Bonds Continue Falling on U.S. Strength

U.S. 10-year bond prices fell to 7-week lows
today, after a slew of positive economic data was released today in the U.S.
Existing home sales, consumer confidence and manufacturing all came in higher
than expected, boosting confidence in the U.S. economy into 2007. Bonds
initially shot up in late June when the Fed initiated a rate-pause on a weak
housing market and an overall slowing U.S. economy. Recent reports have
lent weight to speculations that the economy is picking up again, with
yesterday’s new home sales coming in well above expectations, in addition to
positive retail sales and consumer confidence. Today’s report dealt a
triple-threat blow to bond prices, which fell through the day.

The euro rose to new record highs against the yen
today, and advanced against the dollar despite U.S. economic strength. A
policy maker for the ECB commented that current interest rates are still “low,”
hinting that more rate hikes are due for Europe in the new year. The
global currency market has favored currencies backed by hot, inflationary
economies. Barring this week reports, the U.S. has been struggling to
produce consistent positive reports, while Japan has had basically no positive
news in the last month at all. Europe, on the other hand, has been able to
prove to investors and the central bank that the economy is growing and in need
of an interest-rate check. In addition, countries around the world have
been diversifying their currency reserves from dollars to euros, weakening
dollar support.

Crude oil rose fractionally today on news that
U.S. inventories of crude have declined for the 5th straight week. OPEC
has been calling for an international output reduction to deal with the falling
price of crude, but the threats have yet to make a sustainable impact on price.
Despite the declining numbers, crude oil inventories are over 8% larger than
they were 5 years ago. Crude has fallen 25% since reaching record highs in
July, the main reason OPEC called for reductions in the first place.
Natural gas rose nearly 2% off of 10-week lows, as traders bet that cold weather
will eventually hit the U.S. and drive prices higher.

Gold rose 1% today as investors shed the dollar
in favor of the euro. Recent reports show that countries have begun to
diversify currency reserves into euros away from the dollar, which has led to a
rise in the price of gold. Gold is commonly used as a hedge against the
falling dollar and rising oil, both of which occurred today. Gold is down
about 20% from May highs, but is still up for the year. Copper prices fell
1% on rising inventories.

Soybeans rose nearly 1% on speculation that crop
damage in the Pacific will seriously effect global supplies. Wheat fell
today just over 0.5%, as prices rest off of highs.

Economic News

Existing home sales rose unexpectedly by 0.6% in

A Chicago manufacturing index came in at 52.4, up
from 49.9 in November.

John Lee

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