The market will open with Trichet’s speech and the clues regarding a September rate hike

Event risk on Monday will be contained to US housing data, and the release may only exacerbate current risk aversion trends. The National Association of Realtor’s measure of existing home sales during the month of July is anticipated to have fallen back 0.9 percent to a nearly five-year low of 5.70M. Such a weak figure will not come as much of a shock to the markets, as the dour status of the US housing sector is well known, especially when it comes to the sub prime mortgage crisis that has sparked fears of a global liquidity crunch.

While Friday’s significantly stronger-than-expected new home sales report for the same month spurred optimism that declining prices are finally bringing homes to a more affordable level, there are other factors to consider. First, new homes only represent a small portion of the housing market as whole, with existing home sales making up 87 percent. Also, this survey looks back to activity that is almost 2 months old, which was well before the current depths of the credit crunch and before standards for getting home financing became much tighter.

Lenders and many borrowers are under increasing strain as the fallout from the collapse of the sub prime mortgage market spreads. Mortgage applications fell 5.5 percent in the week ended Aug. 18, according to the Mortgage Bankers Association.

The sub prime crisis is compounding consumer concerns about falling home values and elevated energy costs. Sentiment among U.S. consumers dropped in August to the lowest level in a year, according to an Aug. 17 report from the University of Michigan.As a result, we are likely to see sales figures dip again in the coming months, increasing the risks for a disappointing existing home sales report.

The Fed cut the rate on direct loans to banks this month, trying to increase liquidity as investors avoid assets linked to sub prime mortgages. Fed officials left the benchmark federal funds rate unchanged at 5.25 percent. Interest-rate futures on Aug. 24 showed traders reduced bets that the Fed will lower its overnight lending rate between banks by a half-percentage point to 4.75 percent by its Sept. 18 meeting. Futures showed a 60 percent chance of a cut to 5 percent, compared with 40 percent odds a week earlier. Forty percent were betting on a cut to a 4.75 percent funds rate by then, down from 60 percent the prior week.

The Fed's view that downside risks had grown may have signaled a reversal from its Aug. 7 outlook that inflation was the greatest risk. Minutes of the Federal Open Market Committee's most recent meeting will be released on Aug. 28.

Interest-rate futures on Aug. 24 showed traders reduced bets that the Fed will lower its overnight lending rate between banks by a half-percentage point to 4.75 percent by its Sept. 18 meeting. Futures showed a 60 percent chance of a cut to 5 percent, compared with 40 percent odds a week earlier. Forty percent were betting on a cut to a 4.75 percent funds rate by then, down from 60 percent the prior week.

As for the opening Asian and European sessions there's every indication that we'll see those markets follow thru off Friday's housing and production numbers and that means carry trades will go right along with them as they always do although there is a bank holiday in the U.K. on Monday. Trichet's speech will be observed for clues regarding the September rate hike. No central banker wants to be viewed as altering real economy policy based on liquidity issues. A true quandry exisits here: raising rates at this time is a somewhat risky proposition, while leaving rates unchanged in September may indicate to market participants that the ECB see's things as being worse then they have let on up until now.