Bad news on the economy last Friday sent stocks and the dollar tumbling and led to a surge in oil and gold. The cascade of events went something like this: the labor department reported the economy lost jobs in may (a fifth consecutive month of losses) and that the unemployment rate which was expected be 5.1% turned out worse at 5.5% (apparently more due to a surge in first time employment seekers). The market knee jerk reaction was to sell dollars reflecting a diminishing probability that the Fed would raise rates before the end of the year as the likelihood that the U.S. was in recession grew. In reaction to the dollar selloff, oil began to surge again (further emboldened by an Israeli minister's threatening remarks on Iran), triggering a selloff in global equities and a jump in bond yields as inflation took the front seat of the list of worrisome developments (confirmed by recent Fed remarks).
It is clear by the marked increase in volatility that the markets are trading mainly on sentiment and that when cool heads will eventually prevail, the current "stagflation" like environment will give way to a more sane outlook. This is not to say that the environment won't deteriorate further or that we won't see a sustainable rebound, it is just an observation of an environment that seems to be somewhat detached from reality.
