WILL THE TREASURY SELL OFF CONTINUE AND THE FOMC MEETING…AND THEN THERE IS OIL

Was the attack on the Saudi Arabian oil processing plant a proverbial game changer along the same lines of 9/11?  It is now thought it was the Iranians who orchestrated the event that shuddered about 50% of the Kingdom’s and 5% of the world’s oil capacity.  This is the first time infrastructure was attacked.  During the 1990 invasion of Kuwait the infrastructure was spared.  Moreover the illusion that such facilities are protected is gone.

Will a geopolitical premium return?

Oil surged 20% at the morning opening, the greatest single gain in history.  Prices are still up about 10%.  The immediate question at hand is how quickly will production return?  And then as stated above what are the lasting implications?

Changing topics, It is a forgone conclusion the FOMC will lower interest rates later this week.  The pivotal question at hand is its post meeting statement.  A sharp divide is occurring as to whether this expected reduction is necessary much less more cuts by year end.  As noted many times the markets have discounted between two and three interest rate reductions by year end.

August’s retail sales were another statistic that surprised on the upside.  Moreover July’s data was upwardly revised.  Consumer sentiment also rose more than forecasted after August’s steep drop.

The yield on both the 10 and 30 year Treasury is rising.  About two weeks ago the 30-year was decisively below 2% trading to an all-time low of 1.92%.  Today it is 2.35%.  Two weeks the inverted yield curve narrative was at hysteric proportions.  Today there is neither mention of a steepening curve nor how quick it is steepening.

Some would write that this increase in yield should not be occurring given ECB action of further lowering rates into negative territory and recommencing bond purchases.  Moreover all are expecting the lowering of the overnight rate Wednesday in the US.

I believe this increase in yield is a function of technology based trading where the only parameter is momentum.  I do not yet think it is from the fear of the world’s central banks potentially falling behind the proverbial inflationary curve….aka the un anchoring of inflationary expectations.  If this was the case, I believe the 30-year would have a “4 handle.”

Commenting about the equity markets, will the transition from momentum to value continue?  Last Monday the change between the two was the greatest since at least 2009, a violent transition that could shudder several firms according to Credit Suisse.

As widely known the valuation spread between the most expensive and least expensive stock are at the greatest level since 2000.  JP Morgan stated Friday that such a rotation is in its infancy given the 10 year over performance of momentum growth over value.

In my view I believe the markets have not yet begun to remotely discount the legislative agenda against the social media and mega sized technology firms.  According to Bloomberg this is the first time ever that all fifty states are suing an individual company.  Friday the House opened a bipartisan broad reaching investigation into the “Big Four” mega sized tech companies.

Wow!  How will this unfold?

The economic calendar is comprised of various manufacturing indices, housing statistics and weekly jobless claims.  Will all be superseded by the FOMC meeting?

Last night the foreign markets were down.  London was down 0.13%, Paris down 0.73% and Frankfurt down 054%.  China was down 0.02%, Japan closed for a holiday and Hang Sang down 0.83%.

The Dow should open moderately lower because of oil.    The 10-year is up 19/32 to yield 1.83% and the 30 year is up 1 16/32 to yield 2.31%.

 

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