Bonds Soar on ISM Weakness

U.S. 10-year Treasury bond prices rallied sharply today to start the year, pushed higher by a weaker than expecting U.S. manufacturing report. Bonds are trading just off 3-year record highs. Bonds typically rally on economic weakness and fall on economic strength, so today's bad news only helped to worsen general sentiment towards the U.S. economy. It's obvious that traders have positioned themselves defensively to start the year, and today's rally only emphasized underlying U.S. negative sentiment.

The yen rallied today against the euro and the dollar, as U.S. and global equity markets opened sharply lower to start the new year. The U.S. economy and dollar have been under major pressure in the months leading up to 2008, and the year started off on the wrong foot for the greenback. Underlying dollar weakness was exacerbated by a report that showed U.S. retail sales rose less than expected during key holiday periods. The yen has been trading in line with the so-called carry trade. Traders borrow yen on equity strength and buy it back on weakness, leading to a direct relationship between global equity risk and yen strength.

Crude oil futures rallied past the crucial $100 watermark before falling back slightly, up on the day. Crude has been rallying on record worldwide demand, which is threatening global supplies. Crude fell back recently from record prices a few weeks ago, on concern that slowing U.S. growth and uncertainty would lead to a slowdown in energy demand. The U.S. economy continues to slow, however, while global demand continues to rise. Oil prices are one of the major focuses of the market heading into the new year, and all traders will be watching energy prices in the weeks to come to watch for continuation into new territory.

Gold futures rallied above $860 today, on dollar weakness and record oil prices. Gold normally trades inversely to the dollar and with oil, which is exactly what happened today. Traders bought gold in the face of record oil and a declining dollar. Copper was also up slightly.

Stocks declined on the first trading day of 2008, after a much weaker than expected ISM manufacturing report was released, and oil hit $100 per barrel for the first time. Click here to read the rest of today's Stock Market Recap.