For the week, the S&P500 declined 1.7% (up 6.6% y-t-d), and the Dow fell 1.3% (up 9.1%). The S&P 400 Mid-Caps dropped 2.6% (up 9.0%), and the small cap Russell 2000 was hit for 3.7% (up 6.3%). The Banks declined 1.6% (down 2.8%), and the Broker/Dealers fell 2.0% (down 2.1%). The Morgan Stanley Cyclicals dropped 2.9% (up 6.4%), and the Transports slipped 0.8% (up 7.1%). The Morgan Stanley Consumer index dipped 0.4% (up 3.7%), while the Utilities added 0.3% (up 5.1%). The Nasdaq100 declined 0.9% (up 7.5%), and the Morgan Stanley High Tech index fell 1.5% (up 4.2%). The Semiconductors fell 1.3% (up 7.7%). The InteractiveWeek Internet index dropped 1.7% (up 4.4%). The Biotechs added 0.7% (up 13.4%). With bullion down $68, the HUI gold index sank 9.7% (down 6.7%).

One-month Treasury bill rates ended the week at zero bps and three-month bills closed at 0.5 bps. Two-year government yields declined 5 bps to 0.55%. Five-year T-note yields ended the week down 11 bps to 1.86%. Ten-year yields fell 14 bps to 3.15%. Long bond yields were 11 bps lower to 4.30%. Benchmark Fannie MBS yields were down 11 bps to 3.98%. The spread between 10-year Treasury yields and benchmark MBS yields widened 3 to 83 bps. Agency 10-yr debt spreads narrowed about one basis point to negative 4 bps. The implied yield on December 2011 eurodollar futures declined 4 bps to 0.42%. The 10-year dollar swap spread increased 1.5 bps to 9.25 bps. The 30-year swap spread widened 1.5 to negative 25 bps. Corporate bond spreads were wider. An index of investment grade bond risk increased 3 to 90 bps. An index of junk bond risk jumped 15 bps to 437 bps.

Investment grade debt issuers included JPMorgan Chase $2.0bn, Republic Services $1.85bn, Pepsico $1.75bn, Altria $1.5bn, Highmark $600 million, Pentair $500 million, and Scana Corp $300 million.

Junk bond funds saw inflows of $315 million (from Lipper). Issuers included Dish $2.0bn, GE Capital $1.8bn, WEA Finance $1.0bn, Host Hotels & Resorts $425 million, Celanese $400 million, U.S. Foodservice $400 million, Shea Homes CCO Holdings $325 million, Speedy Cash $250 million, Milagro Oil & Gas $750 million, Kansas City Southern $200 million, Jack Cooper $150 million, and Harmony Foods $400 million.

Convertible debt issuers included Lam Research $750 million, Novellus Systems $600 million and Alaska Communications Systems $120 million.

International dollar debt issuers included Ontario $3.0bn, Mega Advance $1.0bn, Woodside Finance $700 million, ENN Energy $750 million, Sensata Technologies $700 million, Seagate HDD $600 million, Senegal $500 million, Finansbank $500 million, HSBC Brazil $500 million, Fairfax Financial $500 million, MIE Holdings $400 million, Satmex $325 million, China Liansu Group $300 million, Kazkommertsbank $300 million, Fosun International $300 million, and Cimento Tupi $100 million.

U.K. 10-year gilt yields declined 5 bps this week to 3.38% (down 13bps y-t-d), and German bund yields fell 7 bps to 3.17% (up 21bps). Ten-year Portuguese yields dropped 18 bps to 9.32% (up 274bps). Irish yields sank 22 bps to 10.12% (up 107bps), while Greek 10-year bond yields were little changed at 15.35% (up 289bps). Two-year Greek yields rose another 22 bps this week to 24.57%. Spain's 10-year yields slipped 5 bps to 5.23% (down 21bps). The German DAX equities index slipped 0.3% (up 8.4% y-t-d). Japanese 10-year "JGB" yields dropped 6 bps to 1.14% (up 2bps). Japan's Nikkei was little changed (down 1.5%). Emerging markets were lower. For the week, Brazil's Bovespa equities index sank 2.6% (down 7.1%), and Mexico's Bolsa was hit for 4.7% (down 8.7%). South Korea's Kospi index fell 2.1% (up 4.7%). India's equities index sank 3.2% (down 9.7%). China's Shanghai Exchange fell 1.7% (up up 2.0%). Brazil's benchmark dollar bond yields dropped 14 bps to 4.31%, and Mexico's benchmark bond yields sank 16 bps to 4.16%.

Freddie Mac 30-year fixed mortgage rates dropped 7 bps to 4.71% (down 29bps y-o-y). Fifteen-year fixed rates fell 8 bps to 3.89% (down 47bps y-o-y). One-year ARMs were down one basis point to 3.14% (down 93bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates falling 6 bps to 5.25% (down 55bps y-o-y).

Federal Reserve Credit jumped $15.2bn to a record $2.687 TN (26wk gain of $406bn). Fed Credit was up $279bn y-t-d and $376bn from a year ago, or 16.2%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/4) surged $16.7bn to a record $3.452TN. "Custody holdings" were up $102bn y-t-d and $377bn from a year ago, or 12.3%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg - were up $1.798 TN y-o-y, or 22.5%, to a record $9.779 TN. Over two years, reserves were $2.992 TN higher, or 45% growth.

M2 (narrow) "money" supply jumped $24bn to a record $8.965 TN. "Narrow money" has expanded at a 4.5% pace y-t-d and 5.6% over the past year. For the week, Currency increased $1.9bn. Demand and Checkable Deposits rose $26.4bn, while Savings Deposits declined $4.6bn. Small Denominated Deposits fell $2.2bn. Retail Money Funds increased $2.5bn.

Total Money Fund assets were little changed last week at $2.727 TN. Money Fund assets were down $84bn y-t-d, with a decline of $127bn over the past year, or 4.4%.

Total Commercial Paper outstanding surged $24.2bn to a 25-wk high $1.130 Trillion. CP was up $161bn y-t-d, or 40% annualized, with a one-year rise of $28bn.

Global Credit Market Watch:

May 2 - Bloomberg (Ye Xie and Sebastian Boyd): "Brazilian Finance Minister Guido Mantega is wiping out the world's best carry-trade investment. The yield investors receive on real-denominated assets overseas sank to a seven-year low of 1.6% last week from 8.1% on March 30 and 7.7% a year ago, driving investors away from the carry trade... The 6% tax Mantega imposed on foreign loans, known as IOF, in March made financing in dollars more expensive in Brazil, eroding the carry-trade return."

May 3 - Bloomberg (David Mildenberg and Brendan A. McGrail): "California has stronger growth prospects than Greece and is better able to repay debt, so similarities in the financial condition of the two don't hold up to 'closer scrutiny,' Standard & Poor's said... Unemployment rates are at least 12% in both, and they face budget deficits that will boost borrowing costs, S&P said today. However, California's economy grew 3% in 2010 and is expected to expand 2.9% this year... Greece's contracted 4.5% last year and may shrink by 3.5% this year, and the country hasn't posted a budget surplus since 1990, the report said."

Global Bubble Watch:

May 6 - Bloomberg: "China, the biggest foreign holder of Treasury notes, is closely watching the debate over raising the U.S. debt ceiling and wants the Obama administration to do more to curb the deficit, Vice Finance Minister Zhu Guangyao said. 'We are paying close attention to the domestic discussion in the U.S. on debt and deficits,' Zhu told reporters... 'We hope the U.S. can take effective measures toward fiscal reorganization just as President Obama suggested.'"

May 2 - Bloomberg (Joao Oliveira): "Syndicated loans to Brazilian companies will exceed $30 billion this year as rising infrastructure investment boosts demand for structured finance in Latin America's largest economy, according to a Banco Santander Brasil SA executive. Demand is rising as structured loans allow companies to raise capital without increasing debt, Andre Fernandes Berenguer, head of global banking and markets... 'This is the year of structured finance,' said the executive. 'For companies, it's the instrument that has served best for capital-intensive projects for infrastructure.' The volume of syndicated loans may surpass the 2007 record of $29.9 billion..."

May 6 - Bloomberg (Serena Saitto): "Dealmaking is at the beginning of a recovery whose peak will exceed the record $4 trillion of takeovers clinched at the height of the merger boom in 2007, according to Evercore Partners Inc.'s Roger Altman... Buyers... racked up more than $32 billion in purchases globally this week, bringing 2011's total to $839 billion, a 23% increase from a year earlier..."

May 3 - Bloomberg (Ed Johnson and Candice Zachariahs): "Australian companies are selling the most bonds in their local currency since 2007 as demand for corporate debt drives relative yields to the lowest levels since before the financial crisis. Woolworths... led borrowers selling A$3.7 billion ($4.1 billion) of Australian dollar-denominated notes this year..."

Municipal Debt Watch:

May 6 - Bloomberg (Brendan A. McGrail): "The cost of protecting U.S. municipal debt from default fell to the lowest in about 18 months this week as buyers regained confidence in rallying local-government bonds. An investor seeking to insure $10 million of municipal debt for five years would have paid $115,625 on May 2, the least since October 2009..."

May 3 - Bloomberg (Mark Niquette): "New Jersey is giving Panasonic Corp. of North America a $102.4 million tax credit to move its headquarters nine miles. Ohio offered American Greetings Corp. up to $93.5 million in incentives to stay in the Cleveland area. Kansas City business leaders want governors to stop their 'border war' over jobs. States are trying to recover more than 8 million positions lost during the recession as they face deficits that could reach $112 billion. Local and state governments are giving away more than $70 billion in annual subsidies to boost employment, according to calculations by Kenneth Thomas, a political scientist at the University of Missouri-St. Louis."

Currency Watch:

The U.S. dollar index rallied 2.7% to 74.91 (down 5.2% y-t-d). On the upside for the week, the Japanese yen increased 0.7%. On the downside, the Norwegian krone declined 5.1%, the Swedish krona 4.2%, the Euro 3.3%, the Danish krone 3.3%, the Australian dollar 2.5%, the Brazilian real 2.5%, the New Zealand dollar 2.5%, the Canadian dollar 2.2%, the South African rand 2.0%, the British pound 2.0%, the Swiss franc 1.6%, the Mexican peso 1.2%, the Singapore dollar 1.2%, the South Korean won 1.1%, and the Taiwanese dollar 0.2%.

Commodities and Food Watch:

May 2 - Bloomberg (Whitney McFerron): "Wheat production in Kansas, the second-largest U.S. grower, probably will drop as dry weather persists, threatening to increase costs for bread makers and restaurants that are already boosting prices. The state's winter-wheat crop was in the worst shape in 15 years as of last week, after drought across the Great Plains dimmed prospects for the harvest that starts in June... Kansas may produce 257 million bushels this year, down 29% from last year, said Darrell Holaday, the president of Advanced Market Concepts... Texas and Oklahoma crops may be cut by half, he said. The three states made up 28% of all U.S. production last year... 'The U.S. may have a significant reduction in hard, red winter-wheat production, plus we know we have planting concerns with the spring crop,' said Justin Gilpin, the chief executive officer of Kansas Wheat... 'We may have another year-on-year where we have the world consuming more wheat than we're producing.'"

May 4 - Bloomberg (Tony C. Dreibus): "Dry weather in France and Germany and England's hottest April in at least 352 years are threatening crops across the European Union, producer of a fifth of the world's wheat. About 20% of average rain fell in the U.K. in April after a dry March... the Home- Grown Cereals Authority... said... European wheat and rapeseed crops are 'in jeopardy' after an 'incredibly dry' April, according to agricultural weather forecaster Martell Crop Projections."

May 6 - Bloomberg (Luzi Ann Javier): "Drought conditions may persist in wheat-growing areas from China, the world's largest grower and consumer, to the U.S. and Western Europe, hurting crops and lifting prices, British Weather Services said. The La Nina event is likely to continue to block rain from moving into the wheat-growing regions in the U.S. and China through mid-May, while the North Atlantic Oscillation will curb significant rainfall in France, Germany and the U.K., preventing the replenishment of soil moisture..."

May 3 - Bloomberg (Isis Almeida): "Coffee climbed to the highest price in New York in almost 14 years as rains may hurt crops in Colombia, the world's second-largest producer of arabica beans."

The CRB index sank 9.0% (up 1.4% y-t-d). The Goldman Sachs Commodities Index dropped 11.2% (up 6.7%). Spot Gold fell 4.4% to $1,496 (up 5.3%). Silver sank 27.4% to $35.29 (up 14%). June Crude slid $16.75 to $97.18 (up 6.3%). June Gasoline dropped 8.0% (up 27%), and May Natural Gas sank 9.9% (down 3.9%). July Copper declined 4.9% (down 10%). May Wheat fell 5.8% (down 9%), and May Corn sank 9.4% (up 9%).

China Bubble Watch:

May 3 - Bloomberg: "China's central bank said controlling inflation is its top priority, even after a manufacturing survey indicated that growth may slow in the second-biggest economy. 'Stabilizing prices and managing inflation expectations are critical,' the People's Bank of China said... Bank reserve requirements have no 'absolute ceiling,' the report said... Premier Wen Jiabao's government aims to cool the fastest inflation since 2008 and rein in property prices without undermining the economy's expansion."

May 3 - Bloomberg (Ye Xie and Sebastian Boyd): "China's home prices rose for the eighth consecutive month in April... defying government steps to cool prices. The latest gain underscores the challenge facing Premier Wen Jiabao, who said May 1 that the nation is 'determined' to bring down housing prices in some cities to a 'reasonable' level. Home prices rose 0.4% in April from March and climbed in 77 of 100 cities tracked by the nation's biggest real-estate website owner."

May 4 - Bloomberg (Dinakar Sethuraman): "Coal inventories in China, which generates about 70% of its electricity from the fuel, have dropped to an 11-month low, pushing prices higher, as the country faces electricity shortages. India's stockpiles are at 'critical levels, the nation's regulator said."

May 3 - Bloomberg (Sophie Leung and Billy Chan): "Hong Kong's retail sales rose a more- than-forecast 26% in March from a year earlier on reduced unemployment and increased tourist numbers."

Asia Bubble Watch:

May 4 - Bloomberg (Shamim Adam and Unni Krishnan): "Asia's growth can propel three billion people to affluent levels by 2050 should policy makers successfully narrow inequalities and avoid falling into a so-called middle-income trap, the Asian Development Bank said. Successful national and regional policies may boost Asia's gross domestic product to $148 trillion by mid-century, making up 51% of global output in 2050..."

May 2 - Bloomberg (Eunkyung Seo): "South Korea's exports climbed to a record in April as exporters weathered the won's gains, adding pressure on the central bank to boost borrowing costs next week to rein in consumer prices. Exports climbed 26.6% from a year earlier to a record $49.77 billion..."

May 2 - Bloomberg (Suttinee Yuvejwattana): "Thailand's inflation accelerated to a 15-month high in April as food costs increased, giving the central bank more scope to raise borrowing costs further. An index of consumer prices increased 4.04% last month from a year earlier..."

Latin America Watch:

May 3 - Bloomberg (Camila Russo): "Argentine banks are lending the most to companies and consumers in at least 15 years as growth and inflation in South America's second-biggest economy exceed forecasts. Loans to the private sector climbed 41% in the first quarter from a year earlier to 178 billion pesos ($44 billion)... Outstanding credit in Brazil increased 21% in March from a year earlier. In Mexico, lending rose 11% in November from a year before."

May 2 - Bloomberg (Eliana Raszewski): "The night before Graciela Bevacqua finished a report projecting the biggest monthly increase for Argentina's consumer prices in more than four years, she told her three children she might quit her job as director of the inflation index. The next day, the decision was made for her. Bevacqua's boss at the national statistics institute told her on Jan. 29, 2007, that she had to step down because then-President Nestor Kirchner 'wanted my head,' the... mathematician said... A week later, Argentina reported prices for January 2007 had risen 1.1% from the previous month, compared with Bevacqua's estimate of 1.9%."

May 2 - Bloomberg (John Quigley): "Peru's monthly inflation rate held close to its highest level in 33 months in April as food prices surged, increasing pressure on the central bank to increase its benchmark lending rate... Consumer prices rose 0.68% in April from the prior month..."

May 4 - Bloomberg (John Quigley): "Peru has shelved plans to sell as much as $1.2 billion of bonds after yields on the nation's debt jumped to a two-year high on concern former military rebel Ollanta Humala may win next month's presidential runoff."

Unbalanced Global Economy Watch:

May 6 - Bloomberg (Greg Quinn): "Canada added almost three times more jobs than economists forecast in April... Employment rose by 58,300 after a March decline of 1,500, Statistics Canada said today in Ottawa. The jobless rate fell to 7.6% from 7.7%..."

May 6 - Bloomberg (Emma Ross-Thomas): "Spain's economy grew in the first quarter at the same pace as the previous three months... as the nation struggled to rein in a growing debt burden and the highest unemployment rate in the euro region. Gross domestic product grew 0.2% in the first three months of the year..."

U.S. Bubble Economy Watch:

May 2 - Bloomberg (David Wilson): "Americans without a college education are still waiting for their employment outlook to brighten even though the overall jobless rate has fallen at a two-year low... The total was only 104,000 higher than a 12-year low reached in December 2009."

May 6 - Bloomberg (Anna-Louise Jackson and Anthony Feld): "Dining out will cost more this year as U.S. restaurants take advantage of the nearly two-year long expansion to boost prices on food and drinks... Restaurants are emboldened in part by the success of U.S. airlines, which have raised fares almost 10% since a year ago... Several apparel companies... also have announced increases to offset higher costs for cotton, foreign wages and freight."

May 6 - Bloomberg (Natalie Doss and Mary Jane Credeur): "Ryder System Inc.'s used trucks are selling for 44% more than a year earlier, a sign that the U.S. economic recovery is spreading as small- and medium-sized businesses refresh their fleets."

May 3 - Bloomberg (Rob Gloster): "A rookie trading card for Wayne Gretzky sold to an anonymous bidder for $94,163, a record for a hockey card, SCP Auctions, Inc. said...."

Central Bank Watch:

May 6 - Bloomberg (Karl Lester M. Yap and Unni Krishnan): "The Philippines and Malaysia joined India and Vietnam in raising interest rates this week as nations in a region that led the global economic recovery intensified their fight against inflation."

May 3 - Bloomberg (Jim Brunsden): "Bank of England Governor Mervyn King said high debt levels pose 'massive' economic challenges that would be exacerbated by increased long-term interest rates. 'The economic consequences of high-level indebtedness now would become more severe if rates were to rise,' King said... 'It is the main reason why interest rates are so low.'"

May 4 - Bloomberg (Joshua Zumbrun): "Federal Reserve Bank of Boston President Eric Rosengren said record stimulus is necessary to spur the 'anemic' economy and that raising interest rates to combat increasing food and fuel prices would impede growth. 'With significant slack in labor markets, stable inflation expectations, and core inflation well below our longer run target, there is currently no reason to slow the economy down with tighter monetary policy,' Rosengren said... 'Until we make more progress on both elements of the Federal Reserve's mandate -- employment and inflation -- the current, accommodative stance of monetary policy is appropriate.'"

The Gilded Age of Speculative Trading

Today was the one-year anniversary of the 20-minute, 1,000 Dow point plunge, commonly referred to as the "flash crash." After this week's freefall in silver and big drops in energy and commodities prices, market participants shouldn't require an anniversary reminder to appreciate that we operate in an era of acute market vulnerability.

Last week, I delved shallowly into the "Rules vs. Discretion" monetary policy debate. My focus was on myriad dangers associated with the granting of too much leeway to central bankers. When it comes to "rules," my primary focus would be on underlying Credit growth (by sector and type) and key economic variables, such as the Current Account and broad measures of financial and price stability. I strongly recommend that the Federal Reserve remove itself from the business of targeting or attempting to manage asset prices.

I was supportive of the extraordinary fiscal and monetary measures taken back in 2008/early-2009 to thwart financial collapse. At the same time, I was harshly critical when policy predictably gravitated from system stabilization to incredible measures with the goal of inciting rapid financial and economic recovery. And while there was much hoopla with respect to needed financial reform, the reality was that real reform was pushed to the back burner. The priority was to rapidly resuscitate a badly impaired Credit system and maladjusted Bubble Economy, and policymakers pushed the limits. They were more than willing to incite more Bubbles.

Many spoke of the Fed "pushing on a string." Clearly, the traditional monetary mechanism - where the Fed would create additional bank reserves and lower bank borrowing costs, in the process supporting bank lending growth - was no longer operable. The banking system was impaired from previous Bubble excesses; demand for mortgage Credit had collapsed; and system Credit needs simply could not be met through the expansion of bank Credit. Besides, the Credit system some time ago had gravitated away from bank loans and to marketable debt securities. They may have ended up with one soggy noodle for pushing traditional bank lending, yet the Fed had along the way equipped itself with a fully-functioning electric cattle prod when it came to inciting the financial markets. It's proved too empowering.

The Bernanke Fed has fully embraced the doctrine that the main monetary policy transmission mechanism these days is through the financial markets. Dr. Bernanke has essentially telegraphed that the Fed is targeting higher stock prices as a mechanism to bolster confidence, household net worth, and economic recovery. This follows a less explicit reflationary policy course about a decade ago to use cheap mortgage Credit and housing inflation to do battle against the "scourge" of deflation after the bursting of the technology Bubble. Again, I don't want an "activist" Fed intervening in the marketplace with the intent of manipulating market perceptions, liquidity or asset price levels.

The modern hedge fund industry was born during the early-nineties period of "reflationary" policymaking. The Greenspan Fed collapsed interest rates (all the way down to 3%!), while orchestrating a steep yield curve to help recapitalize the banking system. Speculators made a killing playing yield curve "carry trades" and various "borrow cheap and lend dear" schemes made possible by the Fed. When various Bubbles burst along the way, Washington (the Fed and GSEs, in particular) measures repeatedly backstopped the industry (the 1994 bond bust, Mexico, SE Asia, LTCM, and the bursting of the tech Bubble come to mind). What appeared to be a major industry shakeout in 2008 somehow morphed into the Gilded Age of Speculative Trading.

So, these days a rejuvenated "leveraged speculating industry" is bigger than ever - having profited handsomely from the most intrusive policymaker market interventions in modern history. At the same time, so-called "financial reform" incited a mass exodus of Wall Street bank/brokerage "proprietary trading desks" out to the unregulated hedge fund realm. Today's supersized "masters of the universe" are indeed the masters of profiting from government policymaking.

Meanwhile, there's been a manic proliferation of "exchange-traded funds." This trend is dangerous on many levels. If the enormous speculator community and proliferation of derivatives weren't enough, these vehicles further exacerbate trend-following market speculation. When government policymaking seeks to spur higher asset prices, rest assured that the hedge funds will fully exploit this "inefficiency." And once this trend is well in place, just watch a wall of liquidity jump aboard through ETFs and any number of different vehicles. Then, when the trade has become sufficiently "crowded," let the games begin. The enterprising hedge funds, "high frequency traders" and other speculators will do battle to extract profits from the enormous amount of unsophisticated, low conviction and "weak-handed" "money" that these vehicles enticed into the marketplace.

It was an interesting week, to say the least. Down 27%, silver suffered its biggest weekly decline in 35 years. Crude oil sank almost 15% from Wednesday's high to today's low. Over this same period, the Goldman Sachs Commodities index dropped 11%. The currency markets turned quite volatile, while U.S. equities were rather resilient. As usual, emerging debt markets were bulletproof.

The commodities downdraft meted out some pain. The degree of damage done to the global "risk on" trade is difficult to gauge. On the one hand, these kinds of downward moves impose de-risking and de-leveraging. Similar to 2007/08, a policy-induced speculative run in the risk markets has created a backdrop favorable for nurturing a liquidity crisis. "Bull moves" tend to create self-reinforcing liquidity, as speculators borrow to finance their bets. If the borrowing/speculating is of significant scale, the amount of liquidity creation can work to inflate market prices more generally. The problem arises when highly speculative markets reverse course, setting in motion de-risking, de-leveraging and faltering market liquidity - potentially across asset classes and, perhaps, systemically.

Market liquidity analysis remains extraordinarily challenging. I have posited that there are important similarities between the current environment and that from 2008. And a week like this one does bring back memories. Could the break in commodities prices - and resulting de-leveraging - prove the initial crack in the global liquidity Bubble? Is this the start of market contagion, where trouble in one market - and inklings of risk aversion throughout the leveraged speculating community - portends vulnerability in other markets?

I see this week's market developments as ominous in the context of the upcoming end to QE2. The Fed's latest episode of quantitative easing fueled rampant speculation and liquidity overabundance. Such a circumstance creates market dependency for ongoing liquidity abundance and speculative excess. And that's why they've for centuries been referred to as "Bubbles." Come July, markets will be acutely vulnerable to any significant episode of de-risking/de-leveraging. The end of the quantitative easing - "liquidity backstop" - operations will see an immediate jump in market contagion risk. But as of right now, the markets can still anticipate a number of the Fed's $15bn or so weekly liquidity injections. So the liquidity backdrop might be somewhat less tenuous.

The scope of "dollar carry" trades (selling short positions in low-yielding dollar instruments to fund higher yielding/returning assets including commodities, foreign equities/bonds) remains an important unknown. Beyond the disconcerting commodities markets, this week was also notable for confirming potential market vulnerability to a rising dollar. When the dollar catches a bid, risk assets generally feel the pressure - virtually tick for tick. This week's abrupt downturn in commodities prices hit the commodities currencies, providing impetus for a reversal in the dollar. A less than hawkish ECB yesterday provided the dollar another push. And today's report that Greece may be contemplating leaving the eurozone further pressured the euro, in the process adding fuel to the dollar rally.

As a seemingly long trading week comes to an end, it would be helpful to know how severely the commodities stung the hedge funds - and what the Greeks are up to. These might somewhat help us gauge near-term market contagion risk. Acknowledging that things are especially unclear and uncertain in the short-term, let's focus instead on the intermediate. The global "risk on" trade has suffered a meaningful crack - as the clock ticks down on QE2. Add commodities to emerging equities in the now expanding list of poorly trading markets. And let's not forget that we now have multi-Trillions following trend-following strategies, albeit through a vast array of hedge funds, derivative trading, ETFs or otherwise. It doesn't - it wouldn't - take much for huge positions to suddenly reside in "weak hands." How much has flowed into any number of risk markets for the sole reason that these markets have been moving higher? It's when highly speculative markets perceive - and presume - abundant liquidity that serious market liquidity issues tend to ferment.