Investors rush for commodities as oil hits $100

(Xinhua)
Updated: 2008-01-03 23:42

The oil price rally soured the first stock trading day of the year, with the Dow Jones Industrial Average closing 1.7 percent lower, its worst start since a slide of 1.9 percent on the first day of trading in 1983.

Investors bet that the Federal Reserve would be forced to lower interest rates in response to economic weakness, potentially increasing the downward pressure on the dollar.

Related readings:
 German expert says oil prices likely to double in 10 years
 Crude oil prices to continue surging
 Oil prices ease after hitting $100
 Bush not to tap oil reserves to drive down prices

 Shanghai's back-up oil facility to be ready by 2009

The Institute for Supply Management said that its manufacturing index for December fell to 47.7, its lowest level since April 2003 and well below 50.8 in November. A reading below 50 indicates a contraction in activity and has historically served as a harbinger of recession.

TJ Marta, fixed income strategist at RBC Capital Markets in New York, said, "A further decline in the overall index below 45 would be consistent with the recessions of 1990-91 and 2001."

Minutes from the Fed's meeting in December, released Wednesday, revealed that policy-makers "agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook." The minutes said "members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen."

Investors sought the safety of government bonds, sending the yield on the policy-sensitive two-year Treasury down to 2.88 percent from 3.02 percent. Interest rate futures fully priced in a quarter-percentage point rate cut to 4.0 percent by the Fed by the end of this month.

The US data also put pressure on stocks in Europe, with the FTSE 100 off 0.5 percent and the FTSEurofirst index falling 1.2 percent.

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