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.....