S&P/CS House Prices (YoY) (Q2) (09:00 EST; 13:00 GMT)
Expected: n/a
Previous: -1.4%

Consumer Confidence (AUG) (10:00 EST; 14:00 GMT)
Expected: 105.0
Previous: 112.6

How Will The Markets React?

This week is likely to see relatively thin range trading ahead of the US and Canadian Labor Day holidays, but nevertheless, Tuesday’s event risk could spark some volatility. First, S&P/Case Schiller will release housing data for Q2 and the month of June, but it is the quarterly release that may garner the most attention. In the first quarter, the index showed that existing single-family home prices dropped 1.4 percent, marking the first decline since 1991, and things may only get worse. In fact, the National Association of Realtors existing home sales report showed on Monday that non-seasonally adjusted house prices softened throughout Q2 from the year prior at a rate of -1.3 percent in April, -2.5 percent in May, and showing a flat reading in June. Furthermore, Q3 has gotten off to a weak start and with mortgage lending standards tightening dramatically in August, plunging demand for homes should send prices spiraling even lower. Just an hour after the S&P/Case Schiller report, US markets will face consumer confidence for the month of August. The index hit a six year high of 112.6 last month, but given current conditions including volatile financial markets, skyrocketing mortgage defaults, high gasoline prices, fears of rising unemployment, and global tensions, a sharp drop in the sentiment index will not be entirely surprising. Nevertheless, the news may be of concern as it could signal that weaker consumer spending looms on the horizon. Finally, much will likely be made of the release of the minutes from the FOMC’s August 7th meeting at 14:00 EST. We already know from the August 7th FOMC statement that the central bank was still relatively hawkish at the time. However, just 10 days later, the FOMC dropped their inflation bias and focused on deteriorating financial market conditions which “have the potential to restrain economic growth going forward.” With the comments from the August 7th meeting clearly having little bearing on the FOMC’s current stance, markets will likely brush off the news.

Bonds – 10-Year Treasury Note Futures

Range trading has prevailed for 10-year Treasury note futures, with the March high of 109-09 holding as resistance and Fibonacci support at 108-09 keeping the contracts elevated. Widespread event risk on Tuesday has the potential to push Treasuries higher, as a reminder of the dour condition of the housing sector could reignite credit concerns. However, if traders opt to brush off the data, price could continue to ease lower.

FX – EUR/USD

As the status of risk aversion remains the primary theme of the forex markets and liquidity crunch jitters subside, the US dollar has suffered quite a bit over the past few days. In fact, EURUSD has already retraced 61.8 percent of the plunge from the July 24th high of 1.3855 to the lows established on August 16th. The next level of resistance sits at the 78.6% fib at 1.3750, which could be the pairs next bullish target. However, EURUSD faces massive event risk on Tuesday, and the pair’s reaction may sound counterintuitive, as stronger-than-expected figures would further assuage credit crunch concerns. Since the US dollar has traded more as a safe-haven asset over the past two weeks, we could actually see encouraging data contribute to dollar weakness. With daily oscillators looking bullish for the pair, the data could lead EURUSD to test 1.3685, with a break of that level target 1.3750. However, if Tuesday’s data proves to be very disappointing, equity markets could unravel as risk averse sentiment returns and push EURUSD back down towards near-term support at 1.3636, with sharp declines taking on 1.3526. Another possible scenario – and more likely one – is that low volatility will remain the norm market-wide this week, and regardless of the economic data at hand, EURUSD will hold within an ultra-thin range of 1.3686 - 1.3685.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average eased back from resistance at a descending trendline at 13,384, ending Monday down 0.42 percent at 13,322.13. Given the hesitance of the Dow to break above this trendline, the equity index could be moving lower to target the 200 SMA at 12,876 once again. On the other hand, a surge through that resistance level would aim to complete a 78.6 percent retracement of the decline from 14,021.95 at 13,665, but this will only be possible if credit jitters continue to subside. While US equities face event risk from Tuesday’s slew of economic data scheduled to be released, price action in the Dow will likely remain contingent upon volatility and risk aversion trends related to concerns about the liquidity crunch. Nevertheless, surprisingly strong housing data or consumer confidence would underpin any positive sentiment amongst equity traders. On the other hand, weak data could quell market optimism and push the Dow lower, especially if traders become increasingly worried about companies directly involved with the housing sector.

Terri Belkas is a Currency Strategist at FXCM.