Losing Momentum
At a Glance
The momentum trade, which has been a pivotal driver of equity markets, appears to be losing steam as we head into Q4 2023. Per the full note from J.P. Morgan, momentum dispersion is currently at its widest since 1990, indicating a potential shift in investor focus towards overlooked sectors. The MSCI USA Momentum Index experienced a notable 43% gain in just a few months but may signal that its robust performance is waning, urging traders to reassess their equities exposure amidst evolving market conditions.
Key Takeaways
- 01Momentum dispersion at the widest since 1990 suggests a potential shift towards undervalued sectors.
- 02The MSCI USA Momentum Index has seen a 43% gain from March to June, indicating initial strong performance but potential waning interest.
- 03J.P. Morgan forecasts gold prices to average $6,000/oz by Q4 2026, contrasting current diminished investor interest in gold.
- 04Overall investor focus may need to diversify as market conditions evolve, impacting momentum-driven strategies.
Full Analysis
What the desk is arguing
The current analysis suggests that the momentum trade may be reaching its limit as the market grapples with widening performance gaps among stocks. With momentum dispersion at the highest level since 1990, a rotation towards undervalued sectors is anticipated. Per the full note, the strong outperformance of the MSCI USA Momentum Index indicates that this trend is not as sustainable as it once appeared.
Furthermore, J.P. Morgan forecasts that investor interest might shift from high-flying momentum stocks into other areas of the market that have been lagging, creating opportunities in neglected sectors. This shift is evident as overall investor interest is declining even amidst significant gains.
Where it sits in our coverage
Our internal consensus for the EUR/USD is set at a target of 1.075 with a range spanning from 1.04 to 1.12, reflecting differing outlooks among banks on currency pair movements. Specifically:
This position is central within the current consensus, with jpmorgan slightly above the average target while bofa sits below it, indicating a divergence in sentiment regarding the most favorable directional trade in this environment.
How other firms see it
Most firms are cautious, echoing the desk's views on the diminishing strength of the momentum trade. Aligned firms, such as jpmorgan, support the idea that a significant market shift might be underway. Conversely, firms like bofa express skepticism, predicting more downside potential in equity markets.
In the current market climate, equity movements will likely impact currency pairs such as the USD/EUR connection, as shifts in risk sentiment might encourage volatility across major currencies like USD/JPY.
Market Implications
Traders should watch for signs of sector rotation, which could manifest through shifts in equity performance, particularly in lagging sectors. A reversal below the 200-day moving average in key indices could signal further downside for current momentum trades.
From the original
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Related speeches
4 items'Peak Momentum' and a New Phase for Asian Stocks
The desk interprets Goldman Sachs' commentary on potential 'peak momentum' in global growth, suggesting a shift in market dynamics that could lead to modest equity returns. Per the full note, while growth might be slowing, Tim Moe identifies enduring investment opportunities in Asia, especially in China. This is particularly relevant for FX traders focused on Asian currencies, as trends in equities often correlate with currency fluctuations. Notably, the implied caution reflects broader themes surrounding market liquidity and geopolitical risks that could impact currency valuations.
Signals & Noise: Why small & mid-caps are leading the 2026 market rally – and what’s next
Lead — The US small and mid-cap equity markets are showing exceptional strength in 2026, diverging notably from larger cap segments. Per the full note from BofA Global Research, the current rally demonstrates a preference for smaller companies as investor sentiment shifts potentially due to economic resilience despite external pressures. The desk anticipates continued momentum in these markets, driven by factors such as improved earnings prospects and robust consumer spending. Observations from major financial institutions indicate that while some analysts remain cautious, a growing consensus points toward a more favorable outlook for the small and mid-cap segment in the near term.
EM Fixed Income: Getting fully back on the EM horse
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Summer Reset
The central thesis from J.P. Morgan's latest commentary suggests that market participants are under-positioned for a potential shift in FX dynamics, driven by the seasonal reset typically seen in the summer months. Per the full note, the desk emphasizes that FX traders should recalibrate their expectations, taking into account the changing summer landscape. This recalibration may enhance momentum for certain currencies as liquidity conditions shift during the summer lull. Furthermore, the bank indicates a greater emphasis on relative monetary policy stances, suggesting that weakening positions in certain currencies may materialize as central banks continue adjusting their rate paths. Traders would do well to closely monitor U.S. inflation metrics ahead of the summer period, which could inform how the dollar responds to changes from Federal Reserve policies. An alternative read could suggest that traders remain overly cautious, failing to capitalize on the potential for volatility around summer economic data, which typically sparks trading opportunities in a lighter liquidity environment.