WoW. Equity momentum models (+0.8% WoW) led the pack, with FX momentum models (+0.3% WoW) following behind. Rate momentum (-0.2% WoW) models weighed on average performance. However, performance over the past three months remains poor (rates (-2.9%), equity (-1.6%), FX (-0.3%)).

Our Views

President Biden and House Speaker McCarthy suspended the debt ceiling until January 2025 in exchange for an $81bn or 0.3% of GDP expenditure cut relative to the CBO FY2024 baseline and a $68bn increase relative to FY2023. Dominique believes that it is a good deal for the White House, but less so for the Federal Reserve. As a result, she expects a 25bp hike at the June 2023 FOMC meeting.

Elsewhere, John Tierney has kept his eye on the latest developments in AI stocks. He warns investors to enter very carefully. At the same time, with the VIX near 18-month lows, he sees value in owning VIX futures.

*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.

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.)