Commodities Off Hard in Risk Off Trade

Even when there’s an honest-to-gods bearish day the S&P 500 (AMEX:SPY) always seems to be down just a tiny bit while commodities get whacked with the proverbial ugly stick.  Of course they bounce back the next day or the day after, erasing gut-wrenching 3-5% drops on the futures market with similarly breath-taking moves just a little later.  So, while the VIX (AMEX:VXX) is doing it’s best “Weekend at Bernie’s” impression and equities always seem to make it back to VWAP by 4:00 Eastern time, commodities traders (all 6 of them, after MFGlobal, PFG and Knight (NYSE:KCG) )have to endure some of the most volatile trading the world has ever seen.

Today it was the grain complex, which has seen spectacular moves to the upside recently, drop back around ~3% on average for the majors.  Corn was off 2.1%, Wheat, Soybeans and Soybean oil all dropped 3.1% while Oats crashed nearly 3.8%.  the S&P 500 was off a svelte 0.14% in comparison.  Gold (AMEX:GLD) dropped $10, after putting in a strong performance overnight in Asia hitting a high near $1628 on the October contract.

All of this was pushed by a drop in oil prices, Brent Crude futures off $1.82 versus Friday’s close, and the markets getting spooked by yet more bad economic data coming out of China, Foreign Direct Investment dropping, and Japan, GDP growth just 0.3%.   The markets are floating on a sea of liquidity being created by all the central banks and reorganization of the oil and gold international trade which is turning Ben Bernanke and the Fed into the Mickey Mouse in The Sorcerer’s Apprentice.

You can forget outright QE in the short term from the Fed.  From others?  Yes.  The Fed has enough problems on its hands once Europe gets its house in order at that point the short-Euro/long-USD trade unwinds and the flooding will begin in earnest.

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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