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Global Macro: Europe and China Diverge

NEW YORK (TheStreet) -- Based on fourth-quarter data, Europe and its peripheral countries are leading the world higher in 2014 while China is lagging.

Services and manufacturing data in the eurozone have improved markedly since the recession of 2008, and the peripheral countries that were of the most concern during the crisis are outperforming expectations.

There had been fears of disbanding the euro currency and double dipping back into a recession, but the solid string of data late last year has proven Europe is becoming a leader in a global rebound.

Growth in both services and manufacturing indicate that Europe should post strong gross domestic product numbers this year, which would lessen the region's debt burden.

The strong numbers in the periphery countries have caused sovereign bond yields in Spain and Italy to fall and the spread between those bonds and the German Bund yield to contract.

That is positive for the global economy, but weakness out of China has left some investors cautious.

The world's second largest economy has underperformed in both its services and manufacturing sector recently. China consumes and produces large quantities of products, and weakness at home reverberates across the world.

Continued weakness in the country would weigh on emerging markets and lead to financial market consolidation as investors try to make sense of the true health of the global economy.

The chart below is of both iShares China Large-Cap (FXI) and iShares MSCI Europe Financials (EUFN). Strength in the European index proves that a legitimate recovery is under way.

Both indexes began to trend higher in November, but recently Chinese equities have fallen because of China's weak economic performance, while European financials have risen.

As long as Europe and China continue to diverge economically, their equity indexes will follow. In the end, further Chinese weakness in 2014 will drag all equity indexes lower.

FXI 6 Month Price Returns ChartFXI 6 Month Price Returns data by YCharts

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

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


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