The U.S. ISM Non-Manufacturing release – which accounts for 70% of the economy -- is due out on Wednesday and is expected to show that the sector expanded for a second month. Economists are predicting that the measure will report at 51.0 down from 52.0 but above the 50 boom/bust level, following three months of contraction including January’s lowest ever recorded reading of 44.6. The sector has added jobs the last three months, and 12 industries reported growth in April led by Arts & Entertainment which should continue to improve with the bulk of the fiscal stimulus package reaching consumers in May. However, April saw new orders tick lower to 50.1 from 50.2 and new export orders fall into contraction at 48.5 from 55.0 the month prior, signaling that the sector could potentially contract again. Traders will focus on the employment component as last month’s better than expected NFP’s was led by the 90,000 jobs created in the service industry. However, the report may be overshadowed if the recent reemergence of banking woes continues as Lehman Brothers threatens to be the next bank to have a run on it, as it looks to raise capital for a second time.

Bonds – 10-Year Treasury Note Futures

The recent troubles of Lehman Brothers, Wachovia, and Washington Mutual sent traders seeking the safe havens of bonds and had the contract looking to test resistance at 116-08. That was until Chairman Bernanke spoke in Spain and raised inflation expectations and eliminated any chance of further rate cuts. A disappointing ISM Non-manufacturing report may resume the recent flight to safety and lend support to the 10 year note. Conversely, continued strength in the sector, which expanded last month, may serve to calm fears and weigh bonds lower towards support.

FX – EUR/USD

The dollar rallied on testimony from Fed Chairman Bernanke stating that “policy seems well positioned to promote moderate growth and price stability over time.” The monetary policy maker would also put the dollar in focus when he commented,”We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate". Euro bulls had taken control of the pair on the back of bullish European growth and inflation fundamental data, and the reemergence of concerns over the fallout from the subprime crisis in U.S. banks. Last week saw the dollar rally on better than expected Durable Goods Orders, Chicago PMI and New Home Sales. A better than expected ISM Non–Manufacturing may provide similar price action as it may alleviate some of the current banking concerns and feed the current dollar rally. However, a contraction in services, especially in the employment component could send EURUSD higher and reverse the dollars current momentum.

Equities – Dow Jones Industrial Average

Equities have been weighed lower as concerns remerged that the financial crisis may not be over as several red flags were recently raised in the banking sector. Standard & Poor’s lowered it debt rating of Lehman brothers, Merrill Lynch and Morgan Stanley citing the potential for more write offs. Then Lehman announced that it is considering raising billions of dollars for a second time as speculation has increased that the bank may not have enough reserves to cover possible losses in its portfolio, threatening to put the bank on the run. This news followed upheavals at Wachovia and Washington Mutual that saw both banks oust their CEO’s and a profit warning from Bradford & Bingley – U.K.’s biggest mortgage lender. A decline in the service industry will add to the concerns of traders and may see the index threaten support at the March 31 low of 12,262. However, continued expansion in a sector that accounts for 70% of the economy may calm fears over future bank losses rally stocks.

Terri Belkas is a Currency Strategist at FXCM.