What Are The Markets Facing?

Advance Retail Sales are expected to rise 0.4 percent after jumping 1.0 percent gain during the month prior, but given the current economic scenario, this figure could be deceiving when announced at 8:30 EDT. Indeed, consumer confidence remains at dismal levels and energy prices continue to skyrocket. Nevertheless, there is potential for the Advance Retail Sales index to show a positive increase as the result of prices, namely, sales at fuel stations and of food. Further evidence of this was seen in the most recent ICSC sales report, as it reflected a pickup in spending on consumer staples at discounters and wholesale clubs, while consumption of non-necessities, such as luxury goods, apparel, and furniture, all plummeted. The reaction of US assets may be limited, however, as Federal Reserve Chairman Ben Bernanke will testify at 10:00 EDT to the Senate on monetary policy. His commentary tends to be extremely market-moving for not only the greenback, but also for US Treasury and equity markets (and thus, the Japanese yen crosses). Given the uncertainty surrounding the solvency of Fannie Mae and Freddie Mac, commentary on the financial markets will be watched closely and bearish sentiment by Mr. Bernanke could weigh heavily on risk-appetite. On the other hand, if Mr. Bernanke signals optimism that the US economy and financial sector can weather the storm, the US dollar and risky assets, in general, could gain.

Bonds – 10-Year Treasury Note Futures

Despite a sharp sell-off from trendline resistance, Treasuries have since bounced from support at 114, lessening the chances of a bearish turn lower. However, heavy event risk looms on Tuesday as US retail sales will be released, followed by Fed Chairman Bernanke’s testimony on monetary policy. Both of these are key market-movers, but Bernanke’s testimony will likely carry the most weight with the markets in light of the most recent strains in the financial sector. If his commentary sounds bearish on the markets or US economy, Treasuries are likely to surge toward the 100 SMA at 116-04 on flight-to-safety. On the other hand, signs of optimism or the announcement of new initiatives meant to aid troubled financial institutions could weigh the contract down toward support at 114.

FX – USD/JPY

The USD/JPY pair continues to consolidate between Fibonacci support at 105.57 and the 200 SMA at 107.41, however, upcoming event risk threatens both the US dollar and carry trades in general. First, US retail sales will be released at 8:30 EDT and are anticipated to weaken, which could weigh USD/JPY down toward support at 105.57. On the other hand, a surprisingly strong reading could keep the pair propped above 106. Nevertheless, it’s worth keeping in mind Fed Chairman Ben Bernanke’s testimony at 10:00 EDT, as price action may be muted throughout the morning ahead of his contents. Indeed, speeches by Bernanke’s tend to be the biggest market-mover for the US dollar, and Tuesday is unlikely to be any sort of exception. If his commentary sounds bearish on the markets or US economy, USD/JPY could plunge below near-term support toward 104. On the other hand, signs of optimism or the announcement of new initiatives meant to aid troubled financial institutions may send USD/JPY rocketing toward the 200 SMA at 107.41.

Equities – Dow Jones Industrial Average

Thus far, the DJIA has managed to hold above 11,000, where we have a rising trendline that dates back to April 2005. Nevertheless, the broad deterioration in conditions in the financial sector serves as a substantial downside risk to the index. Looking ahead to Tuesday, US retail sales could shake up DJIA futures at 8:30 EDT, but Bernanke’s testimony at 10:00 EDT will be the most important thing to watch. If his commentary sounds bearish on the markets or US economy, the DJIA is likely to dip to at least 11,000, if not lower, amidst risk aversion market-wide. On the other hand, signs of optimism or the announcement of new initiatives meant to aid troubled financial institutions could propel the index toward 13,000.

Terri Belkas is a Currency Strategist at FXCM.