Bonds, Oil Move Lower

U.S. 10-year Treasury bonds fell to 3-month lows
today, after a government auction of $13 billion in 5-year notes saw lower
demand. Bonds had been trading in a fairly tight range for the last 2
weeks, but today’s auction and demand levels sent prices lower. Bond
prices usually rise on economic weakness and fall on strength. Prices have
been falling steadily since the beginning of December, on a string of
turn-around, growth-oriented economic reports from the U.S. Bond prices
initially shot higher last June when the Fed initiated a rate-pause to deal with
slowing growth and moderating inflation; since early December, though, prices
have been moving steadily lower on positive economic news.

The yen rose against the euro, but fell slightly
against the dollar today, after a BoJ board member said that interest rates
should be raised as long as the economic outlook remains positive for Japan.
Yesterday it was reported that the G-7 conference next month would focus on yen
weakness, which sent the yen higher against the major currencies. Japan
has struggled lately to produce consistent, positive economic results that would
garner immediate rate hikes, but politics seems to be playing into the equation
in the form of intercession by the G-7. The international currency market
favors currencies backed by inflationary, growing economies. The euro has
stood out in recent months, backed by high-growth and inflation in most of its
comprising countries, and vigilance on the behalf of the ECB. The U.S. has
just recently started to produce positive numbers, and most investors are now
confident that the Fed will continue to hold through March. Last year,
investors were beginning to speculate that the Fed could begin to cut rates to
deal with the slowing growth.

Crude oil fell more than 1.5% today, on
speculation that inventories in the U.S. are high enough to handle any spike in
demand that could occur. OPEC has called for worldwide production cuts of
nearly 2 million barrels a day, and has warned of more if prices continue
falling. Despite the cuts and warnings, the price of crude continues to
move lower. OPEC did, however, take to the idea of the U.S. doubling its
strategic oil reserve; with the U.S. buying more of the market share, supplies
will be cut. Natural gas futures fell nearly 5% after inventories continue
to come in well above average. Current U.S. inventories stand about 21%
higher than the 5-year average.

Gold futures erased early gains to close
fractionally lower on the day. Gold trades inversely to the dollar, and
with oil, and it was oil action that dominated today’s trading. Investors
turn to gold in the face of rising energy prices and a weak dollar; the dollar
held strongly against a yen rally, and oil continued to push lower today.
Copper futures rose 2% to close at 2-week highs, as China continues to show
signs of increased demand and accelerating growth.

Grains traded mixed today. Soybeans traded
fractionally lower on good farming weather in South America. Wheat climbed
about 0.75%, and corn rose over 1.5%.

Economic News

Sales of previously owned homes fell 0.8% in
December, compared to the 0.5% fall predicted by analysts.

John Lee

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