Global Macro: China's Ripple Effects

NEW YORK (TheStreet) -- The Chinese economy continues to turn out underwhelming data and show signs of a weak recovery.

Urban fixed investment, a main economic driver, came in weaker than expected Monday, followed by a miss on the Chinese industrial production measure. It doesn't look as if China is in free-fall mode, but recent data haven't been promising.

Also, cash flowing into China on speculation that the yuan has further room to climb could be damaging. The yuan has risen lately, and the Chinese central bank has its hands tied somewhat. If it cuts rates and depreciates the value of its currency, it invites more speculative flows into Chinese property markets, already at record highs. A property bubble could be disastrous for China, but the country needs more growth.

Below is a chart of FTSE China 25 Index Fund over Total World Stock Index ETF. The pair shows the relative weakness of China as its economic picture has deteriorated.

Money has taken flight from China's battered markets and made its way into American and Japanese equities. Look for a pickup in Chinese economic data to reverse the direction of its equity market.

One consequence a weak Chinese economy is a weak Aussie dollar. The chart below is of CurrencyShares Australian Dollar Trust over DB USD Index Bullish. This pair measures the strength of the Aussie dollar in terms of U.S. dollars.

The pair's recent fall begins with China. As stated above, the Chinese economic picture has deteriorated. Poor numbers have weighed heavily on Australia, a major Chinese exporter and commodity producer.

China's weakness prompted a rate cut from the Reserve Bank of Australia. Similarly, weak commodities prices have kept the pair from showing any signs of strength. A number of factors have to take shape before the Aussie dollar reverses trend.

As a further testament to commodity market weakness, the chart below shows SPDR Gold Trust over an equal weight DB Commodity Index Tracking Fund. The pair took a nosedive after weak industrial and inflation data out of Europe and China a few weeks back.

The stronger U.S. dollar, based on better employment and retail numbers, has subdued gold and commodities. Weaker commodities and a generally stronger U.S. dollar bring the earlier chart of AUD/USD inevitably lower.

The situation in the South Pacific remains complex, and all of these relevant factors must be monitored to determine when the trends may change.

The last chart is of Utilities Select SPDR over S&P Equal Weight ETF.

The chart gives a good idea of U.S. equity market fear and volatility.

The pair trades are strongly correlated with volatility and are generally inverse to the S&P 500. The chart is moving toward a bottom, which may signal that equity markets are too complacent.

Equity markets have made new highs and been the market of choice for global investors over the past few weeks, which may mean it's time for a pullback. The lack of movement following better-than-expected retail numbers and the low trading volume could signal waning momentum in U.S. equity markets.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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