Will S&P's China Downgrade Matter?

The US dollar gave back some of its gains on Thursday but risks in China are rising after S&P downgraded its sovereign rating to A+ from AA-. The pound was the top performer while the Australian dollar lagged. Japan is on holiday. British PM Theresa May's speech about the EU on Friday followed by German elections on Sunday. A new Premium video was posted following the post-Fed moves in FX, indices and metals.

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China undoubtedly has a debt problem but it's had one for years without causing any real spillovers or consequences. It's one of those looming problems that's impossible to ignore but equally impossible to bet against.

A rarely-talked-about driver of western growth in the past 30 years is credit. It's a magical wealth creator until exhausted and that's what happened in the US financial crisis. China has been endlessly extending credit to companies and individuals and it's helped to pull hundreds of millions out of poverty.

So far bumps in the road have been handled by central planners but virtually everyone believes there will one day be a true hiccup. Whether that's next month or next decade is the impossible question to answer. Other catalysts are needed.

When trouble erupts, it's not likely to be from a downgrade or even a shift in the market. Like we saw two years ago, it's likely to come on some kind of change in policy. For every percentage point higher in growth or incremental rise in credit, the stakes are raised for regulators and economic planners.

That's why we will be watching the once-every-five years Congress that opens on Oct 18. Murmurs from China are that a theme will be stability. That's something we've heard many times before and lends itself to mitigating problems, rather than tackling them.

In other news, the USD rally failed to follow through Thursday. That was despite a fall in initial jobless claims to 259K from 302K in the aftermath of Harvey. The Philly Fed also improved to 23.8 from 17.1.

Perhaps the most-telling indicator was eurozone consumer confidence. It rose to -1.2 from -1.5 – that's the best since 2001. After falling as low as 1.1853 Wednesday, the euro slowly climbed to 1.1938.

Expect a quiet wind down to the week in Asia with Japan on holiday.