OnTheRadar: Risk Appetite Withers On US-North Korea Jitters

By Vicki Schmelzer

     NEW YORK (MNI)   - Risk appetite withered Wednesday as global investors

responded to inflammatory tweets and soundbites from U.S. and North Korean

officials. 

     Market consensus looked for an eventual diplomatic solution to escalating

tensions between the two countries, but analysts warned that players may be too

complacent about pricing in something untoward happening. 

     "The unthinkable - people assume it can't happen," one analyst told MNI. 

     Nevertheless, market players did exhibit caution by buying U.S. Treasuries,

gold, yen and Swiss franc and the dollar versus emerging market currencies. 

     On the fixed income front, U.S., German and UK 10-year yields tested low

levels seen in late June. 

     Ten-year U.S. Treasury yields were last near 2.246%, after trading in a

2.212% to 2.258% range. Yields posted a high near 2.289% Tuesday as well as last

Friday in the wake of the release of upbeat U.S. non-farm payroll data. 

     On the day, 10-year yields traded both sides of the 55-day moving average,

currently at 2.246%, and the market will be reluctant to become bearish towards

U.S. Treasuries until the 200-day moving average, at 2.316%, 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 0.428% Wednesday, after trading in

a 0.418% to 0.480% range. Bund yields have held above the 55-day moving average,

currently near 0.412%, since late June. 

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

until last week, maintained a toehold above 0.50% on expectations of new insight

into the central bank's bond buying plan, set to expire at the end of December,

either at the Jackson Hole symposium in late August or at the next monetary

policy meeting Sept. 7.  

     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 1.109%, after trading in a 1.094% to

1.138% 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 0.072%. 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 $1.1758, in the middle of a $1.1689 to

$1.1764 range. The earlier low was the lowest since July 28, when the pair

bottomed near $1.1671. 

     Last week's 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 Y110.00 Wednesday, in the middle of a Y109.56 to

Y110.36 range. A close below last Friday's low of Y109.85 would be deemed

bearish and target the June 15 low near Y109.27. 

     Yen traders continued to fret a sustained close below the psychological

Y110 mark. 

     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 $1,275.90 per ounce, after

trading in a $1,260.53 to $1,278.85 range. 

     On June 6, the precious metal 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. 

     A break above the June 14 highs near $1,280.77 will target the early June

gold peaks.

     NYMEX September light sweet crude oil futures settled up $0.39 at $49.56

per barrel, after trading in a $48.90 to $49.65 range. 

     Crude prices were underpinned by the day's EIA inventory data release,

which showed a 6.5 million barrel crude stock draw in the week ending August 4. 

     On August 1, West Texas Intermediate saw a wide range of $48.37 to $50.43,

with that day's high the highest since late May. The August 1 range has

subsequently acted as both support and resistance. 

     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. 

     This week, WTI has traded both sides of its 200-day moving average,

currently at $49.37. 

     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. 

     U.S. stocks saw modest profit-taking on the day, but managed to recover

from more sizable opening losses. 

     The S&P 500 closed down 0.04% at 2,474.02, after trading in a 2,462.08 to

2,474.41 range. 

     At the close, the index was up 10.5% year-to date. 

     The Dow Jones Industrial Average and S&P 500 posted record intraday highs

of 22,179.11 and 2,490.87 respectively Tuesday. The Nasdaq Composite posted a 

life-time high of 6,460.841 July 27.

     Players were also keeping an eye on the Russell 2000 index, which often

leads turns in the U.S. equity cycle. 

     The Russell 2000 closed at 1,396.94, after trading in a 1,393.24 to

1,409.78 range. 

     The index posted highs near 1,452 on July 21, July 25 and July 26 and has

struggled subsequently despite the run-up in the DJIA. 

     Earlier, the Russell 2000 flirted with a larger support zone of old lows in

the 1,395-1,400 from mid June to early July. A clear-cut break below that

support zone would target the June 6 low of 1,386.704 and then the May 31 low of

1,354.855.

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

11.11, on the low side of a 11.11 to 12.63 range. 

     The July 26 low of 8.84 was a new life-time intraday VIX low. The prior

life-time intraday low was 8.89, seen Dec. 27, 1993. 

     The VIX posted a high of 16.30 on May 18 at the peak of risk aversion, not

far from the 16.28 high seen April 17 that was driven by North Korea concerns.

     It would take a close above the 200-day moving average, currently at 11.98,

to suggest risk appetite was waning. The VIX last closed above its 200-day

moving average in mid-May, but then only briefly.

     Looking ahead to Thursday, the market will eye weekly jobless claims and

July PPI data. MNI's median estimates are 240,000 and 0.2% for both headline PPI

and ex food and energy. 

     Also, players will home in comments from New York Fed President William

Dudley, who will deliver opening remarks at the Economic Press Briefing on Wage

Inequality in the Region in New York City. Dudley will also take part in

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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