Net Short on FTSE-100 and Gilts

• All S&P500 and Nikkei models signal ‘buy’.
• Best performing bond models signal ‘buy.
• Over the past three months, the best performing bond model has been the 3-month lookback for US long bonds (4.8%) and for equities it has been the 1-month lookback for the Nikkei (12.8%).

The US August CPI was lower than expected and likely marks the start of disinflation. Elsewhere, employment was overshadowed by hot inflation in the UK, and Australia recorded weakening employment. In Asia, Nikkei pulled back from 30,800 highs whilst Indian equity markets make new ground on lowered inflation and food wholesale prices. In Canada, polls have a slim margin favoring the Liberals over the Conservatives, but to only win a minority. With this backdrop, the UK is net ‘sell’ along with US 10y’s, the remainder signal ‘buy’.

Latest Signals

This week, the US 5y 3-month flipped from ‘sell’ to ‘buy’ and US 10y 1-month ‘buy’ to ‘sell’. The best performing bond models for each contract continue to signal ‘buy’, and the 1- and 3-month lookback models for US long bonds gained the most on last week (0.8%) and are giving ‘buy’ and ‘sell’ signals, respectively (Table 1). Lastly, net signals across the bond models for each contract are ‘buy’ except for the US 10y and Gilts (Chart 1).

On equities, just the FTSE-100 3-month lookback flipped from ‘buy’ to ‘sell’. All lookback models for the Nikkei performed strongest WoW gaining 1.4%, all three models signal ‘buy’ (Table 1). Lastly, net signals across equity models signal ‘buy’, except for the FTSE-100 (Chart 1).

Best Performing Models

Looking at the performance of the best models over the past three months, we find the following:

• Bonds: the best-performing bond model is the 3-month lookback for US long bonds. It has delivered 4.8% returns and is currently giving a ‘buy’ signal (Table 1, Chart 2).
• Equities: the best performing equity model has been the 1-month lookback for the Nikkei. It has delivered 12.8% returns and is currently giving ‘buy’ signals (Table 1, Chart 3).

*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.

(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.)