Rotations and Trend Changes
October 30, 2019
The $ has lost momentum, as have the major $ bond indices, all of which have had a tremendous run year to date, suggesting profit taking as year end starts to come on the radar. Also very interesting to note the continued unwind of the momentum over value trade in Equities…….
As the UK Political situation continues to deliver newsflow, there now looks to be a “Get Brexit Done” Election in the UK on December 12th and the currency markets are taking stock. From a technical viewpoint, the break up through 1.27 against the US $ was a meaningful positive, as that is the long term moving average and this level has now switched from resistance to support. It also represents a key Fibonacci retracement of the rally from the lows. Traders would likely view a move back to this level as a ‘big’ drop. although we should always remember that for FX traders the second decimal place is ‘a big figure’. Meanwhile IRL (In Real Life) a pull back to 1.27 is obviously not that big a deal, especially if the trend has now changed.
On the other side of the equation, the Trade weighted $ Index (DXY) has completed a 68.3% Fibonacci reversal of its recent post June rally and also taken resistance around its long term average. Both are at around the same 97.2 level. Watching the two longer term averages will be instructive of any directional trend changes here, which could spark a rotation back into Asia and emerging markets.
Similarly when we look at the offshore Yuan (CNY) price in $s, it currently sits at 7.06, another near perfect Fibonacci retracement of its ‘rally’ from the February lows – although in this case, the quoting convention of Yuan per dollar as opposed to dollars per pound sterling means the terminology is such that a ‘rally’ is actually currency weakness and thus what we are seeing at the moment is an unwind of some of that weakness, doubtless associated with perceptions of progress on trade talks, but also, like the rest of the moves, actually quite technical. While we would not expect anything very dramatic to happen – after all as previously noted the CNY moves in a narrower band against the $ than most developed economy currencies – we might see the ever hopeful Yuan depreciation talking heads duck back down for a while.
Moving to underlying assets, we notice similar fading and signs of reversal in a lot of the underlying bond indices. After spectacular runs from the end of last year, US long bonds, TIPs and high quality bonds are all stalling and fading. Only High Yield Bond indices remain firm – somewhat ironic given the potential fundamentals, but nevertheless consistent with a fading herd of traders and asset allocators, now thinking about year end and booking some profits.
However, for us. probably the most interesting development at the moment is the rotation between Value and momentum stocks, something which first came to a lot of people’s attention in early September when there was a meaningful switch back from momentum to value after the former had outperformed the latter by over 20% year to date.
There are many ways to quantify value versus momentum but we like this chart from Bloomberg, which shows the ratio between the IShares ETF for Global Value stocks versus the one that they have for Global Momentum stocks. Having been strong all through 2017 and 2018, momentum exploded to the upside versus value at the start of this year. After hitting a peak in August, something of an ‘air pocket’ opened up in early September, which shocked a number of crowded trades. After a brief recovery, this looks to be continuing.
Momentum versus Value – unwinding
If we look at other factor indices, representing quality, size and minimal volatility, these look relatively untroubled, suggesting the focus is indeed very much on the value v momentum axis.