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China Reduced the Value of its Currency to Stimulate the Economy Via Trade.

The Chinese Yuan again initially roiled the markets.  The hyperbole about the possible ramifications is exponentially rising.  Some might argue the negative narrative may replace the incredibly myopic negative narrative of oil.

Because of China, the S & P 500 had definitively violated its 200 day moving average until rallying back over this pivotal average late in the day.  It has now pierced and then rallied back above this average four times since 2011.

Considerable ink has been spent discussing the tightest trading on record for the S & P 500.  However this tight trading range masks the volatility beneath the surface.

According to Bloomberg, the S & P 500 has crossed its 50 day moving average line 35 times in 2015, exceeding any full calendar year in history. The speed of this volatility is deafening.  I would argue this sharp but narrow volatility is the impact of technology based trading utilizing moving average lines.

As noted above, today was only the fourth time since 2011 the S & P 500 has violated the 200 day MA.  Will the selling return, the result of changing profit expectations of the large multinationals and technology based trading?

Moreover as I have opined many times any return in the market is dominated by five or six companies, two of which have appeared to have now “rolled over.”

Will monies soon gravitate from the markets to the real economy given the growing belief that it is almost impossible to profit in this market and some claiming there is blatant manipulation by the largest participants where the odds are stacked against most?

Wow!  What an inflammatory statement?  If the psychology changes where higher potential and less volatile returns is greater in the real economy versus the ultra-liquid highest capitalized stocks of the S & P 500,  I can argue the real economy can accelerate (and returns for the typical stock will outperform the indices).

Equities would have been considerably lower yesterday if were not for the advance of the energy sector.  Energy shares staged an oversold rebound on the reports that inventories fell more than expected and are now at the lowest levels since March.

I can also argue some of the rebound could be the result from the severe financial pressure that the energy producing countries are facing; possibly suggesting a change in policy is in the intermediate future.

Demand for funds is rising exponentially in Middle East banks. Most Middle Eastern countries do not utilize the international debt markets for funds but instead rely upon regional entities.  The Middle East equivalent to LIBOR rose to its highest level since March 2014 as liquidity has dropped considerably for Middle East countries during the past six months.

In other words, solid credit growth/demand is greatly outstripping deposit growth, credit growth required for transfer payments in an attempt to placate societies. Credit is up 8.8% while deposits only rose by 3.1%.

How long can this trend continue?  It is generally accepted that China reduced the value of its currency to stimulate the economy via trade.  How long can Middle Eastern countries be immune to economic realities?

What will happen today?

Last night the foreign markets were up. London was up 0.77%, Paris up 1.87% and Frankfurt up 1.95%.  Japan was up 0.99%and Hang Sang up 0.43%.

The Dow should open nominally  higher as concerns eased that China was headed for a disorderly devaluation.  The 10-year is off 4/32 to yield 2.16%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.