Despite the threat of systemic risk from looming collapse of China's Evergrande, anticipation of seasonal market slack and sudden rebound of US retail sales, risk appetite remains surprisingly robust. On Thursday, major US indices posted minor losses, while today the decline in major US and European indices does not exceed half a percent.
The rally in equities is partly driven due to continuing upward revision of firms’ earnings estimates. Isabelle Schnabel, a member of the ECB, also hinted at this, although her statement concerned only the European equity market. A strong trigger for equities correction is yet to emerge despite a number of small catalysts for sales.
The risks of default by the Chinese real estate developer Evergrande have also not yet found a way to spill over to foreign markets. The PBOC has dramatically increased the short-term borrowing capacity of the banking sector through 7- and 14-day repo operations to RMB 90 billion, easing strains on banking sector from possible bank runs.
The key risk today is the report on consumer sentiment from U. Michigan for September. Interestingly, the index fell to 70 points in August, but this did not affect US retail sales in any way. Yesterday's data bewildered investors as despite numerous signals for a fall in retail consumption, it managed to rise by an impressive 0.7% MoM. In addition to consumer sentiment, the markets will follow the dynamics of household inflation expectations, which stood at 2.9% last month. A rise above 3% could push up the yields on bonds and the dollar, since despite the Fed's patience with regard to current inflation, the rise in inflation expectations is unlikely to leave US Central Bank officials indifferent.
The dollar index was torn apart by controversies this week, but the price consistently set highs above previous ones, and support was concentrated in the horizontal area of 92.40-92.50, which may indicate a predominance of buyers ahead of the Fed meeting next week:
This is quite logical, because the Fed is going to reduce pace of QE, which was repeatedly hinted at by the Fed officials, which could also be inferred from positions of other central banks, including doves like the BoJ and the ECB.
The combination of strong US retail sales and weak UK fundamentals for August pushed GBPUSD back towards the near-term support line:
Despite positive forecasts, retail sales plunged 0.9% MoM. The Fed meeting will take place earlier next week than the BoE and given the expectations for QE announcement, the pair has chances to roll back lower towards 1.3750 in the first half of next week.