Equites rose yesterday, led by the sectors that were battered in the worst selloff since the third quarter of 2011. As widely known some sectors have plunged about 25% since June 30. Some of the must owned names in these sectors are down over 35% in the same period.
Markets were encouraged by an upbeat ADP Private Sector Employment survey that is suggesting hiring is steady and were also buoyed by strength in the foreign markets. Tomorrow the all-inclusive BLS report is released.
Yesterday I rhetorically suggested the geopolitical/macroeconomic narrative could change in the next 30 days, similar to the change that occurred in mid-July from Greece to China.
The Middle East is in chaos. Yesterday an event took place that has not occurred since the conclusion of WWII. Russia bombed targets—not ISIS targets—in Syria. Yes Russia was/is involved militarily in many countries in their immediate (key word) back yard and former Soviet satellites, but not this far away from its borders. This is the first time Russia was militarily involved directly and overtly (key words) in the Middle East since 1945.
What is this significance? The United States publically abdicated its unspoken role of global policeman several years ago, an event I extensively wrote about given the preponderance of business conducted by American firms overseas. American foreign policy is based upon expanding the corporate influence of American companies, a symbiotic relationship for all those involved.
Some might cynically write this direct military action is President Putin’s manner to thumb his nose at President Obama and the West. While I will agree with this point, I think there is even greater significance.
The most basic and influential tenant of any foreign policy is Brinkmanship. Will the country respond militarily or not?? This basic tenant was violated by the US with the violation of the proverbial red line and various other mis steps.
I again ask what are the macroeconomic repercussions given 52% of S & P 500 revenues are from trade? Two weeks from now will all be reading about significant Shia incursions funded by Iran, Syria and Russia into Sunni Saudi Arabia that questions the stability of the most influential global oil exporter? I suggest all read yesterday’s A1A WSJ article about this possibility.
If so, how will the macroeconomic forecasts change? Some have commented I am reaching to substantiate my bullish oil position. I am firm believer in the phrase it is not what one does but rather why one does, that most often the most obvious conclusions are ignored. The velocity of change is perhaps the greatest constant.
We don’t know what will happen tomorrow but as noted many times historically oil prices rise when there is turmoil in oil producing countries. I think few will disagree the Middle East is in total chaos, a chaos that may be leading to anarchy.
What will happen today? Will the markets respond to the ISM data or will most mark time until tomorrow’s BLS data?
Last night the foreign markets were up. London was up 0.86%, Paris up 0.44% and Frankfurt down 0.38%. Japan was up 1.92% and Hang Sang up 1.41%.
The Dow should open moderately higher as Chinese data is suggesting the worst is over. The 10-year is off 1/32 to yield 2.04%.
IS CHANGE COMING ONCE AGAIN?
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.
