OnTheRadar: Mkt Seeks Direction Amidst August 'Noise'

--Risk Instruments Emitting Mixed Signals 

By Vicki Schmelzer

     NEW YORK (MNI)   - The month of August is often driven by "noise" and thin

market conditions that mean fast-paced repositioning and risk instruments

emitting mixed signals. 

     Indeed, this week, gold has broken above $1,300 for the first time since

last November and the euro traded over $1.2000 for the first time since January

2015. 

     Earlier Tuesday, 10-year U.S. Treasury yields took out the 2017 yield lows

near 2.10% to test low levels seen last November in the wake of the election. 

     While the moves in these instruments would suggest rising risk aversion and

safe-haven demand, this is not backed up by U.S. stocks, which remain not far

from record highs, nor by risk gauges such as the VIX, which holds easily in sub

20/risk-friendly territory.  

     Weary of soundbites about Hurricane Harvey, North Korea's missile launch,

and President Trump's tweets, traders looked ahead to the post-Labor Day trading

environment, when the financial market will be back to normal and direction may

be clearer.

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

2.131%, on the low side of a 2.088% to 2.141% range. 

     Earlier, 10-year yields took out the 2017 low near 2.103, seen June 14, 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%.

     While 10-year U.S. yields have stabilized above the June low, the lack of

more meaningful recovery had players worried about a sub 2.0% move. 

     After the 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 and retreated 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 0.342 Tuesday, after trading in a

0.320% to 0.366% range. 

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

troughed at 0.238%. The 10-year Bund yields earlier also broke below their

200-day moving average, currently at 0.357%, for the first time since late June.

     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 1.000%, after trading in a 0.987% to

1.024% range. The earlier low was the lowest 10-year Gilt yield since June 22,

when 10-year Gilt yields posted a low of 0.988%. 

     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 0.005% and earlier

nearly tested zero, low levels last seen in the spring. On April 20, JGB yields

flirted with negative territory for the first time since last November.

     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 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 $1.1974 late Tuesday, on the low side of

a $1.1947 to $1.2070 range. 

     The earlier high 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. 

     This month, the August 17 euro low of $1.1662 was the lowest level since

July 27, when the pair bottomed near $1.1650. 

     In other pairs, dollar-yen held near Y109.77 at the close, after trading in

a Y108.27 to Y109.90 range. The earlier low was the lowest level since April 17,

when dollar-yen bottomed at Y108.13. 

     This month, dollar-yen peaked at Y110.95 and Y111.05 on August 16 and

August 4. 

     In commodities, spot gold was closing near $1,309.60 per ounce, after

trading in a $1,305.11 to $1,326.89 range. 

     This week's decisive closes above $1,300 target $1,337.38, the high seen

Nov. 9, in the wake of the U.S. election. The 2016 high was $1,375.34, seen July

11. 

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

support.

     NYMEX October light sweet crude oil futures settled down $0.13 at $46.44

per barrel, after trading in a $45.76 to $46.96 range. The earlier low was the

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

     West Texas Intermediate again closed below its 55-day moving average,

currently at $46.64, which did not bode well for near-term recovery. 

     Crude took little comfort also from API data, released late Tuesday, showed

a crude stock draw of 5.8 million barrels in the latest week. The market now

eyes EIA inventory data, due out Wednesday. 

     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. 

     "In the coming weeks, we expect Hurricane Harvey's impact to make it harder

for OPEC to rebalance the market and maintain bullish sentiment," said commodity

strategists at Barclays in a note. 

     "Disruptions to refineries, production and trade will also make the weekly

EIA data even noisier and less useful as a high frequency indicator at the very

time OPEC needs it most," they said.

     While production impacts may linger going forward, demand will likely slip

sharply in coming weeks "due to a lack of driving-related demand," the

strategists said. 

     "Harvey will raise product prices nationwide, denting demand, especially in

September," they said. 

     "Flooding and destruction in 2005 and 2008 cut demand by more than 1 mb/d

between August and September, twice as much as the m/m seasonal downtrend,"

Barclays reminded.

     The AAA National Fuel Gauge put the cost of regular unleaded gasoline at

$2.378% per gallon Tuesday, which compared to $2.368 Monday, $2.337 a week ago,

$2.309 a month ago and $2.215 a year ago. 

     Citi economist Andrew Hollenhorst observed that "gasoline price rises may

raise headline inflation in September - but this is unlikely to spark more

generalized price and wage inflation."

     In U.S. stocks, the S&P 500 closed up 0.08% at 2,446.30, after trading in a

2,428.20 to 2,449.19 range. The S&P 500 has struggled recently to decisively

vault its 55-day moving average, around 2,449. 

     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 9.3% year-to date and down 1.8% from

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

     Market players were also homing in on the Russell 2000 index, which often

leads larger stock swings.

     The index, closing up 0.11% at 1,383.68 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.

     Both Monday and Tuesday, the Russell 2000 has closed above its 200-day

moving average, currently around 1,381, which suggests scope for additional

gains. 

     On risk appetite, the CBOE's volatility index or VIX was last at 11.70, in

the middle of a 11.48 to 14.34 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 has traded both sides of its 200-day moving average,

currently at 11.68. 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). 

     This week, U.S. employment data, due out Friday, and flash eurozone

inflation data, set for release Thursday, will be key drivers ahead of the long

Labor Day holiday weekend in the U.S. 

     --follow MNIEyeonFX on twitter.com --

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

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