By: Kent Engelke | Capitol Securities
Markets were again mixed as the data gave conflicting signals about the strength of the economy. The ISM Manufacturing was insignificantly lower than expectations, but its “prices paid” component rose. Personal income and spending missed forecasts by a large measure. The dollar fell again following five consecutive months of decline. For those who follow such things, the dollar was expected to advance in 2017.
And then there is oil. Earlier yesterday it was over $50 barrel, trading around the highest levels in over two months only to fall to around $49.25/barrel. Three weeks ago most thought oil would continue to decline.
I think the wild card for crude is Venezuela. Most, including me did not have Venezuela on the proverbial radar as a potential catalyst. How will the situation in this beleaguered country unfold, a rapid downward spiral that is catching most off guard.
The current advance in oil is predicated upon shrinking inventories, lower production, strong demand and the growing belief that Saudi Arabia and Kuwait will “do whatever it takes” to balance the markets.
Consensus thinks that if Venezuela implodes, or if the US declares Venezuelan crude imports illegal, oil would surge about $10/barrel. Venezuelan production is imploding anyway with many believing the country and its oil industry will be in bankruptcy by October/November given the $4.5 billion in scheduled debt payments. The country’s foreign reserves are under $10 billion and international financial entities would be hesitant or perhaps banned to offer assistance given Sunday’s election.
If oil surges, how will inflationary expectations be affected? Yesterday, former FRB Chair Greenspan warned about the possibility of stagflation, an environment that will hurt sovereign debt prices and some equity valuations.
Greenspan was once revered, but lost considerable stature because of the 2008-09 financial crises that he did not foresee coming. However, there are few in my view that possesses the encyclopedia knowledge of Greenspan and how to apply such knowledge to potential economic and market trends.
At this juncture, rising geopolitical risks are not a factor in equity prices. I think the greatest issues at hand are North Korea, the Saudi-Qatar feud, now Venezuela and perhaps the US withdrawing from the Iranian nuclear deal. And then there are Russian and Chinese tensions, tensions that have all but been ignored. Will these tensions become a driver of the markets?
In the immediacy, markets have been dictated by earnings. What will happen today?
Last night the foreign markets were mixed. London was down 0.29%, Paris was down 0.15% and Frankfurt was down 0.39%. China was down 0.23%, Japan was up 0.47% and Hang Sang was up 0.24%.
The Dow should open flat. The 10-year is off 6/32 to yield 2.28%.