Bonds Close Lower, Euro Still Moving Higher

U.S. 10-year Treasury bonds secured their first
December loss in 5 years, as new economic data points to a rebounding U.S.
economy. Bonds shot up in June on a rate-pause, necessitated by cooling
growth and moderating inflation. Recent reports, however, have shown that
the economy is beginning to pick up again, with jobs numbers, housing reports
and manufacturing all beating expectations over the last week. Bonds have
responded by falling drastically in price to nearly 2-month lows, a sign of
confidence in the future of the U.S. economy. The housing market remains
the sore spot in the U.S. economy, but recent numbers have pointed to
significant improvement in new and existing home sales.

The euro continued to push to record highs
against the yen today, as investors speculated that the ECB will lift rates
early in 2007, while Japan will not. The euro also moved higher against
the dollar today, on Europe’s obvious and consistent economic strength.
All comments and reports coming from Europe point to rate hikes next year, while
the fate of Japan and the U.S. still seems to be up in the air. The U.S.
has only recently begun to turn around its overwhelmingly negative housing
market, and positive signs of growth are starting to show in the manufacturing
and retail sales sector. The international currency market has favored
hot, growing economies this year, with the need to raise rates to contain
inflation. The euro stands on the best ground moving into the new year,
with U.S. strength turning positive. The yen remains on weak footing with
consistent negative reports and comments from the country’s central bank.

Crude oil rose nearly 1% on speculation that
Saddam Hussein’s execution in Iraq will lead to disruptions in the Middle East,
the world’s primary source of crude. Crude is down 25% from July highs,
and OPEC has called for international output reductions of nearly 2 million
barrels a day to combat losses. Any major geopolitical crisis in the
region would surely send the price of crude skyrocketing; traders bet today that
Saddam’s execution could be a catalyst for such an event. Oil has also
been pushing lower lately on high supplies and warm weather across the U.S.
Natural gas rose nearly 1%, as traders took advantage of the extremely low gas

Gold rose fractionally today, capping the year
+23%. Gold is down about 20% from May highs, but the metal is still way up
on the year. Gold trades inversely to the dollar and with oil; dollar
weakness and high energy prices have certainly helped to push metal prices
higher this year. Copper fell nearly 1% as inventories show high levels of
the metal, which is commonly used in home construction. Copper has been
under pressure on fears of weak demand, and obviously high supplies.

Wheat fell just over 0.5% in trading today, as
export numbers show that high prices have significantly hurt export quantities.
Wheat prices had their biggest gain this year in over 10 years. Corn rose
fractionally today; corn is up 81% for the year on exponentially increasing
demand for alternative fuels, specifically ethanol.

Economic News

No major U.S. economic news to report today.

John Lee

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