Bonds Bounce After Falling Further on Trade Deficit

Bonds rebounded slightly, after falling even
further today on positive U.S. sentiment and reports. Today, the U.S. released
its currenct budget deficit, which declined more than analysts expected. Traders
took the shrinking U.S. debt as a positive sign for the economy, which send
bonds plummeting. It seems that traders took advantage of the extremely oversold
bond prices, and bought bonds to send prices just slightly higher. Some traders
are now looking for rate hikes this year, compared with previous widespread
sentiment that rate cuts were impending and inevitable.

The dollar moved to 2-month highs over the
euro, and also gained on the yen, after a government report showed that the
U.S. trade deficit fell more than expected in April, and exports also rose to
a record. As the day went on, the euro managed to get back some losses against
the dollar. The dollar continues to gain momentum over the euro, on a string
of turnaround reports and hawkish outlook which began in the beginning of May.
Traders are also beginning to bet that global interest rates will continue to
rise on strong economic growth and rising inflation. A surprise rate increase
by New Zealand helped to foster those sentiments as well. The euro gained
fractionally over the yen today. The U.S. dollar gave up some of yesterday’s
gains over the Canadian dollar today, falling through the day after opening
higher over the Canadian currency.

Crude oil fell over 3% today, on speculation
that rising interest rates will lead to lower demand for energy across the
board. With interest rates on the rise, and stocks struggling to keep moving
higher, many traders speculated that a weak stock market would equate to a
weak energy market, and crude prices suffered accordingly. Natural gas futures
fell 1.4% today on forecasts for mild weather in the U.S.

Gold fell nearly 2% to 2-month lows, on
speculation that rising interests rates will curb demand for the safety metal.
Gold usually trades inversely to the dollar and with oil. Today’s falling oil
prices could have contributed to gold’s decline, but the main story in the
precious metals market was rising interest rates, which are beginning to offer
attractive rates of return. Copper futures fell in-line with gold on interest
rates concerns, down 3.5%.

Grain futures traded mixed today. Soybeans
fell 1.3%, wheat gained 0.7% and corn fell 0.6%.


The U.S. trade
deficit fell 6.2% in April, the most in 6 months.

John Lee

Associate Editor