What Are The Markets Facing?

Thursday’s US economic releases don’t tend to be incredibly market-moving, and given the heavy volatility we’ve seen throughout the markets this past week, price action may die down quite a bit. Regardless, the indicators will be worth watching, as extremely surprising numbers could shake things up. US housing starts are expected to ease down to 960K in June, which would mark a more than 17-year low. Meanwhile, applications for residential building permits are forecasted to fall to 965K, as the supply of homes far outstrips that of demand. While it will come as no surprise to anyone that the collapse of the housing sector has yet to bottom out, an extremely disappointing figure could add to bearish arguments for the US economic outlook and exacerbate concerns about the health of Fannie Mae and Freddie Mac. Indeed, during his testimony before the Senate Banking Committee, Treasury Secretary Henry Paulson said that the two GSEs played a “central role in our housing finance system” as they “now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market.” As a result, the stability and functioning of the GSEs are one major factor that “will determine the pace at which we emerge from this housing correction.” With the market’s focus returning to the status of the housing sector, Thursday’s data could actually prove to spark volatility in the fixed income, forex, and equity markets.

Bonds – 10-Year Treasury Note Futures

Treasuries backed down on Wednesday thanks to stronger-than-expected US figures, but upcoming housing data could lead the contract to recover and test resistance at 116 once again. US housing starts and building permits are both anticipated to fall lower in June, which will only add to concerns that conditions in the US economy are bound to get worse. On the other hand, if the figures prove to be better than expected, Treasuries could fall toward support at 114.

FX – EUR/USD

EUR/USD hit a new record high on Tuesday morning of 1.6038, but has subsequently backed off since then as the US dollar staged a recovery on the back of commentary by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, along with significantly stronger-than-expected US CPI figures. Looking ahead to Thursday, the release of US housing data provides some event risk for EUR/USD, though housing starts and building permits are far from being the most market-moving indicators for the greenback. Nevertheless, if the data proves to be worse than forecasted, EUR/USD could make another push for 1.60. On the other hand, better-than-expected housing numbers could weigh the pair down toward trendline support at 1.5764.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average managed to recover on Wednesday and hold above a rising trendline dating back to April 2005. While 11,250 could provide decent resistance in coming days, the 2.5 percent gain in the index has nevertheless spurred optimism that a short-term bottom is in place. However, traders should keep an eye on financial market news, as indications of distress amongst financial institutions could trigger widespread sell-offs in the global equity markets (and for that matter, forex carry trades). Looking ahead to Thursday, US housing indicators could shake up the markets a bit, with better-than-expected readings likely to help the DJIA rise above near-term resistance at 11,250 toward a falling trendline at 11,500. On the other hand, disappointing news will only add to the concerns surrounding the financial sector and Fannie Mae/Freddie Mac, which could lead the index to fall down toward 11,000 once again.

Terri Belkas is a Currency Strategist at FXCM.