Wednesday, June 20, 2007
It's pretty rare for Sweden to be the focus of financial markets for more than a few minutes, but such has been the case today. The Riksbank announced its interest rate decision this morning and delivered the expected 0.25% increase. However, the accompanying statement was modestly hawkish, hinting at a future rate path slightly higher than that priced by markets. The SEK, erstwhile market whipping-boy and funding currency extraordinaire, promptly rallied a percent, erasing all of the EUR/SEK of the previous week.
Are you listening, SNB?
Meanwhile, a Finance Ministry Report concluded that Sweden's $25.1 billion in FX reserves were excessive and that "the need for currency interventions is limited for the foreseeable future." The report recommended that the Riksbank cut its exposure to foreign currencies over a period of a few years.
Are you listening, PBOC?
Elsewhere, the June BOE vote on rates was surprisingly close at 5-4. Swervin' Mervyn King was on the losing side of the ledger for the second time in his career. This makes a July hike more likely, obviously, and perhaps could sightly raise the terminal rate that's priced into the strip. Macro Man continues to believe that the higher rates go, the harder they (and the economy) will eventually fall, but concedes that that theme is on the backburner for the time being.
A few days ago Macro Man opined that bonds could catch a bid at the expense of stocks as pension funds rebalanced their portfolios into quarter end. He decided to perform a quick and dirty study to see if he could capture this in past performance data.
He took total return performance fitures for the S&P 500 and 7-10 year Treasuries for the past thirteen years and compared the retuns of equities and bonds. Arbitrarily selecting the last two weeks of a calendar quarter as a period most likely to see rebalancing flows, he compared the quarter-to-date outperformance of stocks versus bonds with 10 trading days remaining in the quarter with the relative performance in the last 10 days of the quarter.
The results were mixed. The average quarter-to-date equity outperformance of equities with 10 days left was 1.6%; the average outperformance over the last 10 days was -0.53%. In other words, on average, bonds have outperformed stocks over the last ten trading sessions of the quarter since 1994. This would appear to confirm Macro Man's prior hypothesis.
However, digging deeper suggests that there may not be much in it. Despite the figures cited above, the correlation of QTD equity outperformance with ten days left with outperformance over the final ten days is positive. A glance at the scatter chart above suggests that any evidence for a firm relationship is tenuous at best. Moreover, of the 53 quarters in the study, only 27 have the "right" sign if Macro Man's hypothesis is correct. In other words, equity out (under) performance through the first 2 1/2 months of the quarter is met with equity under (out) performance in the final ten trading days just about half the time. It doesn't get more inconclusive than that.
Perhaps there's data to be had at the extremes? After all, equities have outperformed bonds by 10.5% so far this quarter, the seventh best showing since 1994. Again, performance data from the other six is inconclusive. While equities did indeed underperform bonds during the final ten days of the quarter in four of our prior datapoints, the two in which they did not were doozies, as stocks bested bonds by at least 4% in the span of two weeks.
As a result, Macro Man is forced to admit that after a cursory inspection, he cannot reject the null hypothesis that the final ten days of a quarter will not reverse the pattern of the prior two and a half months. The usual disclaimer, of course, applies: this study was not exhaustive, was not meant to be exhaustive, and if anyone knows of a more rigorous study on the same subject, by all means pass it along!