Close Report
Bonds traded range-bound in the afternoon session, taking back all of yesterday’s losses. European bonds surged overnight, as the BOE injected over $20 bln in additional liquidity. This sent short-term borrowing costs in Europe through the roof overnight. If flight to quality continues in Europe and borrowing rates continue to rise, risk aversion has the potential to bleed into other markets. If this is the case, the bond market in the US should be very well bid. The yield on the 3month t-bill slipped below 3%; and continues to be the preferred contract as indicated by its considerable yield disadvantage vs. the 1&6 month bills. Dec. FED Fund Futures now show a 28% chance of a 50bps cut. This implied rate may be a bit overdone given the recent surge in short-term fixed income. Also, a 50bps rate cut for an economy growing at 4.9% a year seems absurd.
The USD extended its winning streak to 3 days, as the USD Index is up .72% to 75.615. The jump in European borrowing rates overnight helped the USD gain 1% vs. GBP and .67% vs. EUR. USD/CAD gained 1.2% and USD/CHF finished higher by .63%. If credit market tension continues in Europe, look for the USD to continue its advance vs. European currencies and look for JPY to surge.
Energies gave back most of their earlier gains as the DOE provided some of its crude reserves to make up for the supply disruption caused by the pipeline explosion. Crude was as high as 95.17 but finished up only 0.6% on the day to 91.15. Gasoline is down 0.23% to 227.05; Natural gas finished flat on the day and Heating oil gained 0.34% to 258.26.
Gold and other precious metals were sent lower as a result of continued USD strength. Gold slipped below $800 down $8 on the day. Silver and platinum were also down, 0.8% and 0.2% respectively. Copper was up again off signs of stronger demand via today’s GDP data and lower inventories in China; copper finished up almost 2%.