OnTheRadar: Risk Assets Stabilize; On Edge Re North Korea

--CBOE's VIX Posts New 2017 high, Retreats

By Vicki Schmelzer

     NEW YORK (MNI)   - With President Donald Trump warning on Twitter that

"Military solutions are now fully in place, locked and loaded, should North

Korea act unwisely," global investors were reluctant to put on risk Friday, but

at the same time saw no need to sell risk assets aggressively. 

     The three major U.S. stocks managed to post modest gains, while the Russell

2000, which often leads turns in U.S. stocks, also made a mild late-day

recovery. 

     The S&P 500 closed up 0.13% at 2,441.32 Friday. At the close, the index was

up 9.0% year-to date and down 2.0% from the life-time intraday high of 2,490.87,

seen August 8. The S&P 500 again closed below its 55-day moving average near

2,445. 

     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 Russell 2000 closed up 0.12% at 1,374.23 after trading in a 1,368.33 to

1,376.37 range.

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

struggled subsequently despite a run-up in the DJIA.

     This week, the Russell 2000 broke below a larger support zone of old lows

in the 1,395-1,400 from mid June to early July and earlier flirted with its

200-day moving average, around 1,371.  

     Other than a brief dip in the market of Brexit last year, the Russell 2000

index has held above the 200-day moving average since late May 2016.  The next

downside target is the May 31 low of 1,354.855. 

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

15.51, in the middle of a 14.52 to 17.28 range. 

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

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

     The earlier high 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. 

     A close back below the 200-day moving average, currently 11.99, would be

needed to suggest risk appetite was improving. The index bottomed at 11.56

Thursday. 

     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 2.191%, after

trading in a 2.184% to 2.222% range. Friday's yield low 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 2.244%. The market will be reluctant to become bearish

towards U.S. Treasuries until the 200-day moving average, at 2.320%, 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 0.382% Friday, after trading in a

0.376% to 0.406% range. This is the lowest Bund yields 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 last week, 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 1.062%, after trading in a 1.033% to

1.079% 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 0.063%. 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 $1.1824, on the high side of a $1.1749 to

$1.1847 range. The earlier high was the highest since August 4, when the euro

topped out at $1.1889.

     The pair posted a low Wednesday near $1.1689, the lowest level since July

28, when the euro 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 Y109.10 late Friday, in the middle of a Y108.74 to

Y109.40 range. The earlier low was the lowest since April 20, when the pair

troughed at Y108.72. 

     As a reminder, 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 $1,291.50 per ounce, after

trading in a $1,281.50 to $1,292.10 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. 

     This week's break above the June 14 highs near $1,280.77 targeted the early

June gold peaks. 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 up $0.23 at $48.82

per barrel, after trading in a $47.98 to $48.98 range. 

     The front contract peaked Thursday 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 this week. 

     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.

     Next week, in the U.S. retail sales data and the release of the FOMC July

25-26 meeting minutes will be the focus. 

     Friday's CPI data, showing a tepid 0.1% gain for both headline and core

inflation and a year-on-year 1.7% reading, had market players slightly lowering

the odds of a December Fed rate hike. Economists were also marking down their

inflation forecasts. See MNI Main Wire at 10:05 a.m. ET for details.

     --follow MNIEyeonFX on twitter.com --

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

[TOPICS: MNUEQ$,M$U$$$,MI$$$$,M$$FI$,MN$FI$,MN$FX$]