This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Global Macro: Dose of Chinese Medicine

NEW YORK ( TheStreet) -- If the potential removal of U.S. monetary stimulus wasn't enough of an excuse to sell riskier assets, this past weekend The People's Bank of China tightened liquidity measures, and on Monday, equity, commodity, and currency markets weakened to levels not seen since the beginning of the year.

The first chart below is of iShares FTSE China 25 Index Fund (FXI) over Vanguard Total World Stock Index ETF (VT). The chart measures the relative strength of Chinese equities versus a basket of world equities.

The pair has broadly sold off through much of 2013 as growth concerns, as well as structural changes to the Chinese economy, sent investors fleeing China-linked assets. That led to weakness in commodities and commodity-linked currencies. As demand for raw materials wanes in China, developing market exports decline.

Tighter liquidity measures enacted by the PBOC came in the form of allowing the seven-day SHIBOR, the benchmark rate at which banks in Shanghai lend to each other, to rise toward unstable levels around 12%.

The Chinese government is looking to shift policy, hoping to avoid speculative lending. It also is trying to create a more consumer-driven economy. That is no easy task, and alongside the removal of U.S. stimulus, global markets could see heightened volatility and relative weakness in Chinese equities over the next couple of quarters.

The next pair is of CurrencyShares Australian Dollar Trust (FXA) over CurrencyShares Swiss Franc Trust (FXF), which measures the strength of the Aussie dollar over the less volatile Swiss franc. Observing the price action of a commodity-linked currency over a traditional safe-haven currency allows an investor to gauge risk sentiment in global markets.

The chart below shows extreme underperformance of the Aussie dollar over the past three months. A stronger U.S. dollar has weighed on commodities, making them cheaper in dollar terms, which leads to price declines

Similarly, the lack of growth in China has led many to give up on fearing inflation and thus dump inflation-protected assets such as Treasury Inflation-Protected Securities and gold. When inflation expectations retreat, commodity-linked currencies show weakness.

With almost every developed economy releasing tepid data, it looks as if a meaningful return to inflation and thus commodity-linked currencies will not occur until late 2013 or early 2014.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
FXF $101.04 -0.51%
FXA $76.56 -1.40%
FXI $44.74 3.80%
VT $62.04 0.71%
RSP $81.51 1.10%

Markets

DOW 17,989.19 +276.53 1.56%
S&P 500 2,084.53 +23.51 1.14%
NASDAQ 4,936.9260 +45.7070 0.93%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs