Testing Tuesdays

Bob Geldof famously doesn't like Mondays, a sentiment which is likely shared amongst wide swathes of the population.    He presumably has no beef with Tuesdays, and if the populace at large is fairly neutral on the second day of the workweek, the same can probably not be said for equity punters.  For as Citi's Brent Donnelly pointed out yesterday, the stock market's performance on Tuesday has been nothing short of spectacular.

Perhaps it's mere coincidence or a statistical quirk.   Maybe it's the sign of dark forces at work.  Frankly, Macro Man doesn't know.  All he can say is that thus far in 2014, the SPX has rallied an impressive 8.75% on Tuesdays....and dropped a cumulative 6% on the other four days of the week.


Now, when Macro Man was reminded of this phenomenon, he thought it sounded a little familiar, so he did a little digging.  Sure enough, just last year, the cumulative week 17 performance on Tuesdays was 7.89% versus just 2.71% for the other four days.  In fact, the SPX started the year by rallying on 19 of the first 22 Tuesdays, a not dissimilar hit rate to 2014's 15 out of 17.  So what happened next?



To a large extent, the outperformance evened out.   Indeed, from week 22 onwards, the SPX was down nearly a percent on Tuesdays, versus a cumulative rally of nearly 13% on other days.  While the index still punched above its weight for the year as a whole, the discrepancy wasn't nearly as notable as it is today (or indeed was a year ago.)  If anyone has a rational explanation for why Tuesdays have been so great for the first 4-5 months over the last couple of years, Macro Man would love to hear it.   Failing that, he'd suggest that anyone betting on a sustained continuation of this outperformance trend might find themselves tweaking the Boomntown Rats song before too long.

Elsewhere, sterling has been rather notable for its strength in recent days, with cable pushing to its highest level since 2009.  To be sure, some of this strength reflects the relative resilience of the UK data, which itself has filtered through into rate markets.  Nevertheless, it does look like sterling might be a little ahead of itself, even if one accepts that current rate differentials are justified.


That in and of itself is an open question.   While economic activity is clearly quite brisk (and house prices in the Southeast downright rampant), CPI inflation is at its lowest level in 5 years.   Given that Woodfordite central banks pursue a function wherein Policy target = min( employment, CPI, GDP), this should provide ample opportunity for Mark Carney to contrive excuses to keep policy unchanged, perhaps up until the election.

Indeed, Macro Man's own work suggests that appropriate rates based on the post-crisis, pre-Carney reaction function of the BOE are already quite a bit lower than they were a few months ago given the drop in inflation.  As such, it would appear that the in the near term at least, the prospect of UK rate rises might be close to fully priced...


Moreover, the Scottish referendum is now less than six months away, and the polls seem to be swinging ever closer to a dead heat.  History suggests that constitutional referenda  tend to exact an ex ante risk premium in currency markets (viz. the euro in 2005 and the CAD in 1995) which at the moment is absent from sterling.  As such, from Macro Man's perch, sterling should carry a large 'caveat emptor' sign at current levels.

Finally, it will be interesting to see if UKIP follows through on its plans to make the newly-available David Moyes its Head of Strategy.   After all, if he can keep Manchester United out of Europe.....


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Dismal Scientist
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April 23, 2014 at 12:39 PM ×

The best Moyes joke so far, thank you ! Meanwhile in other news, Greenlight's Einhorn thinks we're in a tech bubble but has a big long in solar. No risk, no fun, as the Germans say. And those guys know all about tech and renewable bubbles...

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April 23, 2014 at 1:04 PM ×

In my opinion, the thing with the GBP/USD is not that the market buys GBP, but has more to do with the fact that the market wants to get rid of USD. I have months since I am monitoring the "behavior" of the majors and I am inclined to believe that the trick is on the USD side and not where most of the analysts look at.

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Polemic
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April 23, 2014 at 2:45 PM ×

I m rather hoping that "this time is different". As a fan of turnaround tuesdays and seeing prices take off again over the past week I am as contrarian as ever and this perma-bull has taken some P and is going short term short DM eqs.
Also working on the "Fed vs market expectation of Fed" oscillations I would posit that the risk of surprise side for next fed will be to be "less dovish than expected" side.

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Anonymous
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April 23, 2014 at 3:26 PM ×

@Razvan Podariu,

why does market want to get rid of USD? Could you elaborate?

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April 23, 2014 at 4:53 PM ×

@Anonymous

First of all why would someone buy US bonds for 2.60% - 2.70% (UST10Y) when you can obtain much more buying Spanish or Portuguese bonds and enjoying a negative inflation? The real return is even bigger...isn't it?

Why do I need to hold USD while RBA or RBNZ pays me 2.50% or 2.75% (maybe even 3% very soon) while the FED pays me 0.10% for my money and maybe....maybe....they will raise the interest rates next year. And even then, the hike will be no more than 0.25%. I have NOW 2.75% from RBNZ.

If you have a higher risk appetite you can buy TRY or INR and get 12% or 8% for your money. Look at the EM Index MSCI Ishares ETF: is rallying while Russia is playing with the fire at Ukraine's doors.

The US economy is recovering indeed but who cares? So is the UK's economy (and at a faster pace in my opinion). The Eurozone has a problem with the lack of inflation but has no problem with the growth. And the Eurozone has something else: it has the "whatever it takes" while US has a printing machine to backup the USD.

Last year, IMF recommended to diversify the foreign reserve currencies by buying AUD and CAD. And two of the most powerful CB in the world - SNB and PBOC - are doing exactly this: they are dropping the USD in the favor of AUD, EUR and CAD.

Recently, Russia is moving to drop also the USD as a reserve currency and also looks to denominate the Oil and the Gas in Russian Rubles. Guess what: China is their first ally into this.

I don't think that the FED is tapering because the economy is doing far better than it did last year but they look to taper the QE because they are aware that the QE has done more damages than good things.

So now I have a question for you: why would I buy the USD?

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abee crombie
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April 23, 2014 at 7:08 PM ×

Nice post MM, your are getting to be prolific. Its hard to keep up!

The tuesday performance is interesting. Turnaround tuesday seems etched into traders minds and perhaps does have something to it (after a big Friday-Monday move) but other than that I dont buy it.

I'm finding the energy space quite interesting. Equities are breaking out (defensive rotation) and Gas prices are inching up to 2010, 2011 rejection levels. Something to watch as we get closer to them

There seems to be almost no conviction in any markets I look at. Indonesian nickel situation looks interesting thats about it

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Anonymous
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April 23, 2014 at 7:39 PM ×

@Razvan Podariu,

Thank you for your insightful explanation. I guess that I was thinking that Fed will be the first among majors to be forced to raise rates since Fed has the lowest tolerance on inflation. NZ does not count as it is too small.

AUD has a China problem, not urgent now but never gone. CAD is determined to go down to the toilet to export oil to the US. GBP does have a better economy but its track record on inflation control is miserable. JPY politician really don't have a second choice other than devalue currency. And EUR, it probably has to QE.

So those mystery dots Sherlock Holmes just solved made me believe that even given what you just said, USD should have a pretty strong case to go up.

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April 24, 2014 at 6:24 AM ×

Interesting article! Found this very interesting: Kimberly-Clark to increase investments in Thailand. Read it here http://bit.ly/1f8eKaN

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Anonymous
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April 24, 2014 at 7:59 AM ×

C says
Anon 7.39 victor by a knockout.

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