Momentum Returns Track Sideways as Rates Underperform FX and 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 flat the past week, with equity models up 0.3% WoW, FX models up 0.2% WoW and rates models down -0.5% WoW.
• Momentum models are down over a three-month time frame, with rates models the best performing (-0.2%).

Market Implications

• Momentum models are mixed on USD – our G10 FX team proposed a new dollar trading strategy with return characteristics comparable to FX carry. The signals are generated using PMI outturns. When PMIs are improving you are long the dollar, and vice versa.

Latest Signals

Equity momentum model signals have had small bias shifts. The signal for the S&P 500 shifted to very bullish from modestly bullish, and the FTSE signal flipped modestly bullish from modestly bearish. Signals in the Nikkei (modestly bearish) and the DAX (very bullish) were unchanged (Chart 1).

Rates momentum model signals are all bullish – signals in the US 5Y (modestly bullish) and US 10Y (very bullish) are unchanged. Signals in the US long bond and Gilts shifted to modestly bullish from very bullish, while Bund and JGB signals shifted to very bullish from modestly bullish (Chart 1). We remain dovish on BoE pricing, with inflation still undershooting the BoE’s August forecasts. We expect two BoE cuts by year-end and remain long 10Y gilts.

Turning to FX, momentum models’ biases shifted slightly – EUR/USD and USD/CAD signals remain unchanged (modestly bullish), as do GBP/USD, AUD/USD, NZD/USD and EUR/NOK (all very bullish). The shifts occurred in USD/JPY, EUR/CHF and EUR/SEK (all flipping to modestly bullish from modestly bearish) (Chart 2).

Model Performance

• Momentum models were flat the past week, with equity models up 0.3% WoW, FX models up 0.2% WoW and rates models down -0.5% WoW.

(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).

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.)