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Equities Led by the Energy Sector Traded Nominally Lower Yesterday on Profit Taking.

Equities led by the energy sector traded nominally lower yesterday on profit taking.  Treasuries declined significantly as prices have perhaps massively overshot “fully valued” given the economic and inflation environment.  In my view both markets have been inflated because of the massive amount of cash in the financial system, the result of global central bank monetary policy.

I think for the next two months the markets may be influenced by four factors.

The first is energy.  Was yesterday’s energy rout the acceptance of changing dynamics in the supply part of the energy equation or fearing yet another other global slowdown.  I will argue the former given the massive increase in US energy production, an increase that can impact geopolitical and foreign policy considerations in the Middle East.

Speaking of geopolitical issues, how far into the Ukraine does Putin want to annex?  Will the West’s response greatly impact the economies of Europe?  As evidenced by the European equity market reaction, western response to date is regarded as insignificant.

The second is the election.  Historically equities decline between 5% and 22% before a midterm election.  Will 2014 Congressional change be more dramatic than the history setting 2010 change?

Third, will or have the markets correctly priced in the fact that China may never return to double digit growth?

Fourth, monetary policy.  As stated a gazillion times and now widely accepted, all markets have been direct beneficiaries of extremely simulative monetary policy.  Monetary policy is on the verge of changing and I will argue mistakes will be made.

These mistakes are not the result of incompetence but rather the result of the lack of benchmarks to follow.  A change from today’s policies has never been attempted and it is not if mistakes will be made but rather how bad these missteps may be.

The next three days the economic calendar is very heavy.  In my view these releases can impact the direction of trading in the immediacy as monetary policy is today monodependant upon employment.

Releases today include the Beige Book, vehicle sales, a regional manufacturing index and factory orders.

Last night the foreign markets were up.  London was up 0.80%, Paris up 1.21% and Frankfurt up 1.33%.  Japan was up 0.38% and Hang Sang up 2.30%.

The Dow should open considerably higher on news of a breakthrough in the Ukraine.  The 10-year is off 8/32 to yield 2.45%.


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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.