Bonds On The Rise, Oil Falls

U.S. 10-year Treasury notes continued to climb today, on
speculation that the government will reduce spending now that both Houses of
Congress are controlled by the Democrats. The tightening wallets in
Washington will lead to a lower bond supply, which has sent prices higher since
the election on Tuesday. Bonds shot up in June, after the Fed initiated a
rate-pause, and have hovered near short-term highs as conflicting economic
reports pour in. High growth and inflationary reports lead to a drop in
prices, and low-growth, low inflation usually lead to a rise in prices.

The dollar fell to its lowest levels in two months today,
after China announced plans to diversify its foreign-exchange reserves
yesterday. China plans to sell the U.S. currency in the favor of euros,
which sparked heavy buying in euros against the dollar. The currency
market has been dominated by interest rate and inflationary news, but the large
scaling-back of investments in the dollar led to a major move that put the
dollar at its lowest against the euro in weeks. Both Japan and Europe have
announced this week that they intend to remain hawkish and watchful against
inflation, hinting at rate hikes to come in both countries before the year is
out. The U.S. is showing little chance of a rate hike in 2006, and no
chance of a cut before the year is over.

Crude oil futures fell 2.5% to close at $59.60 a barrel, after
the International Energy Agency curbed its outlook for global demand for the
third straight month. OPEC has called for output reduction cuts to curb
the the falling price of crude, which is down nearly 25% from its July highs,
but has been unable to produce an effective plan. The IEA’s continued
projection of falling demand for crude has investors speculating that oil could
be in for a continued bearish run. Crude inventories in the U.S. remain
well above 5-year averages, despite fluctuations in distillate and other
variations of the energy. Natural gas fell 2.1% on Friday as weather
forecasts continue to look for mild weather across the U.S.

Gold futures fell 1.1%, in line with both gold and the dollar.
Usually gold moves inversely with the dollar, which fell today on China’s new
diversification policy. However, investors were speculative that China
would turn to gold instead of the dollar; the euro looks to be making the most
out of this new plan. Gold is down nearly 20% from its May highs, and has
traded slowly lower since then. Copper fell 6.7%, the most since June,
after inventories in China show that demand may be slowing for the metal, which
is used in building homes and industrial buildings.

Wheat prices fell nearly 2% after a report showed that U.S.
export sales are on the decline. Grain prices have been falling lately,
due to favorable weather, ample supplies and waning demand.

No major economic news to report today.

John Patrick Lee