OnTheRadar: Increased US/North Korean Animosity Weighs On Risk

--Russell 2000 Posts New Record High

By Vicki Schmelzer

     NEW YORK (MNI) - Increased animosity between the U.S. and North Korea

weighed on risk sentiment Monday, with safe-haven demand supporting U.S.

Treasuries.

     U.S. stocks saw modest profit-taking at the start of a new week, but

remained buoyant. 

     After U.S. Air Force B-1B Lancer bombers escorted by U.S. Air Force F-15C

Eagle fighters flew off the coast of North Korea over the weekend, North Korea's

foreign minister claimed the country had the right to shoot such planes down

even if in international airspace. 

     Of the flight, chief Pentagon spokesperson Dana W. White said, "This is the

farthest north of the Demilitarized Zone (DMZ) any U.S. fighter or bomber

aircraft have flown off North Korea's coast in the 21st century, underscoring

the seriousness with which we take DPRK's reckless behavior."

     "This mission is a demonstration of U.S. resolve and a clear message that

the President has many military options to defeat any threat. North Korea's

weapons program is a grave threat to the Asia-Pacific region and the entire

international community. We are prepared to use the full range of military

capabilities to defend the U.S. homeland and our allies," White said.

     Market players have grown numb to the media headlines discussing the threat

of war, which is why reaction was limited. 

     Ten-year U.S. Treasury yields were last near 2.220%, after trading in a

2.215% to 2.262% range. The Sept. 20 yield high of 2.287% was the highest since

August 8, when yields peaked near 2.289%. Ten-year yields last closed above

2.30% on July 27. 

     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. 

     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. 

     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%.

     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 0.400% Monday, after trading in a

0.395% to 0.452% range. The Sept. 21 yield high of 0.484% 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 0.028%. 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 1.334%, after trading in a 1.329% to

1.374% range.  

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

lows near 0.938% and the Sept. 21 high of 1.392%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 $1.1846 late Monday, on the low side of a

$1.1832 to $1.1937 range. 

     The pair bottomed Sept. 14 near $1.1838, and stalled ahead of the August 31

lows near $1.1823, seen as initial support. 

     The 55-day moving average comes in at $1.1793. The pair has been above that

mark since mid August and a break 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 Y111.65, on the low side of a a

Y111.48 to Y112.53 range. The Sept. 21 high of Y112.72 was the highest since

July 17, when the pair peaked near Y112.87, which will be the next topside

hurdle. 

     Dollar-yen bulls were disappointed that the pair was back below its 200-day

moving average, currently at Y112.14. 

     In commodities, spot gold held near $1,309.20 per ounce, after trading in a

$1,289.62 to $1,310.31 range. 

     Gold bottomed at $1,288.20 Sept. 21 and stalled ahead of the 55-day moving

average, currently around $1,285. 

     A decisive break of $1,290 will target the August 25 lows near $1,276.36. 

     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 $1.56 at $52.22 per

barrel, after trading in a $50.39 to $52.28 range. Prices were underpinned by

supply jitters. 

     The front contact has closed above the next topside hurdle, the May 25 high

of $52.00, seen just before 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. Rumors continue to swirl that OPEC may extend the

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

     On Friday, the Joint OPEC-non-OPEC Ministerial Monitoring Committee said

"based on the Report of the Joint OPEC-Non-OPEC Technical Committee (JTC) for

the month of August 2017, OPEC and participating Non-OPEC producing countries

recorded the highest conformity ever with their voluntary adjustments in

production, achieving a level of 116%."

     West Texas Intermediate's decisive close above $52.00 targets $52.65, the

April 19 high, and then ultimately, $53.76, the April 12 high. 

     In U.S. stocks, the S&P 500 closed down 0.22% at 2,496.66, after trading in

a 2,488.03 to 2,502.54 range. The index posted a record intraday high of

2,508.85 September 20. 

     At Monday's close, the S&P 500 was up 11.5% year-to-date. 

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

leads larger stock swings.

     The Russell 2000 was last near 1,452. The index posted a new record high of

1,455.219 earlier, taking out the triple tops near 1,452, seen July 21-July 26. 

     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.

     On risk appetite, the CBOE's volatility index or VIX was last at 10.21, on

the low side of a 9.79 to 11.21 range. The index remained well below its 200-day

moving average, at 11.47, which has been falling lately. 

     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, on the U.S. front, along with several Fed speakers, the

market is keen to see this week's economic data releases, which include August

durable goods, personal income and spending, advanced goods trade, and the third

estimate of Q2 GDP.

     On Tuesday, Federal Reserve Chair Janet Yellen is scheduled to deliver the

keynote address at the NABE Annual Meeting to Assess Prospects for Growth in

Shifting Global Economy in Cleveland, with audience Q&A.

     --follow MNIEyeonFX on twitter.com --

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

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