Bonds Rally on Credit Market Weakness

U.S. 10-year bond prices rallied today, after Standard & Poors cut its credit rating for the world's 2 biggest bond insurers, heightening negative U.S. economic sentiment. The credit crisis and housing meltdown are threatening to derail the U.S. economy, and many traders are now calling for a widespread recession in the U.S. Bond prices typically rise on economic weakness and fall on strength, so it's clear that traders have a negative outlook for the U.S. economy heading into the new year.

The yen gave up significant morning gains today, after the Fed announced a $20 million auction to support the global banking system. Central banks around the world have been pumping money into the banking system to stem losses from the spreading subprime credit crisis. The euro was basically flat on the dollar. The so-called carry trade has been a deciding factor in yen movement in the past months, and looks to continue to do so. Traders have been buying yen on equity weakness and selling yen on equity strength.

Crude oil futures rose about 1.7% today, after the U.S. released inventory numbers which showed a bigger decline in reserves than expected. Crude is trading about 8% under recent all-time record highs. Crude hit the record on general demand worries, but has corrected as traders bet that a slowing U.S. economy would equate to slowing energy demand. Natural gas futures rose about 0.5%.

Gold futures fell fractionally today in the face of falling oil prices. Gold normally trades inversely to the dollar and with crude, and today traders focused on falling energy prices. Traders sold gold with sinking oil, and ignored dollar strength versus the euro. Copper futures rallied about 2.5%.

Grains were higher today. Soybeans rose just under 1%, and corn rallied about 0.6%.

Stocks closed mixed, with the Dow and S&P 500 falling, while the Nasdaq rose. Earlier in the day, the Fed injected $20 billion into the banking system, and Larry Summers, former treasury secretary, called for the government to deliver tax-cuts and a spending package in the region of $50 - $75 billion to help prevent a deep recession. Click here to read the rest of today's Stock Market Recap.