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May was the Narrowest Trading Month in Six and Volume was the Lowest in Eight Months.

Monday I wrote this could be a pivotal week.  Friday there are three major events that could influence the direction of the markets.

First there is Greece.  Greece has assured the financial community that it could make its interest payment this Friday but those required later in the month are questionable.  In my view most are complacent about Greece fearing any backlash if a default does occur will be limited.  I hope this complacency is not misplaced.

Second there is OPEC.  The markets have concluded there will be no cut in production.  What happens if production is cut, the result of financial pressure and politics?  Saudi Arabia and Iran are involved in a proxy war.  Will this animosity be exhibited at Friday’s meeting?

Regarding the fiscal impact,  the IMF estimates that Saudi Arabia will post a record fiscal deficit of 20% of this year’s economic output. Next year the deficit is anticipated to be over 30%, the result of increased social spending and depressed oil prices.  The IMF is “surprised” about Saudi Arabia’s rapid drawdown of its reserves.

The IMF stated Saudi Arabia requires $103 oil to balance its budget.  Iran requires $93.  Iraq $71 and Libya $215.

It is inferred that OPEC could perhaps last another 4-8 months with oil around current levels before facing debilitating financial pressures.

Will unity prevail Friday?

And then there is the US labor report.  Monetary policy is predicated upon the data with great emphasis upon job creation.

Recently I have been commenting about the lack of volume and liquidity, in my view the result of ETFs and indexing.  Bloomberg writes May was the narrowest trading month in six and volume was the lowest in eight months.

Drawing the obvious conclusion, there is no conviction.

Will Friday mark the inevitable transition to something else?  Will Greece no longer be an issue?

Will the narrative in oil change, focusing instead on the geopolitical risk and potential financial collapse of OPEC and potential inflationary expectations?

What will happen today?  Will the markets focus upon the ADP private sector employment report?  Treasuries tumbled yesterday as pricing pressures in Europe rose for the first time in six months.  Will the selloff in Treasuries continue?

Last night the foreign markets were up.  London was up 0.32%, Paris up 0.90% and Frankfurt up 0.92%.  Japan was down 0.34%and Hang Seng up 0.69%.

The Dow should open moderately higher as investors weighed Greek debt talks and awaited jobs data to gauge when the Fed may raise interest rates.  The 10-year is off 5/32 to  yield 2.28%.

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Ken Engelke

Chief Economic Strategist Managing Director

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