Will The Middle East Become A Major Market Catalyst?

By: Kent Engelke | Capitol Securities

Friday stocks limped to a close and Treasuries fell for the third consecutive day. The reason for the weakness… potential tax reform delay.

As noted a gazillion times, this is the first time in 30 years I have observed near universal bearishness as the majority of bulge bracket firms are forecasting a significant decline. The reasons are varied, but the consistency is the change in monetary policy. Some are pontificating that last week was the beginning of a declining trend.

My only comment is rarely does an event occur when everyone is suggesting that it will occur.

To date, there has been little written about the Middle East and its potential impact upon the markets. In years past, any Middle Eastern volatility was met with considerable selling.

Will the purge in Saudi Arabia be of significance, the greatest purge in at least a generation? What about the abdication of the Lebanese President and the subsequent coup in Lebanon leaving the Iranian supported Hezbollah in power? Saudi Arabia has all but declared war on Lebanon. And then there is the Iranian based Yemini Houthi missile fired at the Saudi Arabian capital, an act of war. How will the Kurdistan referendum in Iraq unfold?

The hatred between Saudi Sunni and Iranian Sunni is at least 1200 years old. The potential flash points are at historical proportions. All must remember Iran, Iraq and Saudi Arabia provide approximately 25% of the world’s daily oil needs.

There is little geopolitical premium in either the equity or oil markets. Is this about to change?

Historically it is the unwritten event that becomes a major market catalyst.

This week there are several inflationary indices released as are retail sales. Also posted is industrial production/capacity utilization as well as housing statistics. How will all be interpreted?

Last night the foreign markets were down. London was down 0.09%, Paris was down 0.68% and Frankfurt was down 0.75%. China was up 0.44% and Japan was down 1.32%.

The Dow should open quietly lower. Is the benign inflationary narrative about to change? According to the NY Fed’s underlying inflation gauge, inflation is now at the highest level in more than 10 years, partially the result of a 35% climb in oil from its June lows. The 10-year is up 8/32 to yield 2.38%.

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