A last-minute agreement was reached to hold another two-day meeting in Moscow on June 18th and 19th, but the most positive thing anyone could find to say was that Iran was now talking about its nuclear program which the country has refused to do before.

The price of Brent crude is up this morning by about 0.6% at $107.17, partly in reaction to the failed talks and partly in response to more pressure on Germany from other EU nations to issue eurobonds. Some crude traders have said that the “fear premium” added about $5/barrel to crude prices due to Iranian threats to close the Strait of Hormuz. The impact of further sanctions against the Islamic Republic, set to take effect July 1st, would further isolate the country and its oil, and add even more to crude prices.

Paul Ausick

CME Group owns and operates the Comex and Nymex commodities exchanges as well as the Chicago Mercantile Exchange and the Chicago Board of Trade. The company pulled out of the bidding for the London Metals Exchange earlier this week.

CME stated the reason for the split:

We believe that splitting CME Group stock will appeal to a broader, more diverse mix of investor portfolios. By making our shares attractive to more people, we have potential to further expand the base of ownership.

In other words, liquidity. Shares closed yesterday at $256.16 and trade an average of about 600,000 a day. Lowering the share price to around $50 will, CME hopes, attract more investors. Over the past 12 months, CME shares are down about -14%.

CME, as well as the IntercontinentalExchange Inc. (NYSE: ICE), the Depository Trust and Clearing Corp., and Chicago-based OCC (formerly the Options Clearing Corp.) have been designated as systemically important financial institutions. The designation means more regulatory oversight and perhaps larger reserves to withstand a debacle similar to the MF Global implosion.

Paul Ausick

The International Energy Agency (IEA) reports the US carbon emissions have fallen by a total of 450 million metric tons in the past five, the largest decrease of any country in the world. The news is not all good though. In 2011, global carbon emissions totaled 31.6 billion metric tons, about 1 billion more than were emitted in 2010. The annual increase is considerably higher than the average 600 million metric tons emitted between 2006 and 2010.

In an interview with the Financial Times, the IEA attributes the drop in US emissions to “a combination of policy and technology – policy driving greater efficiency and technology making shale gas production viable.”

Maybe, but a slow economy in the US and throughout much of the globe also contributed to the decrease. The US industrial capacity utilization rate in April 2012 was just 76.1%, compared with a 30-year average of 80.3%. In 2009, at the depths of the recession, the utilization rate was just 66.8%.

And while natural gas production has boomed in the US, global crude production has not. The following chart from Professor James Hamilton’s Econbrowser blog indicates an expected growth path for oil production (red line) versus actual production (blue line) as a function of global GDP. By last year, production should have been near 100 million barrels/day, but barely managed 86.5 million barrels.

If the dip in the red line on the chart had not occurred, production would have had to reach about 105 million barrels/day to meet demand. Assuming that level of production could have been achieved it would not have mattered how much natural gas the US burned to generate electricity. Carbon emissions would very likely not have fallen if the world economy had not tanked.

Abundant, cheap natural gas in the US was more than offset by added coal burning (and carbon emissions) in China and India. To their credit, the Chinese are working on using alternative fuels like solar and wind to keep their carbon emissions in some kind of check. But if China resumes its 10%+ GDP growth path, all the natural gas in the US won’t keep carbon emissions under control.

Paul Ausick

The news was made even worse by Markit data for the entire eurozone. The Eurozone PMI Composite Output Index was at 45.9 (from 46.7 in April), a 35-month low as well.

Chris Williamson, chief economist at Markit, said:

The flash PMI indicated that the Eurozone downturn gathered further momentum in May, with business activity and new orders both falling at the fastest rates for just under three years. The survey is broadly consistent with gross domestic product falling by at least 0.5% across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany. France is seeing the steepest deterioration in business conditions for three years, with the survey pointing to a marked fall in GDP in the second quarter of at least 0.5%. However, even Germany is at risk of GDP falling slightly in the second quarter if the situation continues to deteriorate in June.

The news will color the debate over stimulus versus austerity that has gone on at the EU summit, without any resolution to the path the region’s leaders should take. Germany remains unlikely to agree that any money should be invested in the eurozone’s weakest nations, even through the country’s leaders know that their position could knock Greece out of the union and badly damage the chances that Spain and Portugal can dig themselves out of deep recessions.

Germany actually could seize the numbers as a means to bolster its point of view. If the economies in Germany and France are frozen, they may need to take steps with regard to their own economies. And there is only so much money to go around.

Douglas A. McIntyre

The HSBC Purchasing Managers’ Index fell to 48.7, down from 49.3 in April.

“Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow,” HSBC’s chief China economist, Hongbin Qu, said in a statement.

Policy may not do the trick. Most of the economies in the European Union, the largest region in the world by GDP, are either in recession or close to it. And, China’s own middle class has reason to be concerned about both wages and jobs as factory production falters.

China’s GDP growth is now pegged by some economists to be as low as 8.2%. That is a surge by most measures, but not in China.

Douglas A. McIntyre

The financial damage is massive and the question boils down to how far the contagion can spread throughout Europe (and elsewhere).  Austerity measures throughout Europe are now backfiring.  France put in Hollande as a move back to the left as Sarkozy’s austerity measures were just going to be too great for the population to want.  Inflation before cutbacks!  Live well today, let the kids figure it out when hey get older!  Hell, even The Netherlands could not agree on a budget and they have their act together financially just about as well as any of the top nations.  Angela Merkel’s party suffered a regional election loss in recent weeks as well.

Greece will not likely be the only casualty here.  Portugal, Spain, and Ireland are all at risk.  Sinn Fein has been making policy statements about austerity and the Euro inclusion and went as far as issuing a video to call for a NO vote in the Austerity Treaty referendum.  Spain has a serious capital shortfall in its banks if the reports over the size of the property value losses versus face value of loans is even only one-third true.  Portugal is just totally irrelevant to Europe, but it is upside down and at risk.  And Italy is just simply “too big to bail” with its debt and spending issues that lie ahead.

The fallout is running top to bottom… safe havens to PIIGS… We are seeing all the new 52-week lows come into play in some positions while many others are still above those recent lows.

iShares MSCI Germany Index (AMEX: EWG) is down 2.2% at $19.87 against a 52-week low $16.96; iShares MSCI France Index (AMEX: EWQ) is down 2.4% at $18.61 against a 52-week low of $17.88. The there is “the Euro currency ETF” via the CurrencyShares Euro Trust (AMEX: FXE) with a drop of 0.9% at $125.03 (new 52-week low) as the Euro is at the lowest point since July 2010.  iShares MSCI Italy Index (AMEX: EWI) is down 3.8% at $10.26 and only one-penny above the $10.25 52-week low.

Ireland… The Bank of Ireland (NYSE: IRE) is down 2% at $4.90 against a 52-week low of $3.99. The New Ireland Fund, Inc. (NYSE: IRL) is down 1.1% at $7.79 against a 52-week low of $6.49.

Greece… National Bank of Greece SA (NYSE: NBG) is flat at $1.52 against a 52-week low of $1.45; Global X FTSE Greece 20 ETF (AMEX: GREK) is down 3.5% at $9.99 at a new 52-week low (prior $10.25 low). The election in mid-June will likely be the key determining factor here.  If not, the situation is still not over and Greece is going to be an ongoing flight risk.

Spain… iShares MSCI Spain Index (AMEX: EWP) is down 3.3% at $22.81 and under the prior 52-week low of $22.87.  Banco Santander, S.A. (NYSE: STD) is down 3.5% at $5.58 against a 52-week low of $5.52 and Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is down 4% at $6.02 against a 52-week low of $5.96.

Vanguard MSCI Europe ETF (AMEX: VGK) tracks the  MSCI Europe Index, which is made up of approximately 460 common stocks of companies located in 16 European countries-mostly companies in the United Kingdom, France, Switzerland, and Germany.  It is down 2.6% at $39.85 against a 52-week low of $38.40.  The SPDR EURO STOXX 50 (AMEX: FEZ) tracks the STOXX Europe 50 Index and it is down 2.9% at $26.93 against a 52-week low of $26.10.

This is sort of funny on the surface if you don’t think about the financial and human tragedy that is unfolding.  It is not exactly as though the global economy rose this much when they launched the Euro.  Little reward, massive pain!

Sadly, Europe is starting to feel like Latin America of the 1980s and early 1990s all over again.

JON C. OGG

A collapse of EU economies will hurt China’s export business. Monetary and bank regulation policies by the People’s Republic can only do so much to offset this. There are a few good by-products of the slowdown. The first is that China’s insatiable appetite for commodities, which include oil, will lessen. That should cap any inflation in commodities prices, which has hurt weaker nations around the world.

The other bit of good news is that the forecast is not lower. Many analysts believe that China will have a “hard landing” caused by a sharp decline in exports and a collapse of residential and commercial property values. There is barely a hint of that in the World Bank’s report.

Douglas A. McIntyre

Now that Iran has agreed to inspections by the IAEA, an agreement at the Baghdad meeting is far more likely. If the Baghdad meeting results in a further agreement between Iran and the P5+1, crude prices could fall another $5/barrel, perhaps even more. And Iran has plenty of incentive to negotiate this time.

Iran crude shipments are stalled, with an estimated 40 million barrels or so floating around in the Persian Gulf with nowhere to go. Tankers cannot buy insurance, and without insurance the crude stays put. Iran cannot cut production significantly because that could damage the country’s wells, so it continues to produce millions of barrels a day that it cannot sell.

The oil Iran does sell to India and China is paid for in rupees and yuan, neither of which can be spent outside the country of origin. Iran’s estimated unemployment rate approaches 35% and food prices have risen anywhere from 25%-125% in the last year. Brave words aside, Iran is suffering, the suffering is getting worse, and the sanctions due in July will make the country even more miserable.

Sanctions against Iran won’t miraculously disappear even if the Baghdad conferees reach an agreement. But a delay in imposing part or all of the tougher sanctions due in July is possible. Any movement toward freeing up some of Iran’s production will instantly cause the price of crude to fall, no matter how small the movement. That’s just the way the oil market works these days.

Both Iran and the P5+1 want to be able to claim victory from the coming meeting, and no one wants that victory more than President Obama who is just five months away from an election. Easing tensions with Iran will do more than anything else to lower pump prices, which in turn will be good for the US economy.

The next few days will figure heavily in the US elections, and those of us with long memories may see some parallels with the 1980 presidential election. Predicting what Iran will do is a fool’s game, but politicians in Iran, the US, and Western Europe have too much to lose to let an agreement slip away.

Brent crude prices are down about -0.5% in electronic trading this morning, at $109.77/barrel, while WTI is up about 1.2% at $92.57/barrel.

Paul Ausick

Policies to bolster demand should help close the output gap faster. It needs to be recognized that policy options in this regard come with risks, including uncertainty about their effectiveness. However, these risks need to be weighed against the risk of weak demand that leads to persistently slow growth and high unemployment that become entrenched in decisions made by consumers and investors.

The meet that goal, the Cameron government would have to reverse course and replace its expense cuts, at least in part, with national stimulus. That would be well off the charted path of set by Cameron, and is highly unlikely to happen

The economic crisis abruptly ended the gradual decline in global youth unemployment rates during the period 2002–07. Since 2007 the global youth unemployment rate has started rising again, and the increase between 2008 and the height of the economic crisis in 2009 effectively wiped out much of the gains made in previous years. Globally, the youth unemployment rate has remained close to its crisis peak in 2009. At 12.6 per cent in 2011 and projected at 12.7 per cent in 2012, the global youth unemployment rate remains at least a full percentage point above its level in 2007. Nearly 75 million youth are unemployed around the world, an increase of more than 4 million since 2007. Medium-term projections (2012–16) suggest little improvement in youth labour markets. By 2016, the youth unemployment rate is projected to remain at the same high level.

The rise in part-time employment adds to the anemic creation of highly productive and well-paid jobs. The damage, if it is a decade longer or longer, will almost certainly weigh on the economy well beyond the next decade.

Douglas A. McIntyre