Crude oil fell for a second day amid disappointing inventory report and weak economic data. Success in Treasury auction dragged equities down, which hence pressured energy prices. Currently trading at 85.2, the front-month contract slipped to as low as 84.88 earlier, representing a -2.53% decline from the 18-month high made 2 days ago.
US 10-year notes rallied as the 10-year Treasury auction worth $21B was well-received. Yields on the 10-year bond dropped to 3.86% before edging +1 bp higher today. Strong bond market weighed on stocks with both DJIA and S&P losing +0.7% and +0.6% respectively yesterday.
Rising bond market boosted gold as lower yields reduce the opportunity of owning gold. Moreover, budget deficit problems worldwide have also increased attractiveness of gold purchases. The benchmark contract for gold pulled back to 1144.4 earlier before recovering above 1150.
Apart from Greece's sovereign concerns, the Fed Chairman Ben Bernanke's speech in Dallas pointed out that the US also has to deal with deficit challenges.
Concerning economic outlook, the Chairman said that we are not yet out of woods. 'Fortunately, today the financial crisis looks to be mostly behind us, and the economy seems to have stabilized and is beginning to grow again. But we are far from being out of the woods. Many Americans are still grappling with unemployment or foreclosure, or both. Cities and states are struggling to maintain essential services. And, although much of the financial system is functioning more or less normally, bank lending remains very weak, threatening the ability of small businesses to finance expansion and new hiring'.
This reiterated the dovish stance of the central bank and signaled the Fed funds rate will stay low for an extended period.
Both ECB and BOE announced to keep policy rates unchanged at 1% and 0.5%, respectively.
Although economy has been recovering in the Eurozone, deficit problem in Greece has complicated the situation and the market currently expects no rate hike until the first half of 2010. In order to facilitate Greece, the ECB announced last month to extend the emergency collateral rules into next year. While this decision initially was believed to be good for Greece, some analysts now expect they will worsen the situation. The new framework will make it more expensive for banks to exchange Greek bonds for central bank funds because of their lower credit rating.
The BOE kept interest rate at 0.5% and the size of the asset purchase program at 200B pound. However, the market's focus has been shifted from the central bank's monetary policy to the country's election in May. According the polling survey, Conservative Party leads the ruling Labour Party by only 5%. This has greatly increased the change of a hung parliament which implies difficulties in implementing laws and policies, including those to repairing the public finances, in the future.