Oil Gives Up Early Gains

By John Lee
Monday, Jan 22, 2007
U.S. 10-year bond prices rose moderately today, trading within a 5-day range. Bonds moved higher on speculation that big-cap company sales of corporate bonds will boost demand for the long-term safe rate. Bonds have been trading back and forth for over a week, on conflicting reports of strength and weakness in the U.S. economy. Low energy prices and a rebounding housing market both point to U.S. strength, but more numbers are to come before the next Fed meeting in March. Bond prices usually rise on weakness and fall on strength; prices seem to be moving lower in the longer-term, but have been consolidating for the last week of trading.

The yen fell to its lowest in over 3 years against the dollar, and fell moderately against the euro. Investors speculated that recent U.S. strength will continue, and bet on a hawkish U.S. Fed outlook. The dollar has been surging against the yen since the beginning of December, when the U.S. government began to produce turn-around numbers that reflected a rebounding housing market and growing U.S. economy. The international currency market favors currencies backed by hot, inflationary economies. Japan just kept rates at 0.25% last week, as consistently negative reports continue to roll out of the country. Most of Europe has been characterized by positive growth and inflation, which has helped propel the euro higher against the dollar and the yen. The U.S. economy has just recently begun to improve its economic numbers, after a sluggish second-half of 2006.

Crude oil futures fell nearly 2% to close at $51.11, on speculation that U.S. supplies are large enough to handle any extra winter demand. Crude initially rose over 2% on cold weather fears, but last week's ample inventory report was enough to convince investors that cold winter weather will not create any huge supply pressures on U.S. reserves. Cold weather usually equates to higher prices, as more energy is needed to heat homes and businesses. Natural gas futures rose over 6% to 1-month highs today, on forecasts that cold weather will stick around in the northern U.S. through the beginning of February.

Gold futures fell 0.4%, as the dollar rose and crude prices fell. Gold usually moves inversely to the dollar and with oil, which is exactly what happened in today's session. Gold is used as a hedge against dollar weakness and rising oil prices. With the dollar at multi-year highs over the yen, investors turn away from the precious metal in favor of dollar strength. Copper prices rose 0.5% on speculation that the U.S. housing market is on the rebound, and that demand could pick up soon.

Grains traded mixed today. Both wheat and soybeans closed down fractionally for the day. Corn fell over 0.5% on favorable weather in South America, which could boost supplies.

Economic News
No major U.S. economic news to report today.