Bearish JGBs and Bullish S&P500

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 continued to perform best for rates (+0.3% WoW) despite a positive week for equities (+0.4% WoW). They continued to underperform for FX (-0.2% WoW; -1.6% 3M).
• Momentum models flipped back to net-bullish on the S&P 500 while they turned net-bearish on JGBs.

Latest Signals

Equity momentum models flipped back to net-bullish on the S&P 500 as the three-month lookback model flipped back to signal ‘buy’ (Chart 1 and Table 1). The S&P 500 has traded in a tight range through November and December causing model signals to fluctuate. Elsewhere, equity momentum models pared Nikkei bullishness.

Rates momentum models flipped net-bearish on JGBs. The change comes as Japan two-year yields approach 0%. They remain net-bearish on US rates and bunds as well as turning more bearish on long Gilts.

Within FX, momentum models have tailed SEK and NOK bullishness (net-bearish EUR/SEK, net-bullish: EUR/NOK). Meanwhile, they flipped net-bullish on AUD/USD (Chart 2 and Table 2).

Model Performance

Momentum models have performed best for rates over the past three months (+2.8%), with the past week adding to gains (+0.3% WoW). The success was not shared with FX (-1.6% 3M) and equity (-1.8% 3M).

Our Views

The Federal Reserve (Fed) has delivered a 50bp hike – Dominique’s review will follow shortly. The European Central Bank (ECB) and Bank of England (BoE) have too.

Focusing on the ECB, Henry has concentrated on the hawkish forecast revision. Notably, there is now more support for more hikes. Turning to QT, the pace has been set lower than Henry expected, but it comes in line with market expectations.

And on the BoE, the votes surprised dovishly. It shows the arguments for the front-load are waning and there is growing support for a pause. Going forward, the labour market is key. In total, the update aligns with Henry’s expectations that February will be time for a pivot.

Turning to our trades, we exited our long SGD/CNH trade for a healthy +7.4% return. For now, in DM, we remain short the German 10-year (target: 2.50%), and, in EM, we are long THB/TWD, continue to receive 1s5s MYR IRS, and are positioned for a China reopening (short USD/CLP and long Hang Seng).

*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).

Table 1: Equity and Bond CTA Model Signals and Returns

Table 2: FX CTA Model Signals and 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.)