OnTheRadar: Risk Sentiment Wobbles On Debt Ceiling Concern

By Vicki Schmelzer

     NEW YORK (MNI)   - Risk sentiment wobbled Wednesday as global investors

reacted negatively to comments made overnight by President Donald Trump.

     On financing the promised wall between the United States and Mexico, the

New York Times reported Trump said, "If we have to close down our government,

we're building that wall."

     Trump's words were a reminder of comments made earlier in the year, when

the president stated that the U.S. needed "a good 'shutdown,'" the NYT noted. 

     The 2018 fiscal year begins Oct. 1, 2017 and extends until Sept. 30, 2018.

None of the 12 annual spending bills for FY 2018 were approved by Congress

before it left for its August recess. These 12 spending bills allocate more than

$1 trillion in discretionary funds that keep the federal government operating.

     In addition, the statutory debt ceiling, now almost $20 trillion, must be

increased this fall by Congress to allow the federal government to honor its

obligations and pay its bills. 

     As background, Treasury Secretary Steve Mnuchin sent congressional leaders

a letter on July 28 requesting that Congress pass legislation to increase the

debt ceiling by Sept. 29. The Congressional Budget Office has said the debt

ceiling needs to be raised by mid-October to avoid serious disruptions.

     Upon hearing Trump's remarks overnight, Asian market players turned from

being modestly risk-friendly to being modestly risk-averse, with the trend

continuing in European and U.S. action. 

     On the fixed income front, 10-year U.S. Treasury yields were last near

2.169%, on the low side of a 2.168% to 2.222% range.

     On August 18, 10-year U.S. yields took out the August 11 yield low of

2.184% to test 2.164% - low levels last seen June 27, when 10-year U.S. yields

bottomed near 2.126%. 

     U.S. Treasury yields peaked near 2.289% on August 8 as well as August 4,

non-farm payroll day. Yields struggled to get above these old highs

subsequently.  

     The market will tilt bullish towards U.S. Treasuries unless the 200-day

moving average, at 2.336%, is vaulted decisively.  

     As background, 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. 

     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 0.377% Wednesday, after trading in

a 0.371% to 0.414% range. 

     The earlier low 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.

     Ten-year UK Gilt yields closed around 1.059%, after trading in a 1.048% to

1.102% 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 0.039%. 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 $1.1815 late Wednesday, on the high side

of a $1.1740 to $1.1823 range. 

     This month, the August 17 euro low of $1.1662 was the lowest level since

July 27, when the pair bottomed near $1.1650. 

     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. 

     In other pairs, dollar-yen continued to track U.S. yields closely.

Dollar-yen held near Y108.99 in late afternoon action, after trading in a

Y108.92 to Y109.83 range. 

     Last week, dollar-yen topped out around Y110.95 August 16 and fell to

Y108.60 August 18, which was the lowest since April 19, when the pair bottomed

near Y108.38. The April low was Y108.13, seen April 17. This month's high was

Y111.05, seen August 4. 

     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 $1,290.10 per ounce, after

trading in a $1,282.84 to to $1,291.48 range. 

     On August 18, gold vaulted various old highs from August and a double-top

near $1,296 from June and April to take out the psychological $1,300 mark to

post a high near $1,300.92 before backing off. Since then, gold has topped out

in the $1,290-$1,294 area each day. 

     A decisive close above $1,300 will target  $1,337.38, the high seen Nov. 9,

in the wake of the U.S. election. The 2016 high was $1,375.34, seen July 11. 

     The August 15-16 lows near $1,267-$1,268 will act as initial support.

     NYMEX October light sweet crude oil futures settled up $0.58 at $48.41 per

barrel, after trading in a $47.53 to $48.50 range. 

     The August 17 low of $46.46 was the lowest since July 25, when West Texas

Intermediate bottomed at $46.38. 

     West Texas Intermediate has held above its 55-day moving average, currently

at $46.55, but remained below its 200-day moving average, at $49.38. 

     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. 

     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. 

     On the day, crude was underpinned by a softer dollar and the morning

release of EIA inventory data showing a 3.3 million barrel crude stock decline

in the August 18 week. 

     In U.S. stocks, the S&P 500 closed down 0.35% at 2,444.04, after trading in

a 2,441.42 to 2,448.91 range. The S&P 500 has closed below its 55-day moving

average, around 2,449, after closing above that mark Tuesday. 

     Monday's low of 2,417.35 was the lowest since July 11, when the index

bottomed at 2,412.79. 

     At Wednesday's close, the S&P 500 was up 9.2% year-to date and down 1.9%

from the life-time intraday high of 2,490.87, seen August 8. 

     Market players were also homing in on the Russell 2000 index, which often

leads larger stock swings. 

     The index, closing down 0.13% at 1,369.70, posted a low of 1,349.35 August

18, which was the lowest level since April 17, when the Russell 2000 bottomed at

1,345.363.

     Earlier, the Russell 200 posted a high of 1,373.276, but remained below its

200-day moving average, currently around 1,378. A clear-cut break above the

200-day moving average would suggest scope for additional gains. 

     On risk appetite, the CBOE's volatility index or VIX was last at 11.99, in

the middle of a 11.39 to 12.59 range. 

     The VIX high of 17.28, seen August 11 at the peak of escalating U.S.-North

Korea tensions, was the highest since Nov. 9, the day after the U.S. election,

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

election. 

     In August, the VIX has traded both sides of its 200-day moving average,

currently at 11.78. The index will need to close below that mark on a sustained

basis to suggest that risk sentiment 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). 

     Traders continued to see event risk from this week's Jackson Hole

symposium, with both Fed Chair Janet Yellen and European Central Bank President

Mario Draghi speaking Friday.

     --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$]