OnTheRadar: Geopolitical Jitters Prompt Safe-haven Demand

--US 10-Year Ylds Closing At Lowest Lvls Since Last November

--Gold Prices At Highs Seen Before US Election

By Vicki Schmelzer

     NEW YORK (MNI)   - Geopolitical jitters prompted demand for safe-havens

Tuesday, with gold posting highs last seen before the U.S. election in November

and ten-year U.S. Treasury yields testing low levels seen just after the

election. 

     U.S. stocks suffered also, but managed to recover from the worst levels of

the day.  

     U.S. players, trying to find their sea-legs after the long Labor Day

holiday weekend, were digesting the prospects of North Korea launching another

intercontinental ballistic missile (ICBM) at the weekend, likely Sept. 9 - the

anniversary of the country's founding.

     Reports that Hurricane Irma, heading towards Florida and Puerto Rico, has

turned into a Category 5 storm, added to ongoing concern about the U.S. debt

ceiling and actions in Congress. 

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

2.070%, after trading in a 2.063% to 2.148% range (Bloomberg levels). Last

week's high yield was around 2.18%, seen August 28, will act as resistance.

     Earlier, 10-year U.S. yields took out the 2017 low near 2.088%, posted

August 29, to test low levels last seen 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%. 

     Tuesday's clear-cut close below 2.10% had market players worried about a

sub-2.0% move. 

     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 subsequently.

     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 0.338% Tuesday, after trading in a

0.333% to 0.382% range. 

     The August 29 yield low of 0.320% was the lowest Bund yield since June 27,

when yields troughed at 0.238%. 

     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.

     The European Central Bank meets Sept. 7, with market players looking for

any mention of the FX effects of the euro as well as insight into what will

happen to the current bond buying program when it expires in December. Most

analysts expected ECB guidance in October instead of this month. See Jack

Duffy's ECB Preview on MNI Main Wire at 6:55 a.m. ET for details. 

     Currently, the ECB is buying E60 billion per month. Analysts have varied

views about what the central bank will do in terms of extending the bond buying

program and or reducing the amount of bonds purchased. 

     Ten-year UK Gilt yields closed around 1.026%, after trading in a 1.013% to

1.076% range. Gilt yields bottomed at 0.987% August 29, the lowest levels since

late June.  

     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 -0.002%. JGB yields

have flirted with negative territory since last Friday, and current yields are

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. see also MNI BOJ INSIGHT on the Main Wire at 7:16 a.m. ET.

     In currencies, the euro held near $1.1913 heading into the close, on the

high side of a $1.1868 to $1.1941 range. On Friday, the euro topped out at

$1.1980.

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

2015, when the pair topped out at $1.2108. A few weeks earlier, the euro posted

a high near $1.2570 on Dec. 16, 2014. 

     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 Y108.83, on the low side of a

Y108.63 to Y109.83 range. 

     Last week, the pair topped out Thursday at Y110.67 and at last week's U.S.

yield lows on August 29, troughed near Y108.27, the lowest level since April 17,

when dollar-yen bottomed at Y108.13. 

     In commodities, spot gold was closing near $1,338.60 per ounce, after

trading in a $1,326.27 to $1,344.44 range.

     Gold earlier took out $1,337.38, the high seen Nov. 9, in the wake of the

U.S. election, with all eyes now on a move towards the 2016 high of $1,375.34,

seen July 11. 

     Tuesday's gold high was the highest since Sept. 8, 2016 when the precious

metal peaked at $1,349.51. 

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

support.

     Crude oil prices benefited from a weaker dollar and expectations of reduced

supply.

     NYMEX October light sweet crude oil futures settled up $1.37 at $48.66 per

barrel, after trading in a $47.15 to $48.98 range. Last Thursday's low of $45.58

was the lowest since July 24, when the front contract posted a low of $45.40.

     Crude closed above its 55-day moving average of $46.80, but remained below

its 200-day moving average, currently at $49.48.  

     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. 

     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. 

     Baker Hughes rig count data, released last Friday, showed no change in U.S.

"oil-only" rigs, which remained at 759 rigs in the week ending Sept. 1. This is

less than double the 407 rigs seen a year ago. Rigs are still down 52.8% from

the peak rig count of 1,609 rigs seen Oct. 10, 2014.

     Gasoline prices continued to creep higher. 

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

gasoline at $2.648% per gallon Tuesday, the highest national gas price average

of the year. 

     This compared to $2.638 Monday, $2.378 a week ago, $2.346 a month ago and

$2.204 a year ago. Average gas prices are up 11.4% on the week. 

     In U.S. stocks, the S&P 500 closed down 0.76% at 2,457.85, after trading in

a 2,446.55 to 2,471.97 range. The S&P 500 posted a high of 2,480.38 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 Tuesday's close, the S&P 500 was up 9.8% year-to date and down 1.3% 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 closed near 1,400, down from an earlier high of 1,414.546.

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 12.42, in

the middle of a 11.41 to 14.06 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, the VIX traded both sides of its 200-day moving average,

currently at 11.63. 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, global data and central bank decisions will take a backseat

to North Korea and other uncertainties. 

     --follow MNIEyeonFX on twitter.com --

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

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