The ISM announced their Manufacturing index number last Monday which came in at 49.7 for June, a number that should not be surprising to anyone other than an economist at the Federal Reserve.  It was a full point lower than the lowest of the estimates, which speaks to the amount of hope that has been built into these markets and the analysts covering them. 

If we look closely at the price of oil and the divergence between the price of Brent Crude (AMEX:BNO) and the SPDR S&P 500 ETF (AMEX:SPY) over the past two months we can plainly see that something is seriously out of whack between them.  Since August of 2011 the BNO:SPY ratio traded between 0.58 and 0.65 but that relationship began a downward plunge beginning in March and continued until mid-June where it bottomed out around 0.50.  Now this is saying one of a number of possible things none of which are mutually exclusive:

1. Brent is signaling that the global economy is slowing down
2. The S&P 500 is grossly overvalued
3. Brent Crude is under valued
4. Commodity prices are more sensitive to Federal Reserve policy.

Commodity prices are more sensitive to shifts in demand in real time than equities are.  People own equities for different reasons and different equities have different reasons for being owned.  But, commodity speculators only hold their positions if they are convinced that tomorrow the price will be higher than it is today and in the futures market the marginal volume sets the price, i.e. the speculators.  So, when President Obama came out and said he wanted the rules changed for speculators in the oil market oil’s fate was written in stone.

But if the underlying fundamentals of the economy were strong then oil would have shrugged off that presidential decree and continued to rise or at least hold serve in the face of global demand.  But looking at the data before us coming out of Europe and the U.S. this week it is safe to say that oil has been right and the S&P 500 has been wrong. 

Norwegian, Spanish, Swedish and French PMI numbers were released on Monday and all of them missed expectations and all were lower than 50, signaling contraction.  Add to them the slightly higher than expected but still abysmal German, British and E.U. numbers overall (all less than 50) and an 8th straight month of contraction in China and it is safe to say that the global economy is in serious trouble. 

But, the news gets worse than that.  Drilling into the ISM report we find that New Orders dropped from 60.1 in May to 47.8 in June and prices dropped from 47.5 to 37.0 month over month.  So, radically less stuff is being ordered at prices that are nearing unsustainably low levels.
Friday’s rally in equities globally was no joke.  Big money was flowing into stocks the world over heading into the weekend.  And while it looks like the German Supreme Court will have the last say on the fate of the deal brokered by Mrs. Merkel last week I would be leery of any decision coming that does not uphold the status quo.  Looking back to last week’s tortured decision from the U.S. Supreme Court on the ACA, as a betting man, I would bet that what the politicians want the politicians will get.  And in this case they want the banks to be bailed out and the economy juiced up with a coordinated attack by the central banks. 

Hence, I would be looking to cover any long positions in the U.S. Dollar (AMEX:UUP) as the Fed’s tightening cycle of the past year is likely over, though we will not know for sure until later in the week.  When that happens and the Germans sign off, against their will, the bailout of Spain and Italy, the Euro (AMEX:FXE) should rally.