OnTheRadar: Tensions Remain Taut, Some Signs Of Promise

--Ten Year US Ylds Back Over 2.10%, Gold Off Highs

By Vicki Schmelzer

     NEW YORK (MNI)   - While tensions remained taut Wednesday, there were some

signs of promise on the U.S. front that allowed risk sentiment to recover,

albeit modestly. 

     Nevertheless, nervousness about a North Korea missile launch later in the

week and Hurricane Irma's destruction prevented global investors from embracing

risk more markedly, despite headlines of progress on a Hurricane Harvey Aid

package and a deal to increase the debt limit until December. 

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

2.103%, after trading in a 2.053% to 2.108% range (Bloomberg levels). Tuesday's

high yield  around 2.148% will act as initial resistance.

     The earlier yield lows were 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%. 

     After a larger yield sell-off in June, U.S. yields subsequently recovered,

and 10-year yields rose to 2.396% July 7, the highest since mid-May. U.S. yields

topped out at 2.357% July 14 and more recently, yields peaked near 2.289% on

August 8 and August 4 before retreating.

     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 0.347% Wednesday, after trading in

a 0.325% to 0.355% range. 

     The August 29 yield low of 0.320% was the lowest Bund yield since June 27,

when yields troughed at 0.238%. 

     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.

     The European Central Bank meets Thursday, with market players looking for

any mention of the FX effects of the euro as well as insight into what will

happen to the current bond buying program when it expires in December. Most

analysts expected ECB guidance in October instead of this month. 

     Currently, the ECB is buying E60 billion per month. Analysts have varied

views about what the central bank will do in terms of extending the bond buying

program and or reducing the amount of bonds purchased. 

     Ten-year UK Gilt yields closed around 1.005%, after trading in a 0.995% to

1.026% range. Gilt yields bottomed at 0.987% August 29, the lowest levels since

late June.  

     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 0.01%. Since last

Friday, JGB yields have flirted with negative territory and tested the lowest

yields since mid November.

     JGB yields hit highs near 0.108% 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 low JGB yields compared to 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 $1.1919 heading into the close, in the

middle of a $1.1903 to $1.1950 range. On Friday, the euro topped out at $1.1980.

     The August 29 high of $1.2070 was the highest euro level since Jan. 2,

2015, when the pair topped out at $1.2108. A few weeks earlier, the euro posted

a high near $1.2570 on Dec. 16, 2014. 

     Last month, on August 17, the euro posted a low of $1.1662, which was the

lowest level since July 27, when the pair bottomed near $1.1650. 

     In other pairs, dollar-yen was trading near Y109.33, on the high side of a

Y108.45 to Y109.40 range. 

     Last week, the pair topped out Thursday at Y110.67 and at last week's U.S.

yield lows on August 29, troughed near Y108.27, the lowest level since April 17,

when dollar-yen bottomed at Y108.13. 

     In commodities, spot gold was closing near $1,332.25 per ounce, after

trading in a $1,331.75 to $1,342.55 range.

     On Tuesday, gold took out $1,337.38, the high seen Nov. 9, in the wake of

the U.S. election, to post a high around $1,344.44. All eyes now are on a move

towards the 2016 high of $1,375.34, seen July 11. 

     Tuesday's gold high was the highest since Sept. 8, 2016 when the precious

metal peaked at $1,349.51. 

     The August 15-16 lows near $1,267-$1,268 will continue to act as larger

support.

     Crude oil prices continued to benefit from an overall softer dollar and

expectations of reduced supply.

     NYMEX October light sweet crude oil futures settled up $0.50 at $49.16 per

barrel, after trading in a $48.52 to $49.42 range. The front contract stalled

ahead of its 200-day moving average, currently at $49.50. 

     Only last week, on August 31, West Texas Intermediate posted a low of

$45.58, the lowest since July 24, when the front contract posted a low of

$45.40.

     WTI 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. 

     As background, 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. 

     Gasoline prices continued to creep higher. 

     The AAA National Fuel Gauge put the average cost of regular unleaded

gasoline at $2.661% per gallon Wednesday, the highest national gas price average

of the year. 

     This compared to $2.648 Tuesday, $2.404 a week ago, $2.346 a month ago and

$2.199 a year ago. Average gas prices are up 10.7% on the week and 13.4% on the

month. 

     In U.S. stocks, the S&P 500 closed up 0.31% at 2,465.54, after holding in a

2,459.20 to 2,469.64 range. The S&P 500 posted a high of 2,480.38 last Friday

ahead of the Labor Day weekend. 

     The August 21 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 10.1% year-to date and down 1.0%

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

     Market players were also monitoring the Russell 2000 index, which often

leads larger stock swings.

     The Russell 2000 was closing up 0.18% 1,402.20, down from an earlier high

of 1,406.02 and Tuesday's high of 1,414.546. The index 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.

     On risk appetite, the CBOE's volatility index or VIX was last at 11.65, in

the middle of a 11.35 to 12.59 range. 

     The VIX high of 17.28, seen August 11 at the peak of 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 traded both sides of its 200-day moving average,

currently at 11.62. 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). 

     Looking ahead, Thursday's ECB decision will be the key driver on the day,

along with various Fed speakers.

     Earlier, the Bank of Canada raised the key policy rate 25 basis points to

1.0%, citing stronger than expected growth. See MNI Main Wire at 10:01 a.m. ET

and 1:37 p.m. ET for further details. 

     --follow MNIEyeonFX on twitter.com --

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

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