US Existing Home Sales (DEC) (15:00 GMT; 10:00 EST)
Expected: 4.95M
Previous: 5.00M

What Are The Markets Facing?

On Thursday, the National Association of Realtors is expected to report that existing home sales slipped to 4.95 million - the lowest reading since record-keeping began in 1999. Sales of existing homes account for nearly 85 percent of the market, according to NAR, so this particular release serves as a good indicator of the status of the sector as a whole. Traders will also be looking at the inventory component, as signs that supplies continue to build while demand wanes will suggest that prices have much further to fall. This news will not be entirely surprising as the Federal Reserve’s emergency 75bp rate cut on Tuesday was accompanied by a statement that noted “incoming information indicates a deepening of the housing contraction.” Still, worse-than-expected readings may only lead the markets to price in another round of rate cuts by the central bank on January 30. However, the vote for the most recent reduction in the fed funds rate had one dissenter, William Poole, who “did not believe that current conditions justified policy action before the regularly scheduled meeting next week.” Nevertheless, fed fund futures are still pricing in an 80 percent chance of a 50bp cut to 3.00 percent, and as a result, a worse-than-expected existing home sales report could exacerbate market speculation about the bank’s next move as signs continue to suggest that the US economy is in or nearing a recession.

Bonds – 10-Year Treasury Note Futures

The Fed’s emergency 75bp rate cut added fuel to the current bond rally, and we may expect the surge in Treasuries to continue higher as equities continue to swoon and futures price in additional rate cuts. With Treasuries looking overbought, the contract could consolidate or fall below support at the 2004 high of 117-28, especially if equity markets breath a sigh of relief and recover somewhat. On the other hand, if traders become more aggressive in pricing in another round of rate cuts next week, Treasuries may continue their ascent towards the 2003 high of 121-03.

FX – EUR/USD

The Federal Reserve’s emergency rate cut helped propel EUR/USD up towards resistance at 1.4685, however, the pair has since backed off slightly. However, with fed fund futures pricing in another round of rate cuts next week and the European Central Bank maintaining a staunchly hawkish tone, it may only be a matter of time before the pair resumes its rally towards 1.50. Nevertheless, markets will likely remain extremely volatile and create choppy price action across the majors, but Thursday’s US economic data could weigh on the greenback as NAR existing home sales are forecasted to fall back further. Meanwhile, ECB President Trichet is scheduled to speak about risk in the financial markets later in the morning, and the combination of gloomy US news along with hawkish rhetoric could send EUR/USD surging higher. On the other hand, risk aversion – a major driving force market-wide – could spark sharp sell-offs of EUR/JPY and lead EUR/USD lower as well.

Equities – S&P 500 Index

Fed Chairman Ben Bernanke made an attempt to save the markets with a 75bp emergency rate cut, avoiding more severe losses as the S&P futures were down over 5 percent before the policy action. Nevertheless, the index still ended the day down 1.1 percent at 1310.50 as investors feared the move was too little too late. Although, the index managed to close above significant support levels at 1303, consolidations may be limited as Apple’s missed estimates could easily send the index lower. The S&P has given back nearly 20 percent since its October 11 high, and with recession fears feeding investors anxiety, market sentiment is clearly very bearish and weak existing home sales data on Thursday may only add fuel to the fire.

Terri Belkas is a Currency Strategist at FXCM.