If QE3 Is Imminent, Why Are Commodities Trading So Poorly?

Fear that global economies are about to contract further has sent central bankers scrambling for a solution. To no one's surprise, the central banks are going to figure out a way to loosen the money supply, thereby giving the economies a boost -- or so they hope.

Support for the Bernanke plan is being organized by Janet Yellen, the Fed Vice Chair, and currently the San Francisco Fed President. Though now employed in California, Yellen is part of the ivy-league elites who have been at the center of U.S. economic policy for years. 

At the confirmation hearing for Yellen, Senator Shelby of Alabama voted against her confirmation claiming he felt she had an "inflationary bias."

If Yellen is about to be the co-pilot in helicopter-Ben's money machine, the market is so far unconcerned. Memories, though, are short, and accusations that Bernanke's expansion of the Fed's balance sheet was a primary cause of inflation following the 2008 financial collapse have faded. 

Less Adventurous Traders
There was some recovery in the commodity index values yesterday, but this is, after all, a sell-off of over 20%, which in the last four months has tamed some of the adventuresome animal spirits in the commodity markets.  And, if traders are going to conclude that U.S. inflation is going to perk, weakening the USD, this might result in a healthy bout of USD long liquidation.

Markets traditionally are supposed to look forward and discount future prices, but yesterday's market action seemed subdued. It is interesting to note that in Bernanke's testimony, he said risk from the European bank and debt crises presents a severe threat to the U.S. economy and must be monitored closely. 

The immediate threats to economic disruptions come from Europe, not the U.S. 

Europe's Inaction
European solutions do not seem to be forthcoming. Spain did peddle €2.07B bonds yesterday, but at higher rates and primarily to the very customers who may require a bailout -- the banks. It is amusing to see the ECB holding the bank rate at 1%, but maybe it thinks it will help contain the inflationary price of Brent crude.

In the EUR/USD, I feel more comfortable when I am short. The trouble is that trade is overloaded. Looking at the weekly chart, there is a double weekly high at the 1.2625 area. Should the market take this level out, remaining above the 1.2625 high, we are inclined to go home long the EUR/USD. 

Chances are, there will be a continuation of the rally next week.