OnTheRadar: Deemed Dovish ECB, Other Factors Weigh on Ylds

--USD Tracks US Tsy Yields Lower; USDJPY Nears Y108

By Vicki Schmelzer

     NEW YORK (MNI)   - A deemed dovish European Central Bank decision and press

conference, combined with still on-going concerns about a North Korea missile

launch, Hurricane Irma, and U.S. politics, prompted demand for bonds Thursday,

with U.S. and other global yields moving lower as a result. 

     The dollar slipped not only versus the majors, but also versus such

currencies as the Mexican peso and Chinese yuan. The yuan rose to the highest

level versus the dollar since May 2016. See MNI Main Wire story at 1:42 p.m. ET.

     While EM currencies took comfort from the notion of potentially lower rates

for longer, U.S. stocks instead saw profit-taking and were mixed.  

     On the fixed income front, U.S. yields were in recovery mode after moving

lower earlier. 

     Ten-year U.S. Treasury yields were last near 2.051%, after trading in a

2.032% to 2.099% range (Bloomberg levels). If 2.10% is vaulted, then Tuesday's

high yield around 2.148% will act as the next level of resistance.

     The earlier 10-year yield low was the lowest since Nov. 10, when 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%. 

     After a larger yield sell-off in June, U.S. yields subsequently recovered,

and 10-year yields rose to 2.396% July 7, the highest since mid-May. U.S. yields

topped out at 2.357% July 14 and more recently, yields peaked near 2.289% on

August 8 and August 4 before retreating.

     As background, 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 0.307% Thursday, after trading in a

0.297% to 0.375% range. 

     The earlier low was the lowest Bund yield since June 27, when yields

troughed at 0.238%. The June 14 low of 0.225% was the lowest since April 20,

when yields bottomed at 0.192%.

     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 would

be 0.651%, the Dec. 30, 2015 high. 

     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.

     In his updated ECB State of Play, MNI's Jack Duffy noted that ECB president

Mario Draghi earlier told journalists the Governing Council had had a "very

preliminary" discussion of tapering options at Thursday's meeting and that "the

bulk" of the decisions necessary "to calibrate" QE bond buying beyond the end of

the year would probably be taken in October.

     Draghi also made note of the rising euro's potential effect on the eurozone

economy. 

     "The recent volatility in the exchange rate represents a source of

uncertainty which requires monitoring with regard to its possible implications

for the medium-term outlook for price stability," Draghi said. See MNI Main Wire

at 12:03 p.m. ET for details.  

     Ten-year UK Gilt yields closed around 0.972%, after trading in a 0.959% to

1.041% range. The earlier low was the lowest since June 15, when yields tested

lows near 0.938%. 

     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 0.018%. This week,

JGB yields have flirted with negative territory and tested the lowest yields

since mid November.

     JGB yields hit highs near 0.108% 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 low JGB yields compared to 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 $1.2010 in late afternoon action, in the

middle of a $1.1914 to $1.2059 range. 

     The August 29 high of $1.2070 was the highest euro level since Jan. 2,

2015, when the pair topped out at $1.2108. The 2015 high was $1.2109, seen Jan.

1. A few weeks earlier, the euro posted a high near $1.2570 on Dec. 16, 2014. 

     Only last month, on August 17, the euro posted a low of $1.1662, which was

the lowest level since July 27, when the pair bottomed near $1.1650. 

     In other pairs, dollar-yen was trading near Y108.54, in the middle of a

Y108.05 to Y109.27 range. 

     Last week, the pair topped out August 31 at Y110.67 and subsequently

tracked U.S. Treasury yields lower.

     Earlier, dollar-yen took out last week's lows near Y108.27 as well as the

April 17 lows near Y108.13. The next downside target will be Y107.77, the Nov.

15 lows. 

     In commodities, spot gold held near $1,347.60 per ounce, after trading in a

$1,332.61 to $1,349.43 range. The earlier high was the highest since Sept. 8,

2016, when the precious metal peaked at $1,349.51. 

     All eyes now are on a move towards the 2016 twin-peak highs of $1,375.28

and $1,375.34, seen July 6 and July 11 respectively. 

     The August 15-16 lows near $1,267-$1,268 will continue to act as larger

support.

     Crude prices remained buoyant but off this week's highs. 

     NYMEX October light sweet crude oil futures settled down 0.07 at $49.09 per

barrel, after trading in a $48.63 to $49.33 range. The front contract peaked

Wednesday at $49.42 and stalled ahead of its 200-day moving average, currently

at $49.52. 

     Only last week, on August 31, West Texas Intermediate posted a low of

$45.58, the lowest since July 24, when the front contract posted a low of

$45.40.

     WTI posted a high of $50.22 on August 10. 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. 

     As background, 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. 

     "While OPEC's Joint Ministerial Monitoring Committee (JMMC) meeting, set

for September 22 in Vienna, is unlikely to result in many binding decisions, we

think it will be critical for resolving outstanding differences and for drafting

the 2018 action plan in advance of the 173rd OPEC on November 30," said

strategists at RBC Capital Markets.

     "We believe that momentum continues to build for extending the output

agreement beyond April, but finding a way to bring currently exempted countries

into the agreement and curbing cheating looks more challenging," they said. 

     Gasoline prices continued to creep higher. 

     The AAA National Fuel Gauge put the average cost of regular unleaded

gasoline at $2.672% per gallon Thursday, the highest national gas price average

of the year. 

     This compared to $2.661 Wednesday, $2.449 a week ago, $2.347 a month ago

and $2.192 a year ago. Average gas prices are up 9.1% on the week and 13.8% on

the month. 

     As a point of comparison, the record price for regular unleaded gasoline

was $4.114, seen July 17, 2008, before the start of the U.S. financial crisis. 

     In U.S. stocks, the S&P 500 were last down 0.12%  at 2,463, after holding

in a 2,460.29 to 2,468.62 range. The S&P 500 posted a high of 2,480.38 last

Friday ahead of the Labor Day weekend. 

     The August 21 low of 2,417.35 was the lowest since July 11, when the index

bottomed at 2,412.79. 

     At Wednesday's close, the S&P 500 was up 10.1% year-to date and down 1.0%

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

     Market players were also monitoring the Russell 2000 index, which often

leads larger stock swings.

     The Russell 2000 was last down 0.27% at 1,398, and down from Tuesday's high

of 1,414.546, which was the highest since August 8. The index posted a low of

1,349.35 August 18, which was the lowest level since April 17, when the Russell

2000 bottomed at 1,345.363.

     On risk appetite, the CBOE's volatility index or VIX was last at 11.58, in

the middle of a 11.32 to 12.07 range. 

     The VIX high of 17.28, seen August 11 at the peak of 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. 

     In August and now also September, the VIX traded both sides of its 200-day

moving average, currently at 11.61. The index will need to close below that mark

on a sustained basis to suggest that risk sentiment was improving. 

     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). 

     Looking ahead to Friday, with little on the U.S. data front, the market

will focus on soundbites instead. 

     --follow MNIEyeonFX on twitter.com --

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

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