Merkel dashed the hopes for Eurobonds overnight. This stopped the great convergence of yields between Bunds and periphery for the moment, and managed to embarrass the Bund-to-Dow call for now. However, since the bond vigilantes are unlikely to give up on Italy, Merkel will not be able to oppose Eurobonds for long. So yours truly would expect the convergence to resume shortly. Italy is not a decoy like Spain. So when the house of Italy goes, it will not go quietly and will likely bring the German creditors down with her. The smart Germans know this. In all likelihood, Merkel’s overnight statements are just a calculated move to stem the accelerating rot in Bunds.
As usual, the bears came out overnight and proclaimed that we are headed towards Armageddon. Yours truly think that they are too early to claim victory. Curiously the Greeks looks like they are avoiding the EU summit – the Finance Minister just resigned overnight. There is a strong likelihood that the EU summit will be bad for Greece, but good for the rest of Europe. Bears beware.
Lost in all the noise is the fact that wheat and corn prices are soaring despite the broader commodities sell-off. Our technicians noted that the S&P GSCI Spot Index (70% energy and 8% industrial metal) made a 76.4% pullback. They fear that we are in danger of downside acceleration, just as oil and copper seems to suggest. We agree that industrial metals might accelerate downwards as China’s construction boom stalls, and with Middle East unlikely to have shovel ready projects at this moment. But food and energy does not seem to be at risk of downside acceleration.
Figure 1: S&P GSCI spot index downside acceleration fear
On the contrary, food prices looks like it will continue spiking higher on unfavorable weather. USDA reported that the corn crop had began silking two weeks ago on the lack of rain and high temperatures. Food had played a bigger role in the Arab uprising than most people realized. Thus the explosion in wheat and corn prices recently does not bode well for Arab geopolitics, and thus oil prices. Perhaps the only thing the recent fall in oil prices did was to embolden the Europeans to push through the self-defeating Iranian sanctions that will start in July.
Figure 2: Wheat prices ignoring broader commodities selloff
Figure 3: Corn prices ignoring broader commodities selloff
Good luck in the markets.