Nervousness Is Rising

By: Kent Engelke | Capitol Securities

North Korea dominated the headlines yesterday. Equity markets were generally lower, but not by any significance. Treasuries advanced, but also not by any significance. The question that begets asking, are the markets complacent about escalating tensions believing the statements are only toothless rhetorical words?

The current answer is yes, but I will write nervousness is rising. Will this rising nervousness transcend into selling? To write the incredibly obvious, the potential outcomes of any military action is infinite.

Commenting about the oil markets, for the first time since 2014, spot prices are higher than future prices which suggests greater current demand than supplies. Inventories declined by 6.45 million barrels, considerably greater than the 2.2 million expected. Inventories levels are the lowest since October and are now only 23% higher than the five-year average. At the current six-week rate, in seven weeks, inventories will be at their average levels.

Gasoline inventories, however, surged even as gas demand is at the greatest level since January 2008. Oil prices were originally mixed on the conflicting data, but ultimately ended about 0.8% higher. Can it be suggested that next week’s crude data will be greater than expected and gasoline inventories lower, the inverse of this week? At a casual glance it appears inventories swings such as this appear to be the pattern.

What will happen today? Will there be any reaction to the PPI and initial jobless claims?

Last night the foreign markets were down. London was down 1.12%, Paris was down 0.21% and Frankfurt was down 0.57%. China was down 0.42%, Japan was down 0.05% and Hang Sang was down 1.13%.

The Dow should open moderately lower as North Korean tensions rise. Will the rhetorical words morph into action? Is North Korea taking the extreme polarization in American politics as a sign of weakness or lack of resolution?

For what it is worth department, during the second presidential debate, then candidate Trump was the first candidate that pledged that he would not use nuclear weapons first. The US has never made such a statement, leaving our adversaries guessing as whether or not the US would act — the ultimate form of brinkmanship. Little has been written about Trump’s response as it does not fit the prevailing narrative.

What will happen today?

The 10-year is unchanged at 2.24%.

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