OnTheRadar: Risk Appetite Returns, Albeit Modestly

--US Stocks, US Ylds Edge Higher

By Vicki Schmelzer

     NEW YORK (MNI)   - With the focus shifting from rising North Korea-U.S.

tensions to the domestic front and violence and riots in Charlottesville, V.A.,

risk appetite returned to financial markets Monday, albeit modestly.

     Accordingly, safe-haven positions were unwound, with gold and yen slipping

from the highs seen in recent sessions. 

     U.S. stocks and U.S. Treasury yields edged higher at the start of a new

week. 

     The S&P 500 closed up 1.00% at 2,465.84. At the close, the index was up

10.1% year-to date and down 1.0% from the life-time intraday high of 2,490.87,

seen August 8. The S&P 500 bottomed at 2,437.75 August 10, the lowest level

since mid July. 

     The Dow Jones Industrial Average posted a record intraday high of 22,179.11

on August 8 and the the Nasdaq Composite posted a life-time high of 6,460.841

July 27. The indexes closed Monday up 0.62% at 21,993.71 and up 1.34% at

6,340.23 respectively. 

     In terms of risk appetite, the CBOE's volatility index or VIX was last

12.40, on the low side of a 12.06 to 14.05 range. 

     On Friday, the VIX vaulted twin peaks of 16.30, from May 18, and 16.28,

from April 17, with the latter run-up driven also by North Korea concerns. 

     Friday's VIX high of 17.28 was the highest since Nov. 9, the day after the

US election, when the VIX peaked at 21.48. The 2017 high was 23.01, seen Nov. 4

ahead of the election. 

     Monday's decisive close back below the 200-day moving average, currently

11.99, was another sign that risk appetite 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). 

     As a reminder, sub-20 VIX levels are deemed risk friendly, 20 to sub 40

risk neutral, and 40 and over risk averse.

     In other markets, 10-year U.S. Treasury yields were last near 2.222%, after

trading in a 2.199% to 2.227% range. Friday's 10-year yield low of 2.184% was

the lowest since June 27, when ten-year yields bottomed near 2.126%. 

     This week, U.S. yields posted a high near 2.289% August 8, seen also August

4, in the wake of the release of an upbeat U.S. jobs report, and have edged

lower subsequently as risk appetite declined. 

     Ten-year U.S. yields have again closed decisively below the 55-day moving

average, currently at 2.243%. The market will be reluctant to become bearish

towards U.S. Treasuries until the 200-day moving average, at 2.323%, is vaulted

decisively.  

     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. 

     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 0.406% Monday, after trading in a

0.392% to 0.429% range. Friday's 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.

     Bund yields backed off after the ECB left policy unchanged July 20, but up

until recent risk aversion, maintained a toehold above 0.50% on expectations of

new insight into the central bank's bond buying program, set to expire at the

end of December, either at the Jackson Hole symposium August 24-26 or at the

next monetary policy meeting Sept. 7. 

     In December 2016, the ECB extended its asset purchase program from the end

of March 2017 to the end of December 2017, but also announced that the size of

monthly purchases would be reduced from E80 billion to E60 billion, starting in

April 2017. 

     Ten-year UK Gilt yields closed around 1.071%, after trading in a 1.071% to

1.101% 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 0.055%. 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 $1.1786, on the low side of a $1.1770 to

$1.1838 range. Friday's high near $1.1847 was the highest since August 4, when

the euro topped out at $1.1889.

     On August 9, the pair posted a low near $1.1689, the lowest level since

July 28, when the euro bottomed near $1.1671. 

     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.

     The 2015 euro high was $1.2109, seen Jan. 1. And two weeks earlier, on Dec.

16, 2014, the euro peaked at $1.2570. 

     Dollar-yen held around Y109.68 late Monday, after trading in a Y109.00 to

Y109.80 range. Friday's low near Y108.74 was the lowest since April 20, when the

pair troughed at Y108.72. 

     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 $1,282.25 per ounce, after

trading in a $1,278.69 to $1,290.44 range. 

     The precious metal topped out near $1,292.10 Friday, nearly revisiting 2017

highs. 

     On June 6, gold posted a high of $1,296.15, but then stalled, creating a

double-top with the $1,295.56 high seen April 17. Subsequently, gold moved lower

as U.S. Treasury yields and the dollar recovered, bottoming July 10 near

$1,204.90. 

     If the psychological $1,300 mark gives way, the not topside target will be

$1,337.38, the high seen Nov. 9, in the wake of the U.S. election. 

     NYMEX September light sweet crude oil futures settled down $1.23 at $47.59

per barrel, after trading in a $47.43 to $49.16 range. The 55-day and 200-day

moving averages, at $46.66 and $49.35 respectively, will act as initial support

and resistance. 

     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 followthrough, more so than a change 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. 

     Trading continued to be driven by supply rather than demand, with concern

about OPEC/non-OPEC non-compliance as well as increased U.S. production. 

     Baker Hughes rig count data, released Friday, showed a three rig increase

to 768 rigs for U.S. "oil-only" rigs in the week ending August 11. This is a bit

less than double the 396 rigs seen a year ago. However, rigs were still down

52.3% from the peak rig count of 1,609 rigs seen Oct. 10, 2014.

     This week, Tuesday's release of U.S. retail sales data and Wednesday's

release of the FOMC July 25-26 meeting minutes will be the focus. 

     MNI's median estimate is 0.3% for both headline retail sales and ex-autos. 

     New York Federal Reserve Bank President William Dudley said Monday he would

support another rate hike in the fed funds rate if the economy continues to grow

as expected, and he hasn't changed his forecast very much so far this year.

     "I think it depends on how the economic forecast evolves," Dudley said in

an interview with the Associated Press published online Monday. If the economy

evolves in line with his expectations, "I would be in favor of doing another

rate hike later this year." See MNI Main Wire at 2:19 p.m. ET for details. 

     --follow MNIEyeonFX on twitter.com --

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

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