A wave of risk aversion caught traders by surprise last week, sending benchmark equity indexes and sentiment-sensitive currencies lower. Investors weighed Covid concerns and Chinese contagion risks against a faltering global economic recovery. Growth-sensitive technology stocks led losses on Wall Street[1], with the Nasdaq[2] 100 Index dropping 0.69% on the week.
Evergrande, a Chinese property titan, is under severe stress, threatening the broader Chinese real estate and financial markets. The Chinese company is under $300 billion in debt, making it the world’s most indebted real estate company. Credit markets are in disarray over the contagion risks, with big banks suspending loan issuances to housing developers in China. Chinese retail sales for August missed expectations, adding to the sentiment headwinds.
The safe-haven US Dollar[3] saw inflows through the week as traders digested the fragile global risks factors, with the US Dollar DXY Index gaining 0.64%. Risk-sensitive currencies faltered, including the Australian Dollar[4] and New Zealand Dollar[5]. Treasury yields climbed amid strong domestic data prints. US retail sales and consumer confidence measures ticked up from July, showing some relative strength in the economy. Gold[6] fell for a second week against the stronger Greenback, as well as fears over incoming Fed tightening.
This week brings a heavy economic docket, with several high-profile central bank decisions. The Bank of Japan (BoJ), Federal Reserve, and Bank of England (BOE) will release interest rate decisions. The BoJ may downgrade its economic outlook while keeping negative rates in place. Later in the week, some expect the Federal Reserve to detail balance sheet tapering plans. Finally, the BOE is likely to leave in place its Covid stimulus package amid a slowing economy.
