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US Treasury Secretary Mnuchin blamed volatility in equity markets partly upon high speed trading and the effect of the Volcker Rule.  Mnuchin stated   “in my opinion market structure has led to a lot more volatility, part of this is a combination of market presence of high frequency traders combined with the Volker Rule.

Essentially he validated a basic premise of these remarks that algorithmic trading has negatively impacted market structure that may perhaps cause a systemic issue.  Moreover he affirmed my view that regulatory fiat has created an illiquid market that could further add to the volatility and rising systemic risk.

Mnuchin said he will ask the Financial Stability Oversight Council, which he heads, to study stock market volatility further stating that he has not “prejudge” what exactly is behind the sharp moves before a view is complete, but did state “problems with market structure may be one of the reasons.”

This is not the first time regulators had sought to boost oversight.  After calling for a crackdown in aggressive high frequency trading in 2014, the SEC conceded in 2016 that a “fix had proved difficult, the result of intense pushback from a select few in the industry.”


Continuing with a similar theme, two additional high profile investors have validated another premise of these remarks that the averages will mark time at best during the next 5-10 years.  Legendary hedge fund manager Stanly Drukenmiller and former Fed Chairman Alan Greenspan made similar remarks yesterday, the result of vastly over extended valuations of several mega capitalized companies that dominate the averages, a global change in monetary policy, and a tectonic shift in macro-economic structure.

Many times I have opined it is not what one does but rather why one does it.  Perhaps the above comments will mark the shift back to traditional security and macro-economic research to generate an investment thesis and ideas.

Commenting upon market activity, trading was again volatile with the indices advancing by over 1%, reversing direction to trade nominally lower, only to end higher about 0.30% higher.  Drukenmiller commented about these large swings stating that suitable entry points cannot be determined for such has been eliminated because of momentum based trading skewing traditional market signals.

Today all will be focused on the 2:00 PM FOMC statement.  Consensus is expecting a 0.25% increase but it is the post meeting comments that can be of considerable significance.

Last night the foreign markets were up.   London was up 1.05%, Paris up 0.75% and Frankfurt up 0.77%.  China was down 1.05%,  Japan down 0.60% and Hang Sang up 0.20%.

The Dow should open steady ahead of the Fed meeting. The 10-year is unchanged at 2.82%.


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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.