Bonds Rise, Oil Falls to Monthly Lows

U.S. 10-year Treasury bond prices spiked higher
today, after a non-manufacturing ISM report today said that service growth
slowed more than expected last month. Separate reports also showed weak
manufacturing and slowing home contracts. The U.S. has been struggling to
produce consistently positive economic reports, which has led to whipsaw action
in the bond market as investors bet on U.S. strength and weakness. Bond
prices usually move higher on economic weakness, and lower on strength.
Bond prices initially shot higher in June when the Fed initiated a rate pause on
weak growth and moderating inflation, but recent housing and manufacturing
reports have pointed to underlying strength. The housing sector will
remain a key focus into the new year, and continued weakness in that sector
could lead to higher bond prices and a lower yield.

The dollar surged against the euro to a two week
high, but fell against the yen, as currency traders focused on positive numbers
in U.S. factory orders. The dollar is struggling to recover from 20-month
lows set against the euro last month, as the U.S. works to produce more and more
positive economic reports. The euro is in prime condition to remain
strong, backed by Europe’s growing and inflationary economy. The
international currency market has been favoring currencies backed by hot,
inflationary economies, which puts Europe on top, followed by the United States
and then Japan. The yen has been having a hard time lately battling
widespread negative sentiment, stemming from a string of negative economic
reports in the second half of 2006. The fate of the dollar in 2006 still
seems up in the air, with a number of crucial reports due out before the Fed’s
March meeting.

Oil fell over 4%, the largest drop in just over
two years, as mild weather in the U.S. and large supplies continue to push crude
prices lower. OPEC has called for an international output reduction to
deal with losses from crude’s +25% drop from July highs. OPEC has called
for a reduction of nearly 2 million barrels a day to combat losses, and will
probably push for bigger cuts if crude price continues to fall. Warm
weather is one of the major factors of the continued fall, as energy use
declines with warm weather. Natural gas traded higher 0.5% as investors
speculated that the warm weather cannot last forever, and that demand will pick
up as cold fronts begin to roll in.

Gold futures fell over 0.5% today, as the dollar
gained in the international market. Gold usually trades inversely to the
dollar, and with oil, which is exactly what happened today. Gold is used
as a hedge against dollar weakness and rising oil prices, so those two major
factors contributed to losses today in gold’s future contract. Copper
continued to fall today, closing down nearly 2% on demand worries stemming from
a weak housing report today, in addition to ample supplies.

Soybeans fell nearly 1% on speculation that
demand for the seeds to make fuel will decline. Wheat futures fell nearly
2%, moving away from the highest prices in over a decade.

Economic News

U.S. service-industry growth slowed more than
expected in December.

U.S. factory orders rose unexpectedly in
November, partially boosted by military purchases.

John Lee

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