Bonds Soar on Global Credit Worries
U.S. 10-year Treasury notes soared today, after the ECB said it would provide
unlimited funds at a below-market rate to steer clear of major financial
disaster. It was reported that Fed futures were pricing in a 100% chance of a
Fed rate cut during the September meeting. Bonds plummeted yesterday as the
market rallied, but overnight, the largest bank in France, BNP-Paribas,
announced it was freezing assets in 3 funds heavily invested in the subprime
mortgage markets. Bonds typically rise on weakness and fall on strength, so it
is clear that traders are taking these lending issues as a major problem, and
are worried that overall economic and market conditions could easily worsen.
The yen rose against the dollar and euro today, as global equity weakness led
to traders buying back borrowed yen to cover risky positions. In the so-called
carry trade, traders borrow the yen cheaply, and reinvest in other, more
profitable assets. When equity markets selloff, traders cover those positions,
and the yen makes gains. The dollar gained against the euro, despite a falling
U.S. stock market. The dollar also rose against the Canadian dollar and the
British pound.
Crude oil futures fell about 1% today, recovering some early losses, on
worries that slowing economic growth and market problems could lead to slowing
demand for energy. Crude normally rises during the summer on high energy usage,
but crude has fallen steadily since August 1, around -10%. Natural gas futures
rose nearly 6% today, after a government report showed that inventories grew
less than expected last week.
Gold futures fell 2% today, as traders sold safety positions to cover major
credit losses. Gold normally trades inversely to the dollar and with oil, but
today traders were most concerned about massive credit failures that have forced
a number of huge lending companies to close their doors for business. Copper
futures fell just over 2% on a jump in global inventories.
Grains fell today. Soy was down fractionally while corn dropped over 1%.
Negative news from the French bank BNP Paribas sent the markets reeling
today. Following the news, the major averages traded well below the unchanged
line all day, with the exception of the Nasdaq, which briefly turned positive
before it plunged back into negative territory. Click
here for the rest of today’s Stock Market Recap.
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