Minneapolis Fed President Neel Kashkari made comments that’s validated many of yesterday’s remarks stating hedge funds and “other investment vehicles” are the primary reasons for the illiquidity in the repo market.  Kashkari further opined one of the greatest risks is the failure of a clearing house, a failure that creates a systemic issue for the markets, a view that I also previously and rhetorically espoused.

The primary reason for this illiquidity…leverage and the use of derivatives and liquidity requests that could not be met because of illiquid investments.

The Federal Reserve reported to avert a year end liquidity crunch it pumped $256 billion into the repurchase markets, consequences that are now being felt across the globe including a massive shift of passive funds into equity indexes and the upending of the economics of “cross border investment funds.”

Wow!  Like most I hope the regulatory entities will act proactively.

Speaking of markets, equities traded lower on headlines that a deadly respiratory illness that originated in China has migrated to the US, spurring economic concerns.  Many are comparing this potential outbreak to that of SARS 17 years ago but it is my understanding it is not as dangerous as SARS.

Historically health issues are nothing other than noise.

Speaking of noise, the impeachment trial opened yesterday and acquittal is almost viewed as a certainty.  The question at hand is the political repercussions.  All must remember pocket book issues dominate national elections and at this juncture such is over riding all other issues.

Speaking of pocket book issues, several high-profile earnings releases were mixed.  I am certain the interpretation of the results will change throughout the day.

Will the prevailing sense of complacency soon be shattered?  As widely discussed the S & P has not had a 1% down day for 71 sessions.  Historically volatility proceeds a period of quietness.

Last night the foreign markets were mixed.  London was down 0.14%, Paris up 0.09% and Frankfurt up 0.16%.  China was 0.28%, Japan up 0.70% and Hang Sang up 1.27%.

The Dow should open nominally higher as China took steps to contain the spread of a deadly virus.  Political turmoil returned again to Italy but is not such turmoil routine?   The 10-year is unchanged at 1.78%.

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.