OnTheRadar: 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

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