Momentum Strategies’ Returns Muted as Rates Outperform, Equities Lag

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 down 0.1% over the past week, with equity models down 0.8% WoW, FX models down 0.1% WoW and rates models up 0.3% WoW.
• Momentum models are down in aggregate over a three-month time frame, with rates models the best performing (+0.1%).

Market Implications

• Momentum models remain bearish USD – we wrote this week that an upwardly revised GDP report and potential for stronger payrolls today support our bullish USD bias as markets fully price the soft landing.

Latest Signals

Equity momentum model signals have had a couple of small bias shifts. The signals for the S&P 500 (very bullish) and FTSE (modestly bullish) are unchanged, while the Nikkei signal is modestly bullish after being modestly bearish, while the Dax bias has shifted to modestly bullish from very bullish (Chart 1).

Rates momentum model signals have similarly shifted slightly – momentum signals in the US 5Y, 10Y and long bond futures are unchanged (all modestly bullish). Meanwhile, the JGB signal has shifted to modestly bullish from very bullish. The bund signal remains very bullish, unchanged from last week, while gilts have shifted to very bullish from modestly bullish. Dominique dove deep into the US inflation regime. Although it is not Dom’s base case, the combination of resource pressures and disinflation suggests a risk the US could be returning to pre-pandemic low inflation.

Turning to FX, momentum models’ biases are unchanged – EUR/USD, GBP/USD, AUD/USD, NZD/USD are very bullish; USD/JPY, EUR/CHF, EUR/SEK and USD/CAD are modestly bearish; and EUR/NOK is modestly bullish.

Model Performance

• Momentum models were down 0.1% over the past week, with equity models down 0.8% WoW, FX models down 0.1% WoW and rates models up 0.3% 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.)