Iraq tension shakes up the market

Well "Friday the 13th" came and went without so much as a "whimper."

Unfortunately the same could not be said for the escalating conflict in Iraq. While we wait for Washington to decide on what to do, the Sunni insurgents are forging ahead on their way to Baghdad and full control of the country implementing their "Sharia law". The implications of their takeover of the oil fields could have a disastrous effect on the West including the United States.

Unfortunately the U.S. President must "mull over" his options. My option would be simple. Our air superiority could crush the rebellion using drones to attack the columns of weapons and terrorists with great success in my opinion. While the President is in Palm Springs "considering his options" the men and women who were wounded trying to stabilize the country have to feel their efforts were for naught. The families of those who died are also wondering about U.S. "determination" which has now all but "dissintegrated." The ramifications of "doing nothing or waiting too long" on the part of the U.S. would be economically foreboding as well as the killing by the Sunnis of more than 1,700 former Military and Police who had surrendered their weapons, uniforms and equipment, as reported Friday.

More importantly is the suffering of the populace under "sharia law". The President has demonstrated to the World that the U.S. is weak. I regret to say that the worst is yet to come in Iraq, Iran, Syria, Egypt and more importantly the U.S. after having "traded" five of the worst terrorists for one possible deserter. 

 

Interest Rates

The September treasury bond closed Friday at 135 25/32nds, down 4/32nds tied to concerns that the Governor of the Bank of England, Mr. Carney, suggested the central bank may need to raise rates. That may give an indication of a possible U.S. Federal Reserve to imply the same. That scenario is doubtful and some market participants gave it little or no credence but the effect was to push yields higher. We remain convinced that bonds and yields are in a range and do not expect Fed Chair Yellen to be influenced by the Carney statement. Hold spreads recommended to our clients.


Stock Indices

The Dow Jones industrial average closed at 16,775.58, up 41.49 points but for the week lost 0.9%. The S&P 500 (CME:SPM14) closed at 1,936.15, up 6.04 but for the week lost 0.7%. The tech heavy Nasdaq closed at 4,310.65, up 13.02 points but lost 0.3% for the week. The tradingon Friday was "choppy" as concerns over Iraq and the lack of any definitive decision by the United States weighed on the markets. Additionally the economic data was negative with the University of Michigan/Thomson Reuters sentiment index declining to 81.2 in June, its lowest level in three months. Economists had expected an increase in confidence. I am not sure where they get that level of confidence other than to poll shoppers on Fifth Avenue in New York coming out of high end retail stores like Tiffany’s. We are starting to hear more and more about a "correction" expected by some high powered analysts and we concur. We also implore holders of large equity positions to implement risk hedging strategies using the futures and options markets.

 

Currencies

The U.S. dollar Index (NYBOT:DXM14) closed Friday at 80.73, up 5 points even as the British Pound gained 1.28c to $1.6953 tied to the Bank of England Governor Mark Carney stating that tightening could come before markets currently are expecting. That statement gave rise to ideas that the U.S. Fed Chair Yellen might follow suit. All of which is doubtful in my mind since the Fed "needs" better economic performance before changing its current accommodative stance. Other currencies losing ground against the dollar where the Swiss Franc, 33 points to $1.1115, the Euro 25 points to $1.3543, the Japanese yen 32 points to 0.09810, the Canadian dollar 1 tick to 91.91c and the Australian dollar 21 ticks to 93.41c. We continue to favor the U.S. dollar, not on the basis of a U.S. recovery, but relative to the economies of its trading partners.


Energies

July crude oil (NYMEX:CLN14) closed at $106.91 per barrel, up 38c and for the week gained 4.1%, its biggest gain on a percentage basis since December of last year. The news from Iraq lead the way as any interruption by the Sunni insurgents of the Iraqi oil could have a devastating effect on the West. With no "decision" yet from the U.S. or its allies on halting the progress made by the terrorists and their proximity to the Capital, Baghdad, markets remained concerned. While the U.S. President is in Palm Springs with no "decision" on using our significant air power to "crush" the procession of personnel and equipment towards their goal, we could see further angst early in the week. For now we prefer the sidelines. We continue to favor Natural Gas (NYBOT:CLN14).

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