By Vicki Schmelzer

NEW YORK, August 1 (MNI) – Several instruments flashed warning
signals Monday, with the market at its most risk averse since March.

All eyes were on the key votes taking place in the Senate and House
of Representatives, where Congress will vote on a plan that would raise
the U.S. debt ceiling before the August 2 deadline (hopefully) and
reduce the U.S. budget deficit by $2.4 trillion over ten years.

Senate Majority Leader Harry Reid said Monday afternoon that the
plan is now for the House to vote first on the debt ceiling agreement
“sometime this evening,” and then send the bill back to the Senate.

In comments to reporters after meeting with Vice President Biden
and Senate Democrats, Reid said he hopes the Senate could vote on the
plan Monday evening but said this is not certain.

Passage in the Senate is viewed as more certain, but the House vote
is deemed a nailbiter and was responsible for the bulk of the angst felt
in the market.

Eurozone peripheral spread widening, whether caused domestically
(Moody’s ratings put Spain on watch for a downgrade last week) or U.S.
uncertainty, added to risk aversion.

That market players were tenterhooks was clear from the trading
action seen Monday, with U.S. Treasuries and German Bunds in hot demand
as safe-havens, along with the Swiss franc and yen.

The CBOE’s volatility index or VIX, was trading at 24.57, after
trading in a range of 22.46 to 25.63 range.

The index has broken above the mid June peak of 24.65 (highest
level since the summer) and is back at levels last seen mid March (31.28
peak seen March 16 in the wake of Japan’s earthquake and tsunami).

CitiFX technical analysts noted that the VIX already closed Friday
above the June high and posted a monthly reversal for July.

“The last time we saw this (and also from the same support levels)
was in April 2010 — the following month saw the VIX rise to a high of
48.20%,” CitiFX said.

Oil and the S&P 500 were moving in lock-step with each other, in
contrast to prior months where each instrument had a mind of its own.

The market fretted the technical picture, where there is scope that
both crude and the S&P might close below key support in the form of
their 200-day moving averages.

NYMEX September light sweet crude was trading at $94.55 per barrel,
after holding in a $93.42 to $98.60 range.

A close below the 200-day, just under $95 Monday, would target the
late June lows at $89.61. Crude last traded below its 200-day on a
sustained basis in September 2010.

In stocks, the S&P 500 held at 1279.89, after trading in a 1274.73
to 1307.38 range.

Already Friday, the index briefly broke below its 200-day moving
average (then at 1284.84) but then closed at 1292.28.

A clear-cut close below the 200-day (1285.41 Monday) would be
viewed negatively, with scope then for a retest of the summer lows of
1258.07, seen June 16. Larger support is seen at 1249.05, the 2011 lows
seen March 16.

Mary Ann Bartels, head of U.S. technical analysis at BoA/Merrill,
called 1250 “the technical line in the sand” and says “a decisive loss
of 1250 would break uptrend support from March 2009, the March 2011 low
and the neckline of a potential six-month top.”

A clear-cut break below 1250 “risks the S&P 500 declining to
1150-1140 or 16%-17% from the high in May,” she said.

A “Yes” vote in both the House and Senate would go a long way to
improve risk sentiment, but the market would still be left with other
less promising truths.

First, the $2.4 trillion in budget reduction will likely not be
enough to prevent Standard & Poors from downgrading the United States
credit rating from ‘AAA’.

Second, weeks if not months of uncertainty, about the eurozone as
well as the U.S. have taken a toll on economies around the world.

PMI data released Monday had very few upbeat elements.

Official Chinese CFLP PMI at 50.7 in July versus 50.9 in June, was
not as bad as feared (sub 50), but remained down from the 52.0 level
seen in May.

Markit data released earlier showed that Korea’s PMI rose to 51.3
from 51.1 in June.

Nevertheless, of the BRIC, Brazil fell to 47.8 in July from 49.0 in
June, below the 50 mark for the second consecutive month, India fell to
53.6 in July from 55.3 in June (third consecutive decline), and Russian
PMI fell to 49.8 in July from 50.6 in June, the first sub-50 reading
since December 2009.

In developed economies, U.K. CIPS/Markit PMI fell to 49.1 in July,
versus 51.3 in June and compared to Market News median of 50.8.

Eurozone manufacturing PMI came in at 50.4 in July, the same as the
flash result, and compared to 52.0 in June.

U.S. ISM purchasing managers index fell to 50.9 in July versus 55.3
in June and compared to median estimates of 54.4.

Reduced risk appetite/risk aversion helped to support the yen and
Swiss francs, as select emerging market currencies, at the expense of
the euro and dollar.

“There are two currencies (dollar and euro) setting the tone,” one
trader said.

The euro was trading at $1.4245 Monday, on the low side of the
day’s range of $1.4186 to $1.4453.

Last month, the pair traded in a range of $1.3835 (July 12) to
$1.4577 (July 4).

Dollar-Swiss held at Chf0.7815 and euro-Swiss at Chf1.1135, up from
the new life-time lows of Chf0.7730 and Chf1.1025, respectively, seen
earlier in the day.

Dollar-yen was trading at Y77.22 in afternoon action, in the middle
of a Y76.29 to Y78.00 range.

Earlier, the pair came within striking distance of testing the
life-time low of Y76.25, seen March 17, the day before the BOJ-led
coordinated intervention to weaken the yen.

A Nikkei News story Monday, stating that the Japanese government is
considering intervention to reverse the yen slide and the Bank of Japan
is debating additional monetary easing, served to further underpin
dollar-yen and euro-yen.

The Bank of Japan will begin a two-day monetary policy meeting
Thursday.

“If the yen’s appreciation and weakness in the Nikkei stock index
accelerate following the results of the U.S. decision next week, the BOJ
board stands ready to take policy action,” said a July 29 MNI sources
story.

Regardless of the cause of a stronger yen, policymakers were well
aware of the need to carefully scrutinize the impact of a stronger yen
on corporate activity and sentiment.

“If the strong yen trend continues, it could derail the foundation
for a moderate economic recovery backed by increasing exports to
overseas economies,” MNI said.

On March 18, the day the BOJ and other central banks stepped in,
dollar-yen traded in a Y78.99 to Y82.00 range before closing near
Y80.59. By March 31, fiscal year-end, the pair closed at Y83.15.

** Market News International New York Newsroom:212-669-6430 **

[TOPICS: M$U$$$,M$X$$$,MN$FX$,M$$CR$,MFU$$$]