Oil and Gold Bounce Back

U.S. 10-year bond prices fell moderately today,
after the University of Michigan consumer confidence report rose to its highest
levels in 3 years. Bond prices have been pushing lower since December on a
string of turnaround-reports from the U.S., pointing to a rebounding economy and
accelerating growth. Bond prices climbed steadily through the second half
of 2006, after the Fed initiated a rate-pause to deal with slowing growth, a
faltering housing market and an overall weak U.S. economy. Since early
December, though, U.S. economic reports have been characterized by strength and
growth, helping to push bond prices lower. Bond prices are now near
3-month lows. Bond prices usually rise on economic weakness, and fall on
strength.

The dollar traded with fractional change against
the euro and the yen today, and the euro hovered near record highs against the
yen. Currency market action has been focused on yen weakness lately, as
the BoJ kept rates the same this week, on continued economic weakness and slow
growth. The currency market has favored currencies backed by hot,
inflationary economies with high growth levels, which puts the yen at a severe
disadvantage, considering Japan’s string of negative-growth and low-inflation
reports. Consistent strength and growth from European countries has kept
the euro trading strongly against both the yen and the dollar, with the euro
trading near record highs over the yen. The dollar has just recently been
able to push back against 20-month lows against the euro, signaling a
turn-around in U.S. confidence and strength. The housing market remains a
focus for the the U.S. as 2007 unfolds, as traders will be watching closely any
future U.S. housing reports for signs of strength or weakness.

Crude oil rose nearly 3% today to close at $51.96
a barrel, on forecasts of continued cold weather in the U.S. through January.
Crude oil has fallen over 30% from its record highs from last summer on excess
supplies and slow demand. Cold weather usually leads to a rise in energy
prices across the board, as more energy is needed to heat homes during the
winter. OPEC has cut nearly 2 million barrels of crude production around
the world, and has threatened for more if prices do not stabilize. Natural
gas jumped over 8% on the cold weather forecasts.

Gold rose over 1% today, in line with the energy
sector. Gold usually trades inversely to the dollar and with oil, and it
was oil action that dominated today’s trading. Investors turn to gold as a
safe-haven against high energy prices, and the bounce today in oil and natural
gas was enough to attract buyers of the metal. Copper prices rose 1% on a
drop in inventories and a rise in U.S. consumer confidence.

Grains traded mixed today. Corn fell about
1% on fears that high prices will hurt U.S. export demands, and wheat also fell
moderately. Soybeans rose fractionally.

Economic News

The University of Michigan reported that U.S.
consumer confidence is the highest in 3 years.

John Lee

johnl@tradingmarkets.com


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