OnTheRadar: Fed Rethink, Tax Reform Hopes Lift US Ylds, USD

--Russell 2000 Again Posts New Record High

--USD vs MXN Closes Above MXN18 Mark First Time Since July 7

By Vicki Schmelzer

     NEW YORK (MNI) - A rethink of Fed views and hopes for U.S. tax reform sent

U.S. Treasury yields and the dollar higher Wednesday. 

     Greenback gains however were selective and seen more markedly against

currencies whose own yields were not moving in lockstep with U.S. yields, where

market players were penciling in increased odds of a December rate hike.  

     Ten-year U.S. Treasury yields were last near 2.301%, on the high side of a

2.237% to 2.314% range. 

     Ten-year U.S. yields last closed above 2.30% July 27. All eyes are homing

in on the 200-day moving average, which comes in currently near 2.326%. 

     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. If the

200-day moving average is vaulted, this will be the next topside target. 

     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%. 

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

2.628%.

     The Sept. 8 yield low near 2.016% 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. 

     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 0.468% Wednesday, after trading in

a 0.415% to 0.487% range. The earlier high was the highest since August 7, when

Bund yields peaked near 0.491%. 

     The low of 0.292%, seen Sept. 8, 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.

     Ten-year Japanese government bond yields closed around 0.059%. When U.S.

and other global yields were at recent lows earlier in September, JGB yields

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. 

     Ten-year UK Gilt yields closed around 1.383%, after trading in a 1.349% to

1.402% range.  

     The Sept. 8 low of 0.951% was the lowest since June 15, when yields tested

lows near 0.938% and Wednesday's high was the highest since Feb. 3, when UK

yields hit 1.420%.

     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%.

     In currencies, the euro held near $1.1752 late Wednesday, in the middle of

a $1.1717 to $1.1795 range. 

     The earlier low was the lowest since August 18, when the euro bottomed at

$1.1709. A break of $1.1700 will target the August 17 lows near $1.1662.

     The Sept. 8 high of $1.2092, seen at the peak of dollar selling, 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. 

     In other pairs, dollar-yen held near Y112.75, in the middle of a Y112.22 to

Y113.26 range. The earlier high was the highest level since July 14, when

dollar-yen peaked at Y114.49. 

     The 200-day moving average, currently at Y112.09 will act as initial

support. 

     As evidence of a shift in the larger U.S. dollar tone, the Mexican peso,

often used as a proxy for emerging market risk, was under heavy pressure versus

the greenback. 

     Dollar-peso was closing near Mxn18.1830, on the high side of a Mxn17.9328

to Mxn18.2006 range. The pair was set to close above the psychological

Mxn18.0000 mark for the first time since June 7. 

     A decisive close above Mxn18.1634, the prior low seen Nov. 9 in the wake of

the U.S. election - now a resistance point, will target Mxn18.4056, the July 5

peak. 

     In commodities, spot gold held near $1,283.65 per ounce, after trading in a

$1,282.61 to $1,296.25 range. The precious metal has been weighed by U.S. dollar

strength. 

     Earlier, gold broke below its 55-day moving average, currently around

$1,288. The precious metal has been above its 55-day moving average since late

July. 

     A close below the 55-day moving average will target the August 25 lows near

$1,276.36 and mid August lows near $1,267-$1,268 

     The $1,357.61 gold high, seen Sept. 8 at the peak of U.S. dollar sales and

risk aversion, was the highest since August 16, 2016, when the precious metal

peaked at $1,358.21. 

     NYMEX November light sweet crude oil futures settled up $0.26 at $52.14 per

barrel, after trading in a $51.63 to $52.34 range. Tuesday's high of $52.43 was

the highest level since mid April, with prices underpinned by supply concerns. 

     West Texas Intermediate's decisive close above $52.00 (May 25 high) on

Monday had some eyeing a move to $52.65, the April 19 high, and then ultimately,

$53.76, the April 12 high. 

     Crude oil peaked in late May ahead of the announcement of a nine-month

extension of the OPEC/non-OPEC production cuts. 

     This extension was largely priced in and crude prices fell to $42.05 on

June 21 before recovering. There has been talk recently that OPEC may extend the

current agreement, set to expire in March 2018, until the end of next year. 

     EIA inventory data, released earlier, showed a crude stock decline of 1.85

million barrels in the latest week.   

     In U.S. stocks, the S&P 500 closed up 0.41% at 2,507.04, after trading in a

2,495.91 to 2,511.75 range. This is a new life-time intraday high. 

     At Wednesday's close, the S&P 500 was up 12.0% year-to-date. 

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

leads larger stock swings.

     The Russell 2000 was last near 1,485, down from the new record high of

1,487.950 posted earlier.  

     Last month, the index bottomed at 1,349.354 on August 18, the lowest level

since April 17, when the Russell 2000 bottomed at 1,345.363. From last month's

low to Wednesday's high, the index was up 10.3%.

     On risk appetite, the CBOE's volatility index or VIX was last at 9.84, on

the low side of a 9.63 to 10.42 range. More recently, the VIX has traded in a

9.50, seen Sept. 22 to 11.25, seen Sept. 25 range and has held below its 200-day

moving average, currently at 11.44.

     The VIX high of 17.28, seen August 11, was the highest since Nov. 9, the

day after the U.S. election, when the VIX peaked at 21.48. The high for this

month has been 14.06, seen Sept. 5. 

     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, weekly jobless claims and the third estimate of Q2 GDP will

be eyed Thursday, along with advanced trade data for August. See MNI U.S.

Economic Data Calendar for details. 

     The market is also eager for additional details of the Trump administration

(Big Six) tax plan, which lowers the corporate tax rate to 20% and shrinks the

number of income brackets from seven to three. 

     --follow MNIEyeonFX on twitter.com --

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

[TOPICS: MNUEQ$,M$U$$$,MI$$$$,M$$FI$,MN$FI$,MN$FX$]