Volatility to Continue Through US Economic Data

How Might the Markets React? 

The recent surge in volatility has left US assets in the dust, with the dollar, bond yields, and stocks all considerably lower. Seemingly overdrawn price movements have nonetheless occurred on little fundamental data—leading to a great deal of speculation ahead of tomorrow’s economic news. With traders around the world now firmly at their trading desks, the boost in liquidity limited any continuation of last week’s move and sets the stage for reactions to follow the upcoming deluge of fundamental reports. Dollar bears who latched on to last week’s precipitous declines must subsequently hope for mediocre economic data to set the stage for a fundamental shift in Greenback markets. On the opposite side of the fence, dollar bulls looking for retracements expect that reasonably strong news will restore equilibrium to markets and force the EURUSD to re-test its previous 7-month range high. Given the uncertainty surrounding major currencies, US fundamentals will prove critical to predicting future trends for the almighty Greenback.

Special attention turns to the first economic release on the ledger, with US Durable Goods Orders to show that demand weakened through the month of October. With volatile changes in headline Durable Goods Orders on a monthly basis, the potential for large surprises highlights the risks surrounding the release. Traders may nonetheless wait for the later Consumer Confidence and Existing Home Sales numbers to force the dollar in either direction. Consumer optimism will likely garner a great deal of attention, as domestic retailers hope that strong confidence will keep important December holiday sales high. Suffice to say, however, the recent focus on housing data likewise places pressure on the US Existing Home Sales Report. Surprises in either measure would likely provide markets with ample reason to send the Greenback in either direction, with current biases seemingly calling for a pullback in dollar declines.

Bonds – US 10-year Treasury Note Futures

Price charts below emphasize the truly bearish turn in outlook for the future of US expansion and subsequent interest rate changes. Risks arguably remain to the downside for bond premiums, with positive economic data likely to provide a retrace higher in yields. Otherwise, we could see yields on the 10-year bond future break below the highly significant 4.9 percent mark—triggering a further breakdown for the US dollar against its major counterparts.

FX – EUR/USD

In the three previous active sessions, FX traders were able to push the EURUSD over 300 points higher.  This substantial was achievable only because of the lack of liquidity in the final days of last week when US and Japanese traders left their desks for the extended holiday weekend.  Looking at today’s price action though reveals a very different market.  First and foremost, liquidity returned to full capacity as US markets came back online.  The gap that formed in virtually all the dollar-denominated pairs at the open of the Asian session revealed the faction of traders who tried to get in on the last gasp of the rally before the bloated market settled all the pairs.  Almost unprecedented, today’s EURUSD gap higher tallied 50 points.  However, the bullish sentiment did not last long as only an hourly later the pair was stopped cold at 1.3180.  From this level, the highly leveraged volatility of last week switched gears to a more conservative market looking ahead to weighty economic releases in the coming days.  The fundamental value of the dollar will be bombarded Tuesday with indicators evaluating consumer confidence, durable goods orders and perhaps most importantly existing home sales.  With the EURUSD already boasting a strong technical break of former highs, a bearish cut on tomorrow’s data could provide the fundamental impetus to extend the rally into a genuine trend.  On the other hand, shaking off the shackles of the recent environment of sluggish volatility could prove more difficult than many expect.

Equities –  S&P 500 Index Futures

Black Friday was so named because firms jokingly said that the jump in consumer spending following the Thanksgiving holiday will finally push firms into the black.  However, this was not the feeling on Wall Street Monday.  All three major equities indices were on the lam with the Dow off 1.3 percent, the S&P 500 sinking 1.4 percent and the Nasdaq Composite pacing the drop with a massive 2.2 percent plunge.  The turn seemed unusual as initial reports indicated consumers spent 19 percent more over the extended shopping weekend than they did just a year ago.  Conversely, it seemed to be a combination of overextended price action, rising oil prices and caution ahead of coming economic indicators that tipped equities into a dive.  The steady decline in energy prices from record highs set in mid-July has consistently contributed to the positive move in stocks.  Holding true to this correlation in good and bad times though has proven detrimental to firms as the recent contract rollover has triggered a rebound in volatile crude oil prices.  Another 1.8 percent advance today has finally pushed the raw material above the closely watched $60 per barrel mark.  Furthermore, the steady run up has found fewer buyers in the wings to swoop in and add momentum to the petering run.  This pressing market condition has become all the more important as a stocked economic calendar looms over all US markets.  In less than 24 hours, consumer confidence, durable goods orders and existing home sales reports will set macro-economic valuations in motion.  While stock traders have grasped firmly to the hope of an eventual rate cut by the first half of 2007, the consistent pain felt in the housing sector, and more broadly in the overall economy, may begin to take precedence.