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Free AccessOnTheRadar: Risk Jitters Weigh On US Stocks, US Yields, USD
--CBOE's VIX Rising, Not Yet Back At May High
By Vicki Schmelzer
NEW YORK (MNI) - Comments this week from President Donald Trump and other
U.S. officials about the threat from North Korea, as well as retaliatory remarks
from North Korea leader Kim Jong Un, kept the market in "risk-off" mode
Thursday.
As a result, global investors decided to take profit in U.S. stocks,
especially tech stocks, not a surprise after the run-up to record highs in
recent sessions.
At the close, U.S. stocks closed below key supports, which suggested a new
leg lower. Nevertheless, the move can still be viewed as the long-awaited
correction that some analysts have been calling for.
The S&P 500 closed down 1.45% at 2,438.21 Thursday. At the close, the index
was up 8.9% year-to date and down 2.1% from the life-time intraday high of
2,490.87, seen August 8. The S&P 500 has 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 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 down 1.75% at 1,372.54, after trading in a 1,372.54
to 1,396.60 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.
Earlier, the Russell 2000 broke below a larger support zone of old lows in
the 1,395-1,400 from mid June to early July. The day's clear-cut break below
that support zone as well as the June 6 low of 1,386.704, targets the May 31 low
of 1,354.855.
Ahead of that, the 200-day moving average comes in just under 1,370. 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.
In terms of risk appetite, the CBOE's volatility index or VIX was last
around 15.74, after trading in a 11.56 to 16.17 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.
As background, the VIX saw a high of 23.01 Nov. 4, ahead of the U.S. election.
The VIX has closed above its 200-day moving average, currently at 11.98,
which suggests risk appetite is waning. The VIX last closed above its 200-day
moving average in mid-May, but then only briefly.
As a reminder, sub-20 VIX levels are deemed risk-friendly, levels 20 to
sub-40 risk-neutral, and levels 40 and over risk-averse.
In other markets, 10-year U.S. Treasury yields were last near 2.203%, after
trading in a 2.199% to 2.255% range. Thursday's yield low was the lowest since
June 28, when ten-year yields bottomed near 2.195%.
Yields were weighed by safe-haven demand as well as deemed dovish comments
by New York Fed President William Dudley.
"I do think I expect inflation to start to move higher in the medium term
but probably not get back to 2% on a year-over-year basis," Dudley told
reporters at a press briefing.
"We've had these very weak inflation reads for a number of months in a row
so we're not going to get to a year-over-year number of 2% until some of these
very low readings drop out of the statistics, six to 10 months from now," he
said. See MNI Main Wire story at 11:27 a.m. ET for details .
U.S. yields posted a high near 2.289% Tuesday, as well as last Friday, in
the wake of the release of an upbeat U.S. jobs report, and have edged lower
subsequently as risk appetite declined.
On the day, 10-year U.S. yields have closed decisively below the 55-day
moving average, currently at 2.245%. The market will be reluctant to become
bearish towards U.S. Treasuries until the 200-day moving average, at 2.318%, 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 0.415% Thursday, after trading in a
0.402% to 0.451% range. Bund yields have closed above the 55-day moving average,
currently near 0.413%, 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 1.082%, after trading in a 1.073% to
1.123% 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 0.058%. 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 $1.1778, on the high side of a $1.1704 to
$1.1785 range. 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 Y109.22 Thursday, on the low side of a Y109.16 to
Y110.18 range.
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 $1,285.75 per ounce, after
trading in a $1,274.74 to $1,287.92 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 down $0.97 at $48.59
per barrel, after trading in a $48.35 (after hours) to $50.22 range.
Risk aversion and a lack of topside followthrough, more so than a change in
oil fundamentals, weighed on prices Thursday.
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. Up until today, 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 $42.05 on June 21.
Trading continued to be driven by supply rather than demand, with concern
about OPEC/non-OPEC non-compliance as well as increased U.S. production.
Looking ahead, unless Friday's CPI data is an outlier and there is some new
news on the North Korea front, the market is likely to remain risk averse into
the weekend.
MNI's median estimate looks for a 0.2% rise in both headline and core CPI.
--follow MNIEyeonFX on twitter.com --
--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com
[TOPICS: MNUEQ$,M$U$$$,MI$$$$,M$$FI$,MN$FI$,MN$FX$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.