Momentum Models Remain Bearish on UK Rates

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 (-0.8% WoW) registered negative returns across FX (-0.4% WoW), rates (-1.4% WoW) and equities (-1.0% WoW). 

• Rates momentum models are the best-performing models over a three-month timeframe (+2.2%). FX (+0.1%) followed, while equity (-3.3%) struggled. 

Market Implications 

• Momentum models remain bearish on UK rates. However, Henry sees value in being long the front end of the UK curve. 
• They remain bullish on USD but have tamed somewhat, in line with our expectation that the USD rally has tired. 

Latest Signals 

Equity momentum models flipped bullish on the FTSE-100, while they remain bearish on the S&P 500, Nikkei and DAX. However, hedge funds are positioned for Nikkei outperformance. 

Meanwhile, rates momentum models remain heavily bearish. However, on a strategic front, Henry and Richard see value in owning the front end of the curve, receiving February 2024 MPC-Dated SONIA (target: 0bp) and being long the March 2024 SONIA future (target: 94.80). 

Turning to FX, momentum models have pared EUR/CHF bullishness, though Ben and Richard remain long EUR/CHF, and pared AUD and CAD bearishness (vs USD) – Ben and Richard are monitoring short AUD/CAD. Overall, signals remain net bullish on USD, though they have tamed, in line with our near-term view that the USD rally has tired. 

Model Performance 

Momentum models (-0.8% WoW) struggled over the past week with rates momentum models performing the worst (-1.4% WoW; Charts 3 to 5). However, over the past three months they remain the top performer (+2.2%). FX momentum models have registered a marginally positive return over the period (+0.1%) while equity momentum models have proven unfruitful (-3.3%). 

*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.

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.

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(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.)