Bonds, Euro Hit New Highs

U.S. 10-year Treasury bonds rose to near 11-month highs today, as
the $20 billion auction of 2-year notes was met with strongest demand in six
years. Consumer confidence declined this month, and lower prices in the
housing sector led to an increase in previously owned homes. These muddled
reports, coupled with similarly-blurred comments from Fed chief Bernanke, led to
buying in the long-term U.S. bonds. Bonds have soared since June, when the
Fed initiated a rate-pause on the grounds that the U.S. economy is slowing down
and that inflation is less of a worry at this point. With conflicting
reports and comments constantly being released, bonds have wavered near 9-month
highs until making nearly 1-year highs today. Watch for more reports and
comments to crystallize the Fed’s interest rate stance for the coming year.

The euro rose to a 20-month high against the dollar today, and
to new record highs against the yen today as traders bet that the ECB would be
forced to raise rates before the year is over. A report was released today
in Europe that showed the money supply growth levels were near 3-year highs,
which added to the bets that the ECB will raise rates soon. The global
currency market has been dominated by interest rate and inflationary news, as
investors seek to buy into currencies backed by hot, inflationary economies.
There is no chance that the U.S. Fed will raise rates this year, and only a slim
chance that the BoJ will raise before January. Europe, on the other hand,
has practically guaranteed rate hikes before January to deal with inflation and

Crude oil futures rose over 1% to close at $61 a barrel today,
on cold weather forecasts in the U.S. Cold weather usually equates to more
energy use, which in turn leads to higher energy prices across the board.
Crude is down 25% from record July highs, and OPEC has even called for global
output reductions to battle the falling prices. The cuts have not
influenced price significantly, but daily fluctuations in weather reports and
supply continue to drive price movement. Natural gas rose 2% to 2-week
highs today, as investors speculated that cold weather across the U.S. will
boost demand for the energy.

Gold fell 0.5% today on speculation that a slowing U.S.
economy will equate to lower demand for the energy. Usually gold moves
inversely to the dollar and with oil, but the metal performed against its common
trend today. Investors bet that U.S. consumers would buy less gold
jewelry, as a slowing economy would be able to support only so much demand for
the precious metal. Gold is down 20% from May highs. Copper prices
fell nearly 2% today as investors bet a slowing economy and large inventories
will continue to dampen demand.

Softs and grains traded mixed today. Corn fell 1.5% and
wheat fell just over 1% on speculation that high prices will limit U.S. exports.
Coffee rose 1% on speculation that global inventories will not be able to handle
the growing demand for coffee. Cocoa rose 2.5% on speculation that the low
worth of the dollar will increase overseas purchases.

Economic News

Consumer confidence fell unexpectedly this month.

Sales of previously-owned homes rose unexpectedly last month,
boosted by lower prices.

John Lee