Oil Jumps on Nigeria Worries

U.S. 10-year Treasury bonds fell fractionally
today, but closed higher for the week on slowing inflation pressures. A
core inflation report early in the week sent bonds higher, as traders increased
bets that the Fed would be forced to cut rates this year. Bonds fell
slightly today from near 2-month highs, taking a breather, as traders gained
confidence on a continued equities rally. Bonds usually fall on economic
strength and rise on weakness; traders took today’s market action as a plus for
the economy, but it is clear from early-week action that inflation is cooling,
troubling trader sentiment.

The dollar fell against the euro and the yen this
week, mostly due to a weak core consumer prices report that was released on
Tuesday. Today, though, the dollar bounced back against the yen and the
euro on an equities rally. The soft inflation report on Tuesday boosted
the euro to within a fraction of record highs against the dollar. The euro
has been surging against both the dollar and the yen in the past 3 weeks on
positive industry and manufacturing growth numbers out of a number of different
European countries. This week, the euro pushed to new record highs against
the yen, and just missed breaking record highs against the dollar. The
currency market favors currencies backed by positive growth and inflation, which
puts the euro in the best position to move higher.

Crude oil jumped over 3% today, on speculation
that tomorrow’s election in Nigeria could lead to a significant reduction in the
country’s crude output. Traders are worried that political disruptions
could lead to more terrorism and future pipeline and output damage. Crude
has been trading in a fairly tight range since falling after the Iran/UK hostage
situation was resolved. Crude prices are very closely linked to political
stability and situations in the Middle East, and that does not look to change
any time in the near future. Natural gas futures fell about 1.5% on
further speculation that winter is over.

Gold futures rose just over 1% as China’s
equities market rebounded, forcing traders to speculate that gold would be used
as a hedge against inflation there. Gold usually moves inversely to the
dollar and with oil, but it was China action that dominated today’s trading.
Traders bought gold to hedge against inflation in China. Copper rose about
1% today, in line with gold.

Grains traded mixed today. Soybeans rose
about 0.7%, wheat rose just over 1% and corn fell 3%.


No major economic
news to report for the U.S. today.

John Lee

Associate Editor