As just about every political pundit predicted, the federal government once again proved unable to reach a timely compromise on a major budget issue, this time the automatic cuts to take effect under sequestration. Most financial news sources are blaming the sequester impasse for an initial decline in the Dow Jones Industrials (DJINDICES:^DJI) this morning, which fell as much as 100 points in early trading. Admittedly, as Fool contributor Alex Dumortier examined an hour ago, the across-the-board cuts do have the potential to hurt economic growth. But ongoing uncertainty from Italy also likely played a role, as prospects for a grand compromise to form a coalition government appear to be fading. Moreover, positive news from the manufacturing sector helped the market reverse its losses, and as of 10:55 a.m. EST, the Dow was actually up about 13 points.

Among Dow stocks, economically sensitive companies Alcoa (NYSE:AA) and Caterpillar (NYSE:CAT) were among the biggest losers. For Alcoa, continuing overcapacity in the industry due to major expansion by Chinese aluminum manufacturers bodes ill for the fundamentals of the metal, as high supplies can only keep prices depressed, absent a huge upswing in global economic activity. Meanwhile, Caterpillar announced possible job cuts yesterday, and a surging dollar could prove difficult for the company as it tries to sustain growth in its international markets despite Chinese headwinds. Both companies need strong macroeconomic trends to take root before they can recover fully.

Elsewhere, SandRidge Energy (UNKNOWN:SD.DL) dropped 3.7% after releasing earnings last night. Although the exploration and production company managed to cut its losses compared to the year-ago quarter thanks to a massive 60% rise in production, SandRidge's recent sale of Permian Basin assets forced the company to cut production guidance for 2013, and high expenses took their toll on earnings. Of more concern to investors is the proxy fight that is seeking to remove CEO Tom Ward amid concerns over alleged self-dealing and the stock's horrible performance over the past two years.

Finally, MGIC Investment (NYSE:MTG) soared almost 20%, adding yesterday's gains after announcing that it could look for ways to raise capital in order to get risk levels back into compliance with regulatory requirements. Given rival Radian Group's successful sale of stock and debt, which raised nearly $700 million for the mortgage insurer, MGIC should take advantage of favorable access to capital while it lasts in order to reverse the alarming rise in its risk-to-capital ratio.