Oil Plunges on Warm Weather

U.S. 10-year Treasury bonds rose slightly today,
despite a private industry report that saw manufacturing expand unexpectedly in
December. The strong ISM report came out at 51.4, up from 49.5 in
November; a number above 50 indicates an expanding economy. Bond prices
have been hit with conflicting reports and price action lately. Recent
manufacturing and housing reports have begun to point to positive growth, a turn
away from the negativity which plagued most U.S. economic reports in the second
half of 2006. It remained clear, however, that the future of interest
rates are still very up in the air, and the Fed will have more data to work with
before their next meeting in March. Interest rate futures show around an
80% chance that the Fed will hold in March.

The dollar rose the most in a month against the
euro, and moved to 2-month highs against the yen, after a manufacturing report
showed unexpected strength in the U.S. The U.S. has been battling
widespread investor sentiment with a string of positive economic reports,
including key housing, confidence and manufacturing numbers. The euro,
though, is still looking strong, with the ECB set to continue its string of
rate-hikes into 2007, on widespread European strength. The yen has been
showing major weakness lately in the currency market, as Japan cannot seem to
produce any consistent positive economic numbers.

Crude oil fell over 4% to close under $60 a
barrel today, as traders bet that supplies increased on the continuing warm
weather in the U.S. Oil is down over 25% from record July highs, prompting
OPEC to call for international output reductions of close to 2 million barrels a
day. Despite the organization’s call for supply cuts, oil continues to
fall on warm weather and large supplies in the U.S. Weather remains a key
focus for the energy sector, with natural gas down 2% on demand worries.

Gold futures fell over 1% today, as the dollar
surged and oil fell. Gold usually trades inversely to the dollar and with
oil, which is exactly what happened today. Gold’s luster diminished as
investors bet that dollar strength could continue on positive U.S. reports, and
that energy prices would continue to fall on warm weather. Copper fell
nearly 8% in trading today, on news that U.S. construction dropped in November.
Copper is commonly used in home and industrial construction.

Corn fell over 2% and soybeans fell just over 1%,
as it became clear that grain sales had increased despite the higher prices.
Grain prices have been on sharp rise lately, and today’s pullback could be seen
in terms of a breather from high prices. Cocoa rose nearly 3% to 5-month
highs, as crops in the Ivory Coast on weather and supply concerns.

Economic News

The ISM report rose to 51.4 in December, up from
November’s 49.5.

ADP forecast that the U.S. lost 40,000 jobs in
December, in contrast to analyst expectations of a gain of 120,000.

John Lee


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