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China Is Quietly Unraveling as the World Frets Over Europe

Breakout

As we limp towards the finish line of the third quarter, we're on track for what could be the fifth consecutive month of declines on the S&P 500. Stocks are down roughly 5% for September and commodities have been among the weakest performers with Copper down 25% plunge in the past 2 weeks that have pushed it to a 14-month low.

But "Dr. Copper" is not alone. Others tied to economic growth are feeling the pain. Silver, Coffee, Corn, and Wheat are all down more than the 10%. If you're looking for a culprit, you need look no further than China, where Michael Darda, the chief economist at MKM Partners, points to copper and a hole host of other warning signs.

"We are seeing signs of stress. A big slow down in Chinese liquidity indicators, China's yield curve spread has collapsed," Darda says in the attached clip. "We're seeing a tone and tenor to the forward business cycle indicators in China that we haven't seen since 2008."

On the equity side, September has been brutal for China. As the world worried about Europe, the benchmark Shenzhen Index quietly shed 12% and is now wallowing at a 14-month low. Compare that to a 3% haircut for the STOXX50 in Europe this month and the trouble-ahead story starts to gain traction.

"The recent trends are a sobering setback to the view that China was just gonna motor on through and continue to be the locomotive of global growth," says Darda.  He says 9% growth forecasts for China are "several hundred basis points" too high and points out that a technical recession there is not necessary to inflict serious damage on commodity markets, emerging markets and large cap multi-nationals.

As for what is working now, Switzerland's SMI (^SSMI) looks like it will be able squeak out a positive September but Turkey's ISE 100 is the best in the world right now, with a 10% gain.