By DailyFX – Wednesdays economic releases provided another bearish shade for the worlds biggest economy. A number of indicators covering various sectors of the… … US economy weighed on investors sentiment across the various markets, but the reaction to the numbers was a little different in each.

At 15:00 GMT, simultaneously released
indicators of construction spending, manufacturing activity and pending home sales
provoked an immediate response in currencies, bonds and equities. In treasuries,
the reaction was undeniable. A gap in ten-year notes face value was reciprocated
with a drop in yields to its lowest level since October 4th. For the EURUSD, an
immediate spike higher to 1.2800, the loftiest level the pair has seen since August
28th, proved only temporary as the market was quick to move in and take profits.
Apprehension in reigning over the majors as the dollar index now sits on major
support, which is translating into major levels in many pairs. Furthermore, traders
are erring on the side of caution as a lack of data tomorrow makes the event-risk in
Fridays nonfarm payrolls report even greater. Finally, the equity response to
todays indicators was swift, though the slide was already underway making it
tough to judge the lone effect.

Bonds – 10 Year US Treasury Notes

Government debt provided the most clear and reliable reaction to todays
disappointing indicators. In the moments following the release of the growth
detracting numbers, the 10-year Treasury note immediately put in a 4/32nds gap. In
total, in the few minutes following the release, the benchmark asset was actually
bid up to 102 15/32nds to tally up a total 7/32nds initial reaction. However, like
the currency market, debt traders cut the rally short rather quickly. Though the
figures were supporting weakness in housing and factory activity, market
participants were already looking ahead to Fridays nonfarm payrolls report. On
the other hand even though the initial reaction was moderated, the retracement
didnt spell the end of the negative sentiment for yields. Aside from the
headline manufacturing read hitting its lowest level since June 2003, the specific
drop in the prices paid component provided support to rate watchers who are
speculating on a cut in the first half of 2007.

FX EUR/USD

Though the dollar was quick to react to todays economic offerings, there was no
development to back up the initial move. In the hours leading up to reports on tap,
the EURUSD was once again relegated to a narrow trading band. From the Asian
hours 15-point congestion band, the addition of European liquidity did little
more than given traders a little more room with a 30-point range with a low around
1.2742. When the news hit the wires, spot was hovering near the middle of this
range. From the economic calendar, the market jumped to the often market-moving ISM
manufacturing report for its face value feel on the days data. The nationwide
factory activity report proved to be cut from the same bearish clothe as most of the
regional indicators that had been absorbed in the market before it. Dropping to a
more than three-year low 51.2, the outlook for capital investment and strengthening
hiring trends in the months ahead seemed bleak. In moments the initial face value
wore off, but traders only found more bearish data to guide fundamental positioning.
Pending housing starts reinitiated its decline by falling a greater than expected
1.1 percent over September. Furthermore, construction spending for the same month
fell 0.3 percent. This was a potent mix of disappointing data, but the dollar was
able to hold up against the barrage, only allowing a 35-point run to 1.2800 for the
EURUSD before big resistance kicked in. The quick retracement that formed only
minutes after the spike higher revealed the expectations held out for Fridays
employment numbers.

Equities – S&P 500

Strong earnings reports released in the early hours of Wednesday morning could not
hold back the tide of pessimism that overtook the equities markets only minutes
after the open. At the outset of the day, strong earnings reports from MasterCard
and Burger King gave the S&P 500 a quick bump. A 1.8 point gap in the index
provided the momentum to drive the benchmark all the way to the sessions high
1,381.58 by 14:45 GMT. From there however, the drop was consistent and picked up
steam as time went along. Though the turn happened just before the days economic
releases, the pessimism aroused by the data points was undeniable. Dropping almost
non-stop through the session, the S&P 500 plunged 1.1 percent from its intra-day
high to its low at 1,366.26. Compared to the limited follow through in the dollar
and bonds, equities already had the kindling needed to facilitate a strong sell off.
First of all, the index hit a new high only four sessions ago. This has led
many traders to see stocks as far oversold, while profit taking and trailing stops
could easily act as the accelerant to the right spark. A spark was what was
realized in todays dour economic data. Nationwide factory health plunged for the
month of October, now barely in expansionary territory. This will no doubt weigh on
revenues from the manufacturing related sectors, but will also have implications in
weaker capital investment that pads the quarterly earnings of other firms providing
machinery, technology and other support services. The more troubling release
however was the housing numbers. Both pending home sales and construction spending
slipped for their respective months, reinitiating the bearish sentiment for the
housing market that was showing initial signs of stalling in reads for the month of
August. As this market accounts for the majority of American consumers wealth,
the implications were significant for demand going into the holiday season. By the
end of regular trade, the S&P 500 closed 10.13 points from the open at 1,367.81, 0.7
percent off the open.

Regards,

John Kicklighter
Forex Capital Markets
32 Old Slip, 10th Fl
New York, NY 10005
Email: jkicklighter@dailyfx.com

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