OnTheRadar: US Stocks Buoyant Amidst Nervous Energy

-- DJIA Posts New Record Intraday High, Record High Close

--US Tsy Ylds back off, USD Struggles 

By Vicki Schmelzer

     NEW YORK (MNI)   - U.S. stocks remained buoyant Tuesday, but there was an

element of nervous energy surrounding the day's trading activity. 

     This served to underpin U.S. Treasuries and at the same time prevented the

dollar from falling to even lower levels. 

     In U.S. stocks, there continued to be a modest exodus out of tech stocks

into more tried and true equities, which allowed the Dow Jones Industrial

Average to play catch up to the Nasdaq Composite.

     Earlier Tuesday, the DJIA posted a new life-time high of 21,990.96. The

index closed also at a life-time closing high of 21,963.92.

     On July 27, Nasdaq Composite and S&P 500 posted new life-time highs of

6,460.841 and 2,484.04 respectively, before succumbing to profit-taking. 

     The S&P 500 closed up 0.24% at 2,476.35. At Monday's close, the index was

up 10.6% year-to-date. 

     Global investors have already begun hedging downside equity risk, said JP

Morgan strategists. 

     "The current put-to-call open interest ratio for S&P500 index options has

been rising for most of this year; While this ratio had peaked in June and its

current level is not extremely high, it nevertheless stands above its post 2014

average," they said.

     Even more extreme is the "call-to-put open interest for VIX option," which

stands almost at 4.0, close to historic highs, they said. 

     "The combination of these two observations implies that there is greater

demand for hedging against equity tail risk or a volatility spike relative to

hedging against a typical equity market correction," the strategists said. 

     In addition to hedging by institutional investors, retail investors have

also been taking out some insurance against a larger stock sell-off, JPM said. 

     Indeed, "the heavy buying of bond funds this year reflects, at least

partly, the desire by retail investors to offset or hedge the rising AUM of

their equity fund holdings," the strategists said.  

     JPM take from recent client visits is that with Fed balance sheet

reduction, and/or ECB tapering, on the horizon, investors have already begun to

reduce "their net exposure to risk markets via hedges in order to protect

themselves against a repeat of the August 2015 correction. 

     In fixed income markets Tuesday, 10-year U.S. Treasury yields were last

near 2.253%, after trading in a 2.251% to 2.321% range. As background, yields

traded near 2.32% ahead of last week's Fed announcement. 

     The July 21 and July 24 low yield of 2.229% was the lowest since June 29,

when U.S. yields bottomed near 2.221%. 

     The market watched to see if U.S. yields will stabilize above or below the

55-day and 200-day moving averages, currently at 2.248% and 2.301%.  

     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 0.491% Tuesday, after trading in a

0.486% to 0.556% range. 

     Bund yields backed off after the ECB left policy unchanged July 20, but

have not slipped too far as many still expect 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 1.213%, after trading in a 1.196% to

1.261% range. The July 7 high 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 0.083%. 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 dollar struggled to recover Monday.

     The euro was closing near $1.1802, in the middle of a $1.1785 to $1.1844

range. 

     The pair topped out at $1.1846 Monday, the highest since Jan. 14, 2015,

when the pair peaked also near $1.1846.

     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 Y110.34 Tuesday, after trading in a Y109.93 to

Y110.59 range. 

     The July 26 high near Y112.20 was the highest level since July 20, when the

pair peaked at Y112.42. The earlier low was the lowest since June 15, when

dollar-yen troughed at Y109.27.  

     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 $1,268.70 per ounce, in the

middle of a 1,2662.66 to $1,274.16 range, with the earlier high the highest

since June 14 when gold peaked at $1,280.77. 

     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.

     With the dollar on the defensive in recent sessions, gold has made slow

progress higher. A break above the June 14 highs will target the early June

peaks. 

     Just one day after West Texas Intermediate saw the first closing settlement

above the psychological $50 mark since May 24, crude prices came tumbling lower

again, mostly due to a lack of topside followthrough. 

     NYMEX September light sweet crude oil futures settled down $1.01 at $49.16

per barrel, after trading in a range of $48.37 to $50.43. The earlier high was

the highest since late May.

     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. 

     Tuesday's close back below the 200-day moving average, at $49.40, targets

the 55-day moving average at $46.78. Ahead of that are the July 27 and July 26

lows of $48.25 and $47.86 respectively, which may act as support. 

     The market awaited the latest API inventory information, due out later

Tuesday, as well as the more definitive EIA inventory data, due out Wednesday

morning. 

     On the risk front, the CBOE's volatility index or VIX was last around

10.08, in the middle of a 9.95 to 10.56 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.

     It would take a close above the 200-day moving average, currently at 12.10,

to suggest risk appetite was waning. The VIX last closed above its 200-day

moving average in mid-May, but then only briefly.

     Looking ahead, the market will eye Wednesday's release of ADP payroll data

for July, looking for insight into Friday's release of July U.S. non-farm

payroll data. 

     MNI's median estimate is 181,000 for headline July non-farm payrolls, with

a range of 170,000 to 220,000. The unemployment rate is seen at 4.3% vs 4.4%

last and average hourly earnings are seen rising 0.3%. Due to a large 0.4% rise

in hourly earnings in July 2016, the year/year gain for July 2017 is likely to

be trimmed. 

     --follow MNIEyeonFX on twitter.com --

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

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