Bonds Surge On Housing Starts

U.S. 10-year Treasury bonds rose the most in nearly 2 months
today, after a housing report showed that U.S. housing starts declined in
October to a 6-year low. This report suggests that the economy is slowing,
and will lead to slower growth through the rest of the year. Bonds shot up
in June when the Fed initiated a rate-pause, on the grounds that the economy is
slowing and that inflationary concerns were easing. The housing start
report led to a sharp rise in bond prices today, as investors sought safety in
the long-term strength of the U.S. economy. Bonds have wavered around
7-month highs, as conflicting reports and Fed comments continue to pour in.
Fed interest rate futures show a greater than 30% chance that the Fed will lower
rates before March of next year.

The dollar fell against the yen, and the most in a week
against the euro, after a weak housing report was released in the U.S. The
housing report led to speculation that the Fed is gearing up for a rate cut to
combat easing inflation and a slowing U.S. economy. The currencies market
has been dominated by interest rate and inflationary news, and today’s weak
housing report led to an expected slide in the dollar, as investors shed the
inherent weakness of slowing U.S. growth. The BoJ and ECB have practically
guaranteed rate hikes before the year is out, while the U.S. is starting to face
the possibility of inevitable rate cuts.

Crude oil futures traded fractionally higher today, as
investors speculated that falling U.S. inventories will lead to a rise in crude
price next week. Investors bet that the trend of falling inventories,
coupled with an OPEC reduction on the table, will be enough to ease crude’s
drastic fall over the past 4 months. Crude reached record highs in July,
in the middle of a war in the Middle East that threatened the global supply of
crude. OPEC has since called for output reductions, aiming for a cut of 1
million barrels a day. Natural gas rose 5.5% on forecasts that cold winter
will set into the Northern U.S. by the end of this month.

Gold futures fell fractionally today, ending a 5-week bullish
rally in the commodities metal. Gold has been trading in-line with gold
and inversely with the dollar for some time now; the trend has remained fairly
consistent. Oil’s breakdown has led to a slide in the metal, which is down
nearly 20% from May highs. The dollar’s weakness on the global market
should lead to some gold buying, but for now, investors are focused on the
metal’s relationship with energy. As energy falls, so does gold.
Copper prices also fell, and look to continue dropping as stockpiles grow and
China’s demand for the metal weakens.

Coffee fell 6.1% as new crops from Vietnam flood the market,
easing supply concerns. Corn traded up just over 1% and soybeans were
basically flat on the day.

Economic News

U.S. housing starts fell 14.6% from September’s starts, which
put the market at 6-year lows.

John Patrick Lee