With investors questioning the sustainability of equity valuations in a context of rising bonds yields, a Momentum reversal in equities is taking shape. Defensive sectors, and more recently Technology stocks, faced downward pressures while Financials and Energy rallied, leading to a -10% fall in the Dow Jones U.S. Momentum Index (long/short) so far this month. But while Momentum in equities has crashed since the Pfizer vaccine announcement on November 9 (-25%), the Momentum risk premia across asset classes traded by trend-following strategies is doing very well. CTA strategies staged a rally so far this month, up +3.6% according to our estimates (+2.5% yearto-date).

Commodities have been a key contributor to CTA performance with long positions on every corner of the market. For those who do not trade the asset class, commodity currencies such as the NOK and the AUD (vs. USD) have been a good proxy to capture the upward trend in energy and metal prices. For different reasons, the GBPUSD also contributed positively to performance among G10 currencies. With regards to the equity/ bond complex, long fixed income positions have been significantly reduced, but they detracted from performance lately. Long positions on equities, mainly in the U.S., have shown to be supportive for CTA performance.

Going forward, we upgrade our stance on the strategy from Neutral to Overweight. CTAs are attractive to benefit from surging inflation expectations and/ or real bond yields via their currency and commodity exposures as additional fiscal stimulus in the U.S. kicks in. The deleveraging in fixed income also suggests the strategy could be well prepared for any tapering of asset purchases from the Fed later this year. Finally, CTAs currently provide exposure to equities in moderate proportions and are, for most strategies, not sensitive to the sector rotations that are taking place. Overall, CTAs currently provide a great deal of diversification against rich valuations in equity and bond markets. Some CTA strategies have started to diversify their portfolio with exotic assets such as cryptocurrencies and/ or remote corners of commodity markets, but these exposures are too small to have a meaningful impact on performance.