CRB

Think gold and silver were the worst performing financial asset in June? Think again: that dubious distinction falls to the Bovespa, the Shanghai Composite and the Greek stock market index, all of which tumbled more than the precious metal complex did in the past month. Yet what an odd month for hard assets - on one hand WTI, Corn and Brent were the best performing assets, while gold, silver, copper and wheat tumbled.

A sense among investors that the global economy is unraveling has injected tremendous volatility into the markets. As Bloomberg's Rich Yamarone notes, if the global equity market decline is not a “Sell in May” event, but the beginning of a great unwinding, then the economy, skating on thin ice, may be even more susceptible to recession. However, most of the US equity disconnect from the reality of weak data (and other markets) can be laid at the feet of the Fed's ever-generous monetary policy. However, given all of this 'weakness' - or missing of Fed benchmarks that we discuss below - that the Fed is well aware of, we ask again, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions.

The financial and other markets do not seem to reflect the reality of subdued growth is how Hoisington Investment's Lacy Hunt describes the current environment. Stock prices are high, or at least back to levels reached more than a decade ago, and bond yields contain a significant inflationary expectations premium. Stock and commodity prices have risen in concert with the announcement of QE1, QE2 and QE3. Theoretically, as well as from a long-term historical perspective, a mechanical link between an expansion of the Fed's balance sheet and these markets is lacking. It is possible to conclude, therefore, that psychology typical of irrational market behavior is at play. As Lance Roberts notes, Hunt suggests that when expectations shift from inflation to deflation, irrational behavior might adjust risk asset prices significantly. Such signs that a shift is beginning can be viewed in the commodity markets. "Debt is future consumption denied," and regardless of the current debate - Reinhart and Rogoff were right. Simply put, "the problems have not been solved, they have merely been contained."

The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase. But the biggest news of the night was European inflation data: the April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision.

There have been several recent developments that have flown in the face of both neo-liberalism and ordo-liberalism and thrown investors off balance.  Discuss.  

A high level overview of the drivers of the capital markets.

We are wondering if and when these signals will have significance.

Chairman Bernanke is losing the war to re-inflate the economy and stock market. 

A listless overnight session with just the previously noted first disappointing LTRO-2 repayment and the now traditional big beat out of the "other" German confidence indicator, IFO, which beat expectations of 104.9, rising to a 10 month high of 107.4 to attempt to push the economy out of the recessionary slump (just don't mention yesterday's PMI), and nothing on today's US calendar is a fitting way to end the week, and further shows that markets are once more completely oblivious to the risks of the Hung Parliament outcome that this weekend may bring in Italy should the Berlusconi juggernaut maintain its momentum. The EURUSD and the US futures have disconnected once more, with almost all of yesterday's market weakness filled in the overnight session as the good old low-volume levitation returns. Here are the few news items worth reporting.