OnTheRadar: Risk Appetite Improves Amidst Trepidation

--US Stocks Plod Higher, Flirt With Tech Resistance

By Vicki Schmelzer

     NEW YORK (MNI)   - Risk appetite improved Tuesday, but there was still

great trepidation about diving head first into riskier assets. 

     U.S. stock plodded higher, nearing key resistance levels, but other

instruments remained in recent ranges.

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

2.217%, in the middle of a tight 2.187% to 2.218% range.

     On Friday, 10-year U.S. yields took out the August 11 yield low of 2.184%

to test 2.164% - low levels last seen June 27, when 10-year U.S. yields bottomed

near 2.126%. 

     On August 8 as well as August 4, non-farm payroll day, U.S. Treasury yields

peaked near 2.289%. Yields struggled to get above these old highs subsequently. 

     The market will tilt bullish towards U.S. Treasuries unless the 200-day

moving average, at 2.334%, is vaulted decisively.  

     As background, U.S. Treasury yields bottomed June 14 near 2.103%, which was

the lowest since 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%.

     U.S. yields subsequently recovered, with the June lows deemed overdone,

with 10-year yields rising to 2.396% July 7, the highest since mid-May. More

recently, U.S. yields topped out at 2.357% July 14 and have been on the

defensive subsequently. 

     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 0.400% Tuesday, after trading in a

0.397% to 0.419% range. 

     The August 11 low of 0.376% was the lowest Bund yield since June 28, when

yields troughed at 0.332%.  

     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 1.087%, after trading in a 1.066% to

1.103% range. 

     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 0.041%. 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 high yields compare to April 20, when JGB yields flirted with

negative territory for the first time since last November and 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 $1.1763 late Tuesday, on the low side of

a $1.1745 to $1.1824 range. 

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

July 27, when the pair bottomed near $1.1650. 

     The August 2 euro high near $1.1910 was a 30-month high and the highest

since Jan. 6, 2015, when the pair peaked near $1.1969. The euro last traded

above the psychological $1.2000 mark Jan. 5, 2015. 

     In other pairs, dollar-yen continued to track U.S. yields closely.

Dollar-yen held near Y109.57 in late afternoon action, after trading in a

Y108.89 to Y109.65 range. 

     Last week, dollar-yen topped out around Y110.95 August 16 and fell to

Y108.60 August 18, which was the lowest since April 19, when the pair bottomed

near Y108.38. The April low was Y108.13, seen April 17. This month's high was

Y111.05, seen August 4. 

     As background, dollar-yen bottomed at Y108.83 June 14, the day U.S. 10-year

yields posted their most recent low of 2.103%, and then tracked U.S yields

higher, topping out near Y114.49 July 11, the highest level since mid March,

around the same time 10-year yields hit 2.396%. 

     In commodities, spot gold was closing near $1,285.30 per ounce, after

trading in a $1,282.10 to to $1,292.61 range. Gold topped out Monday at

$1,293.85. 

     On August 18, gold vaulted various old highs from August and a double-top

near $1,296 from June and April to take out the psychological $1,300 mark to

post a high near $1,300.92 before backing off. 

     A decisive close above $1,300 will 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 act as initial support.

     Joni Teves, strategist at UBS, outlined what might drive gold above $1,300.

     "Dovish monetary policy, especially from the Fed, and/or significant

escalation of geopolitical risks are potential triggers - we expect the former

to have a more durable price impact," she said.

     There was also event risk from this week's Jackson Hole symposium, with Fed

Chair Janet Yellen and European Central Bank President Mario Draghi speaking

Friday, she said. 

     "While there is little expectation for significant news, any hints on

policy normalization paths and views on inflation are likely to gather much

attention from markets," Teves said.

     NYMEX September light sweet crude oil futures settled up $0.27 at $47.64

per barrel, after trading in a $47.20 to $48.03 range. 

     The August 17 low of $46.46 was the lowest since July 25, when West Texas

Intermediate bottomed at $46.38. The front contract settles Tuesday and most are

already trading the October contract, which settled at $47.83 per barrel. 

     West Texas Intermediate remained above its 55-day moving average, currently

at $46.54, after closing below that mark last Thursday for the first time since

late July.

     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. 

     Risk aversion and a lack of topside follow-through, more so than a larger

shift in oil fundamentals, has weighed on prices recently. 

     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. 

     The market will eye API inventory data, due out later Tuesday, along with

the more definitive EIA data on inventories, set for release Wednesday morning. 

     In U.S. stocks, the S&P 500 closed up 0.99% a 2,452.51, after trading in a

2,433.67 to 2,454.77 range. The S&P 500 has closed above its 55-day moving

average, around 2,449, after breaking below that mark last week. 

     Monday's low of 2,417.35 was the lowest since July 11, when the index

bottomed at 2,412.79. 

     At Tuesday's close, the index was up 9.5% year-to date and down 1.5% from

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

     Market players were also keeping an eye on the Russell 2000 index, which

often leads larger stock swings. 

     The index, closing up 1.08% at 1,371.54, posted a low of 1,349.35 last

Friday, which was the lowest level since April 17, when the Russell 2000

bottomed at 1,345.363.

     Earlier Tuesday, the Russell 200 topped out at 1,372.332, but remained

below its 200-day moving average, currently around 1,377. A clear-cut break

above the 200-day moving average would suggest scope for additional gains. 

     On risk appetite, the CBOE's volatility index or VIX was last at 11.54, on

the low side of a 11.35 to 12.94 range. 

     The VIX high of 17.28, seen August 11 at the peak of escalating 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 11.84. 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). 

     --follow MNIEyeonFX on twitter.com --

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

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