Rates and racing to jockey for Aussie traders' attention

Melbourne Cup is big business

Tuesday's Reserve Bank of Australia (RBA) meeting is billed as one of the central bank's most important of 2015, but local market reaction is likely to be muted regardless of the result.

Economists are split on the chances of further monetary easing but nearly all agree on the significance of Tuesday's review since it will lay the groundwork for further interest rate cuts in December and 2016. But with the Melbourne Cup, Australia's premier annual horse race, kicking off a half hour after the rate decision at 2.30pm local time, traders could be more focused on foreign thoroughbreds than domestic interbank markets.

For Australians, Cup Day is more than just a regular sporting event; it's known as "the race that stops a nation." Victoria, the country's second-most populous state, is shut for a public holiday while workplaces and schools elsewhere operate on unofficial shortened hours.

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"There's no doubt that most traders will be watching the Cup, so we will likely see a definite market slowdown and lower volumes after 2.30pm [local time] leading into the race with traders away from their desks, and especially with Victoria already shut " noted Evan Lucas, IG's Melbourne-based market strategist.

Japanese-trained horse Fame Game is reportedly the overwhelming favorite to win Tuesday's $4.4 million race, which would make him the Cup's second ever Japanese-trained winner, according to Reuters. Three of the past five winners have been prepared outside Australia and New Zealand, popularizing the term "international raiders."

This lack of attention to anything but the racetrack is nothing new.

"The Melbourne Cup is the Australasian National Day. It would be difficult to overstate its importance. It overshadows all other holidays and specialized days of whatever sort in that congeries of colonies ... I can call to mind no specialized annual day, in any country, whose approach fires the whole land with a conflagration of conversation and preparation and anticipation and jubilation," wrote Mark Twain in his 1897 book 'Following the Equator.'

Because the central bank is forced to share its rates decision with the racing event every November, there's plenty of historical evidence supporting the case for a tepid market reaction. The RBA normally meets on the first Tuesday of each month, and the Melbourne Cup always takes place on the first Tuesday of November.

Stocks haven't closed up on Cup Day in the last consecutive four years, according to Lucas. That's because markets traditionally rally in October, resulting in saggy trading in the first few days of November, he explained. Australian shares were 4.5 percent higher last month, in line with a global market bounce.

Moreover, most final dividends get paid into investors' accounts by end-October, which could further weigh on risk sentiment, he added.

But the Aussie dollar could still see normal trading volumes since traders in the rest of the Asia-Pacific region will still be able to move the currency, especially if the RBA eases further.

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Tim Harcourt, the J.W. Nevile economics fellow at the University of New South Wales, believes market participants will be able to enjoy race day without too much angst from the RBA.

"There will be no chance of a rate rise, just a cut which may put money in the pocket of punters who've lost their shirt," he said in a note.

The bigger question was whether the excitement caused by the race increases the likelihood of overall risk-taking throughout the trading day, Lucas noted.

Indeed, a 2007 study by Andrew Worthington from the University of Wollongong aimed to answer exactly that by examining the effects of the Melbourne Cup on daily stock returns from 1961 to 2005.

"The results indicate that the mean Melbourne Cup Day return of 0.1916 is significantly higher than the mean return for other Tuesdays in November (-0.2345), Tuesdays in other months of the year (-0.0352) and Monday, Wednesday, Thursday and Friday returns throughout the year (0.0516). This suggests the exuberance associated with Australia's unofficial national day is translated into irrationally positive market behavior."

Happily for the RBA, the race is a serious contributor to the Aussie economy, estimated to boost spending by $700 million, including $50 million on race-day attire.