Momentum Models Signal Lower UK Yields

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.  

Market Implications 

• Momentum models signal lower UK yields. This aligns with Henry’s bias in the front-end of the curve. They also agree with our bearish US rates bias. 

• In FX they align  with our long EUR/CHF trade. 

Summary 

• Rates momentum models (+1.5% WoW) outperformed FX (+0.2% WoW) and equity momentum models (-0.8% WoW) over the past week. 
• Rates momentum models are the best-performing models over a three-month time frame (+4.5%). FX (+0.1%) followed while equity (-2.6%) struggled. 
• Momentum models are signalling lower UK yields but UK equity outperformance. In FX, they have begun to align with our long EUR/CHF trade. 

Latest Signals 

Nikkei and DAX equity momentum models shifted bearish having done the same on the S&P 500 last week. They remain heavily bullish on the FTSE-100. 

Meanwhile, rates momentum models have flipped bullish on Gilts having turned less bearish on them last week. Henry sees 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 flipped bullish EUR/CHF which aligns with Ben and Richard’s latest trade and flipped bearish EUR/SEK though Ben claims the reason for this is misleading market participants. With signals otherwise unchanged, we remain bullish on USD by being long USD vs EUR, CHF and GBP in G10 and long USD vs INR and TWD in EM. 

Model Performance 

Rates momentum models (+1.5% WoW) remained the best performing models over the past week with FX (+0.2% WoW) the other positive performer, on average. The same order follows over a three-month time frame, too: rates (+4.5%), FX (+0.1%), equity (-2.6%). 

*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.)