Bonds Sink on Equity Strength, Comments

U.S. 10-year Treasury bond prices fell today, after two major days of rallying, as stocks rebounded from yesterday's selloff, and a Fed President said that the housing market worries should not harm overall economic growth. Bonds have been rallying this week on speculation that rate cuts will be necessary to deal with slowing growth and rising inflation. Traders fear that housing problems and major subprime issues could derail U.S. growth expectations. However, bonds erased major gains from yesterday's rally today. Bonds typically fall on positive news and rise on the negative, so today's action was a positive sign for the U.S. economy.

The yen fell against both the dollar and the euro, and the dollar managed to scrap back some losses against the euro in the afternoon. The yen fell after U.S. stocks managed a bounce after yesterday's heavy losses, prompting traders to speculate that the carry trade is in no jeopardy. During the last few selloffs over the past few months, the yen has bounced on any major drop in the equity markets, as traders buy back borrowed yen to cover risky positions. Today, the yen fell on speculations of global equity strength. The dollar bounced on the Canadian dollar, but gave up gains through the day. The dollar continued to accrue major losses against the British pound, as well.

Oil fell about 0.3% today, after a U.S. energy report showed that U.S. oil stockpiles fell for the 7th straight week. Refinery capacity is nearing 100%, so more and more oil is being converted to gas and other products to support U.S. energy consumption. Energy prices usually rise during the summer on high levels of demand, and it looks so far like this summer will be no different. Natural gas futures fell 0.6% on comfortable supply levels.

Gold futures fell 0.4% on speculation that the dollar slide is nearly over. Gold normally trades inversely to the dollar and with oil; today's gold action revolved around speculations of dollar strength. Traders sold gold in favor of the dollar. Copper rose 0.6% on strike concerns in South America.

Grains traded mixed today. Corn fell 0.6% and soybeans gained 0.3%.

John Lee
Associate Editor
johnl@tradingmarkets.com