Are The Markets On A Knife’s Edge?

By: Kent Engelke | Capitol Securities

Are the markets on a knife’s edge? There was little reaction to the headlines that North Korea has successfully produced a miniaturized nuclear warhead that can fit inside its missiles, crossing a key threshold on the path to becoming a full pledged nuclear power. The US has declaratively stated it would not permit North Korea to cross this boundary.

And then there is oil. Venezuela is on the verge of total anarchy threatening the viability of its oil industry. All foreign oil workers from various countries have been ordered home by their respective organizations. Russia stated it will not advance Venezuela more funds, advances secured by future oil production. Venezuela is the third largest provider of crude to the US, supplying about 750,000 barrels a day.

OPEC stated that Iraq and the UAE — the biggest violators of their production pledges — will now honor their commitments. Libya and Nigeria’s production has been capped. Saudi Arabia announced reduced shipments to China, similar in scope to the reduced deliveries to the US.

Oil demand is at a record high and supplies are contracting where according to the EIA demand is about 1 million barrels greater than supply.

Will we wake up one day and see oil at $60?

What about equities as yet another high profile firm is questioning the narrowness of the markets, narrowness based upon the massive impact of ETFs and high frequency traders?

And then there is the bond market. The two largest asset managers, firms that manage over $7 trillion, have remarked the bond market is grossly overvalued partially predicated upon the record number of US job openings, rising to 6.163m in June from 5.702m. The vast majority of employers stated finding qualified drug free applicants is “difficult.” [Note: FRB Chair testified last month between 25% and 40% of job offers are rescinded because of opioid and other drug use.]

As stated so many times, all markets are dominated by cross-correlated technology based trading; trading involving massive use of derivatives and futures.

I am not bearish, but rather greatly concerned about the large imbalances that I believe exist.

About 20 months ago, Barclays Bank presented a scenario where certain sectors of the markets would “melt up” at the expense of the vastly over-owned sectors that threaten the stability of a money center bank. Barclay’s scenario was presented around the same time that both the FDIC and Federal Reserve began questioning all money center banks about their exposure to HFTs and ETFs.

The passivity via ETFs and complacency is great. Is this about to be shattered?

Only history will answer this question.

Last night the foreign markets were down. London was down 0.72%, Paris was down 1.57% and Frankfurt was down 1.26%. China was down 0.19%, Japan was down 1.29% and Hang Sang was down 0.35%.

The Dow should open moderately lower on geopolitical concerns. Oil is up on a greater than expected inventory draw. The 10-year is up 7/32 to yield 2.24%.

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