Bonds Plummet on Housing Data

U.S. 10-year Treasury bonds fell to six-week lows
today, after a government housing report showed that new-home sales rose more
than expected in November. Traders sold bonds on speculations that the
recent housing slide could be nearing an end, which would have a positive impact
on the U.S. economy. Bonds initially shot higher in June, when the Fed
initiated a rate-pause to deal with a slowing economy and housing market, and
moderating inflation. Recent reports, however, have shown the U.S. economy
picking up, with the latest new-home sales numbers solidifying those sentiments.
The housing sector remains one of the main weaknesses of the U.S. economy, and
one that will continue to heavily dominate interest rate and bond action.

The dollar fell against the yen and euro today,
after the head of the central bank of the United Arab Emirates announced that
the collection of states will begin to convert some of its currency reserves
from dollars to euros. The dollar bounced back slightly after the positive
housing report, but, on the whole, international sentiment is building up
against the dollar. Barring today’s report, the U.S. has been struggling
to consistently produce positive economic data, which has led to whipsaw action
against the euro. The yen has been weak lately on continued negative
reports from Japan. The euro looks best-set to move at the beginning of
2007, with positive-growth, inflationary reports rolling out of Europe.
The international currency markets favors currencies backed by hot, inflationary
economies, which puts the euro in the most favorable position.

Crude oil fell over 1% to close at $60.33 as mild
weather and inventories continue to drive prices lower. OPEC has called
for an international output reduction of nearly 2 million barrels a day to curb
losses from the falling price of oil, but those threats have had little
sustainable impact on crude. Crude is down 25% from July highs.
Natural gas continued to fall today, moving to a 10-week low as warm weather in
the U.S. keeps a lid on energy prices across the board.

Gold rose 0.5% today as the dollar fell on the
international market. Gold is commonly used as a hedge against dollar
weakness and rising oil prices, and dollar weakness seemed to control the metal
action today. Gold is down about 20% from May highs, but is still up for
the year. Copper rose for the second straight day today, up 1.3%.
Today’s housing report sparked interest in the metal, which is commonly used in
home and industrial construction.

Wheat fell nearly 1% today on news that Pakistan
will lift its 2-year-old export ban of the grain. High grain prices across
the board has sparked investor interest, and Pakistan’s lifting of the ban
points to an overall global awareness of grain market action. Cocoa prices
moved higher by about 1% today, on speculation that unrest in Nigeria, a major
producer, will lead to supply shortages soon.

Economic News

New home sales exceeded forecasts in November,
moving higher by about 3.4%.

U.A.E. announced its plans to convert about 8% of
its currency reserves from dollars into euros.

John Lee

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