OnTheRadar: DC Dysfunction Has Mkt Risk Averse, Negative on US

--US Stks Stabilize After Sharp Sell-off

By Vicki Schmelzer

     NEW YORK (MNI)   - Washington dysfunction kept market players risk averse

Friday, although U.S. stocks managed to stabilize ahead of the weekend. 

     This week's media sound bites, of which there have been many, have put the

nail in the coffin on any lingering hopes for U.S. tax reform and stimulus.

     "Indeed, enough key players in Congress are stepping away from the shadow

cast by the Trump presidency that financial markets are marking down the

prospects of this president being able to achieve any constructive objects for

tax reform, infrastructure spending or health care reform," said Carl Weinberg,

chief global economist at High Frequency Economics in Valhalla, NY. 

     With growing concerns also about the debt ceiling, "there is a legitimate

gray cloud hanging over U.S. economic policy - domestic and international - and

expectations for changes in it," he said. 

     The recent sell-off in U.S. stocks has been driven "if not by the scar of

Charlottesville, then by the cumulative weight of all the chaos caused by the

White House," Weinberg added. 

     At midday Friday, the S&P 500 stood around 2,439, after trading in a

2,420.69 to 2,440.27 range. The earlier low was the lowest since July 11, when

the index bottomed at 2,412.79. 

     At Thursday's close, the index was up 8.5% year-to date and down 2.4% from

the life-time intraday high of 2,490.87, seen August 8. 

     The S&P 500 has closed below recent lows of 2,437.85, seen August 11, and

2,437.75, seen August 10, which were the lowest levels since mid July. 

     The Dow Jones Industrial Average posted a record intraday high of 22,179.11

on August 8 and the Nasdaq Composite posted a life-time high of 6,460.841 July

27. The indexes were last at 21,785 and 6,253 respectively. 

     Market players were also keeping an eye on the Russell 2000 index, which

often leads larger stock swings. 

     The index, last at 1,361, earlier posted a low of 1,349.35, which was the

lowest level since April 17, when the Russell 2000 bottomed at 1,345.363.

     The Russell 200 remained below its 200-day moving average, around 1,375,

which pointed to still lower levels. 

     On risk appetite, the CBOE's volatility index or VIX was last at 13.83, on

the low side of a 13.64 to 16.04 range. 

     The VIX high of 17.28, seen August 11 at the peak of escalating U.S.-North

Korea tensions, was the highest since Nov. 9, the day after the U.S. election,

when the VIX peaked at 21.48. The 2017 high was 23.01, seen Nov. 4 ahead of the

election. 

     The VIX has recently been trading both sides of its 200-day moving average,

currently 11.94. 

     The July 26 low of 8.84 was a new life-time intraday VIX low (prior

life-time intraday low was 8.89, seen Dec. 27, 1993). 

     On the fixed income front, 10-year U.S. Treasury yields were last near

2.210%, after trading in a 2.164% to 2.210% range.

     Earlier, 10-year U.S. yields took out the August 11 yield low of 2.184% to

test low levels last seen June 27, when ten-year U.S. yields bottomed near

2.126%. 

     On August 8 as well as August 4, non-farm payroll day, U.S. Treasury yields

peaked near 2.289%. Yields have struggled to get above these old highs

subsequently.  

     The market will tilt bullish towards U.S. Treasuries unless the 200-day

moving average, at 2.330%, is vaulted decisively.  

     As background, U.S. Treasury yields bottomed June 14 near 2.103%, which was

the lowest since Nov. 10, when 10-year yields saw a wide range of 1.991% to

2.145% two-days after the U.S. election. Nov. 10 was the last time 10-year

yields traded below 2.0%.

     U.S. yields subsequently recovered, with the June lows deemed overdone,

with 10-year yields rising to 2.396% July 7, the highest since mid-May. More

recently, U.S. yields topped out at 2.357% July 14 and have been on the

defensive subsequently. 

     U.S. Treasury yields posted highs near 2.421% on May 11, which was the

highest yield since March 31, when the 10-year yield peaked at 2.431%. These

levels will be the next larger topside hurdles.

     On March 14, ahead of the Fed decision, 10-year U.S. yields topped out at

2.628%.

     As a reminder, 10-year U.S. yields rallied from lows near 1.720% Nov. 9,

the day after the U.S. election, to highs near 2.639% on Dec. 15, 2016, which

was the highest since the Sept. 19, 2014, peak near 2.655%.

     Ten-year German Bund yields closed near 0.414% Friday, after trading in a

0.395% to 0.428% range. 

     The August 11 low of 0.376% was the lowest Bund yield since June 28, when

yields troughed at 0.332%.  

     The July 12 yield high of 0.619% was the highest since Jan. 4, 2016, when

Bund yields peaked at 0.627%, the 2016 high. The next level of resistance will

be 0.651%, the Dec. 30, 2015 high. The June 14 low of 0.225% was the lowest

since April 20, when yields bottomed at 0.192%.

     As background, Bund yields fell to a low near -0.161% Sept. 27, 2016,

versus the life-time low around -0.2059% seen July 6, 2016.

     Ten-year UK Gilt yields closed around 1.090%, after trading in a 1.061% to

1.093% range. 

     The July 7 high Gilt yield of 1.338% was the highest since Feb. 6, when

yields peaked at 1.370%. The June 14 low of 0.923% was the lowest since Oct. 7,

when Gilt yields bottomed near 0.905%.

     On Jan. 26, 2017, 10-year UK yields saw highs near 1.530%, which was the

highest yield since Dec. 15, when yields hit 1.536%, the highest since May 5,

2016, when Gilt yields saw a high near 1.538%.

     Ten-year Japanese government bond yields closed around 0.048%. Yields hit

highs near 0.108% on July 7, which prompted the Bank of Japan to step in buying

bonds, offering to buy 10-year JGBs in unlimited amounts at 0.11%. 

     Current high yields compare to April 20, when JGB yields flirted with

negative territory for the first time since last November and the Feb. 3 highs

near 0.150%, which were the highest since the BOJ introduced negative interest

rate policy back on Jan. 29, 2016.

     In currencies, the euro held near $1.1750 Friday afternoon, on the high

side of a $1.1709 to $1.1774 range. The pair has been weighed by euro-yen cross

sales in recent sessions. 

     Euro-yen, currently around Y128.66, has fallen from a high near Y131.40

August 2, to a low around Y127.56 earlier, the lowest level since June 30, when

the cross bottomed around Y127.45. 

     Thursday's euro low of $1.1662 was the lowest level since July 27, when the

pair bottomed near $1.1650. 

     The August 2 euro high near $1.1910 was a 30-month high and the highest

since Jan. 6, 2015, when the pair peaked near $1.1969. The euro last traded

above the psychological $1.2000 mark Jan. 5, 2015. 

     The 2015 euro high was $1.2109, seen Jan. 1. And two weeks earlier, on Dec.

16, 2014, the euro peaked at $1.2570. 

     Dollar-yen continued to track U.S. yields closely. The pair held near

Y109.50, after trading in a Y108.60 to Y109.60 range. 

     Dollar-yen topped out around Y110.95 on Wednesday and Friday's low was the

lowest since April 19, when the pair bottomed near Y108.38. The April low was

Y108.13, seen April 17. 

     As background, dollar-yen bottomed at Y108.83 June 14, the day U.S. 10-year

yields posted their most recent low of 2.103%, and then tracked U.S yields

higher, topping out near Y114.49 July 11, the highest level since mid March,

around the same time 10-year yields hit 2.396%. 

     In commodities, spot gold was closing near $1,286.40 per ounce, after

trading in a $1,283.64 to $1,300.92 range. 

     Gold earlier vaulted various old highs from August and a double top near

$1,296 from June and April to take out the psychological $1,300 mark. 

     A decisive close above $1,300 will target  $1,337.38, the high seen Nov. 9,

in the wake of the U.S. election. 

     The August 15-16 lows near $1,267-$1,268 will act as initial support.

     NYMEX September light sweet crude oil futures held up $1.39 at $48.48 per

barrel, after trading in a $46.78 to $48.50 range. Thursday's low of $46.46 was

the lowest since July 25, when West Texas Intermediate bottomed at $46.38. The

front contract settles Friday and most are already trading the October contract,

currently at $48.01. 

     West Texas Intermediate is back above its the 55-day moving average,

currently at $46.53, after closing below that mark Thursday for the first time

since late July.

     The front contract peaked August 10 at $50.22. This came after topping out

at $50.43 August 1 and $50.41 July 31, which was also the last time West Texas

Intermediate closed above the $50 mark. 

     Risk aversion and a lack of topside follow-through, more so than a larger

shift in oil fundamentals, has weighed on prices recently. 

     Even Wednesday's EIA data, showing a crude stock draw of 8.9 million

barrels in the week ending August 11, failed to underpin crude prices.

     Most recently, WTI topped out at $52.00 May 25, before the announcement of

a nine-month extension of OPEC/non-OPEC production cuts. The extension was

largely priced in and oil fell to $42.05 on June 21. 

     Looking ahead, the Jackson Hole symposium will be the highlight next week,

with both Federal Reserve Chair Janet Yellen and European Central Bank President

Mario Draghi speaking. 

     On the data front, release of durable goods in the U.S. and flash PMIs in

the eurozone will be of interest. 

     --follow MNIEyeonFX on twitter.com --

--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

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