Pending Home Sales (MoM) (AUG) (10:00 EST; 14:00 GMT)
How Will The Markets React?
After US pending home sales for the month of July plummeted 12.2 percent - the most since the National Association of Realtors started keeping records in 2001 - to an index reading of 89.9, traders will be keeping an eye on the August report to see if even worse levels are yet to come. This could certainly be the case, especially as mortgage lending standards didn't start to tighten significantly until August. As a result, the number of Americans entering into contracts to buy previously owned homes during the month could prove to be more disappointing than the expected decline of 2.1 percent. While it is very clear that the housing sector is in a dismal state, this leading indicator of existing home sales activity will only highlight that fact. Meanwhile, we've seen that median price growth for previously owned homes has remained positive thus far, while median prices for new homes dropped by the most since 1970 in August. However, with demand likely to continue withering and inventories still growing, prices of existing homes - which make up about 85 percent of the US housing market - could be next. Nevertheless, with the highly market-moving, hard-to-handicap non-farm payrolls report scheduled to be released on Friday, range trading conditions could take over in the forex markets, while bulls continue to reign in the equity markets.
Bonds - 10-Year Treasury Note Futures
Treasury note futures remain contained to an ascending channel, possibly aiming to target the 110-03 level, and the release of pending home sales on Tuesday may only boost the contracts as the figure could prove to be even worse than expected. However, with equities hitting record highs and showing few signs of letting up this week, the long end may have difficulty holding up and could start to ease back towards trendline support at 109-04.
FX - EUR/USD
EUR/USD has finally started to ease back from its record highs - though they are still a stone's throw away - as the pace of the pair's rally slows. The broad weakness of the US dollar hasn't received any help from economic data as home sales, labor market, consumer confidence, and inflation reports all proved to be softer-than-expected. The greenback may face another round of disappointing news as pending home sales are scheduled to be released on Tuesday. While the index is not anticipated to show as sharp of a decline as it did in the July report, signs that fewer people are entering contracts to purchase an existing home will only exacerbate concerns regarding not only the housing sector, but a recession as well. However, the impact if the pending home sales report on EUR/USD may be limited as traders will be anxiously awaiting Friday's non-farm payrolls report. Nevertheless, if pending home sales are worse than expected, EUR/USD would target the recent record high if 1.4284. However, if the release of the housing data proves to be surprisingly positive, traders may start to speculate that the housing recession has bottomed, which could help send EUR/USD down to test 1.4110/20.
Equities - Dow Jones Industrial Average
The Dow Jones Industrial Average closed at a new record high of 14,087.55 on Monday, despite Q3 earnings warnings from both Citibank and UBS. However, it is worth questioning how realistic it is to expect the Fed's policy actions from two weeks ago to fix the credit crunch that the US is facing, especially as both supply and demand for credit wanes. As a result, traders may stop riding the wave of optimism that the Fed initiated last week and instead focus on the status of the economy. If pending home sales weaken more than expected, the Dow could return its focus on a decline towards 13,700. On the other hand, 'irrational exuberance' may continue to rule, and if the data is actually somewhat optimistic or simply in line with expectations, the equity index could hold aloft and continue its trek towards 14,200. Nevertheless, with the market-moving NFP report due to be released on Friday, the Dow is most likely to return to range trading for the remainder of the week.