Global Macro: Slowing China Growth Dents Markets

TheStreet.com

NEW YORK (TheStreet) -- Last Friday markets cheered as U.S. employment data hinted at continued Fed easing. Over the weekend, however, the release of important Chinese data shook East Asian markets.

Releases ranging from inflation to export data showed that the global economy is still not strong enough to thrive without central bank easing.

As economies gradually recover, China will follow in stride, but until then, talk of tightening monetary policy in any region of the world will incite volatility.

The first chart below is of FTSE China 25 Index Fund over Total World Stock Index ETF. The pair measures the relative strength of Chinese equities versus a broader global market. The pair has been trending downward for the past couple years, and with the underperformance of this past weekend's data, it broke sharply lower.


The relative weakness of Chinese equities is due to the continued weakness of the global economy. Europe and the U.S. are key trading partners with China, and their declines have kept investors wary of Chinese growth. Until the U.S. and Euopean economies pick up, the pair will continue its trend lower.

The next chart is of CurrencyShares Australian Dollar Trust over CurrencyShares Swiss Franc Trust. The pair signals the strength of sentiment surrounding Chinese markets as viewed through currencies.

Most analysts like to look at the Aussie dollar versus the yen as an indicator of the global economic outlook. But due to the volatility of the yen recently, I chose to go with the Swiss franc, another safe-haven alternative.

As concerns have risen over the health of China and its demand for resources, the Aussie dollar has shown weakness. If the global economy is weak, then Chinese exports will fall, as seen in this past weekend's data.

Fewer exports lead to lower demand for resources, a major revenue driver for Australia. The currency cross below depends on an improvement in global demand. Until China begins to move higher, this pair will remain at depressed levels.

The last chart is of DJ-UBS Copper Total Return Sub-Index ETN over an equal weight DB Commodity Index Tracking Fund. The pair measures the relative strength of copper against a basket of commodities.

The price of copper largely depends on demand in China. Chinese industrial companies consume large amounts of copper, and when demand softens, the price takes a dive. This industrial metal has underperformed recently, just as the charts above have.


A pickup in output for Chinese industrials will lead to an increased demand for copper, and this chart, along with the other charts tied to Chinese growth, will begin to trend higher.

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.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

Rates

View Comments (0)