What Are The Markets Facing?

The US economic calendar is very light this week, leaving pending home sales as one of the few potentially market moving numbers. The housing market is one of the US economy’s biggest problems. A deteriorating housing market has hurt everyone from Wall Street to Main Street. With that in mind, stability in the housing market may be exactly what the US economy needs to get back on track. 10-year bond futures and USDJPY have traded themselves into very tight ranges – a breakout is imminent for both and perhaps pending home sales is the catalyst currency and bond traders are waiting for.

Bonds - 10-Year US Bond Futures

Over the past 2 weeks, US bond futures have quietly trended higher as expectations for a rate hike get pushed further out the calendar year. With prices now above the 50 and 200-day SMA, there is a decent chance that the 10-year bond futures could hit 116. Surprisingly weak pending home sales could help to send prices in that direction and yields lower in the process. However critical support sits not far from current levels. If pending home sales are strong, it could drive treasuries below 114, which would open the door for a move down to 112.

FX – USD/JPY

Like bond prices, USD/JPY is at an important crossroad. The currency pair is trapped between the 10 and 200-day SMA which translates into a range of 106.70 and 107.60. Interestingly enough, this is also the support and resistance levels for the triangle indicated in the chart below. The stability of the housing market plays an important role in the outlook for the US economy. Therefore weak numbers could drive USD/JPY below 106.70, which would open the door for a move down to 105. Good numbers could take the currency pair above 107.60, leading to a possible move beyond 108. Judging from the price action of the treasuries, bond traders are leaning towards dollar bearish numbers.

Equities – DJIA Composite Index

Uncertainties in the financial sector pushed the DJIA to retrace early morning gains, with market participants suggesting that a bear market has come into play as the index closed near a 2 year low of 11,230. Ongoing credit concerns paired with a decline in the Pending Home Sales release could further induce bearish sentiment as the home sales are expected to decline. A fall in home sales may push the DJIA below the near-term support of 11,000, but better-than expected results could help to stave off downside pressures and may lift the index to test for resistance at 11,450 and then possibly 11683 over the medium term. Market participants should also be aware of the slew of earnings report due out this week, which may reflect additional write downs and ongoing weakness in the financial sector.

Terri Belkas is a Currency Strategist at FXCM.