The Markets, the Economy, and Perhaps Global Order is on the Brink of Change.

Today the Minutes from the July FOMC meeting are released.  As noted yesterday, the economic landscape is different today than that of three weeks ago.  Housing and autos are showing considerable strength.  China has devalued. Oil has plunged, falling by a record amount in July.  Global financial markets are volatile and are on edge.

Many times I have commented about the velocity of change and to expect the unexpected.

What are the odds OPEC’s decision to capture market share by price will be viewed as one of the greatest economic blunders in at least 100 years given the anarchy already present in the Middle East?  Yesterday three of OPEC’s smallest members (Venezuela, Algeria and Libya) requested a production cut from both members and non-members for budgetary/social reasons.

Saudi Arabia, the world’s largest oil producer is hemorrhaging money as foreign reserves have plunged from $724.5 billion in January to $664.4 billion in June.  Some are expecting if crude remains at current levels, reserves would fall to around $560 billion by year’s end.

Saudi Arabia opened its financial markets two months ago, an event that has not produced the windfalls expected as the bourse is continuing to decline falling another 3.9% yesterday.   As noted several days ago, the kingdom turned to the bond market for the first time since 2007 to help meet its 2015 budget.

Because of the sharp decline in crude, the IMF is now projecting Saudi Arabia’s 2015 deficit to be around 20% of GDP.   The IMF further commented “the sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade risking considerable financial distress.”

In my view Saudi Arabia is at proverbial cross roads.  If the kingdom cuts social spending, the odds of anarchy rise.  If spending is not cut and oil remains at current levels, economic pressures increase.

As noted above, the Middle East is already in chaos, the greatest chaos since the dissolution of the Ottoman Empire 100 years ago which created today’s map.  What are the odds the geopolitical and socioeconomic events in Saudi Arabia becomes a major topic of monetary discussion just as China is perhaps today?   Few thought China would devalue.

Continuing with this theme, I think the markets, the economy, and perhaps global order is on the brink of change.  Will this be positive or negative change?  What are the odds US, European and Japanese growth exceed expectations, partially the result of strong housing and auto sales in the US?  What are the odds the respective presidential nominees are vastly different from today’s consensus?

As stated, I think the status quo is on the verge of major change, but to what?  The discussion on this view is infinite.

What will happen today?  Yesterday’s trading was quiet, a good representation of the trading during the “dog days of summer.”

Last night the foreign markets were down. London was down 0.91%, Paris down 0.64% and Frankfurt down 1.10%.  Japan was down 1.61%and Hang Sang down 1.31%.

The Dow should open nominally lower ahead of the Fed Minutes fearing a slowdown in global growth. Bloomberg writes emerging markets are now at a four year low on these concerns. The CPI is released at 8:30 and little reaction is expected from this data point.  The 10-year is unchanged at 2.19%.

kent
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.