Global Macro: The Effects of Slowing Chinese Output

NEW YORK (TheStreet) -- Slowing Chinese output could continue to weigh on PowerShares DB Commodity Index (DBC) and iShares MSCI Emerging Markets (EEM) in coming weeks.

The figure for Chinese trade balance for January will be released Tuesday night, and should show that the export surplus has dipped below $20 billion for the first time since October. The trade figure influences both commodity prices and business activity in emerging markets.

China demands large quantities of raw materials for its manufacturing and service sectors, and a decline in domestic output weighs on demand for energy and for industrial metals, dragging the prices of each lower.

Developing economies tend to operate at the beginning of the stream within the Chinese production line. Whether an emerging-market country exports resources or provides labor, the majority of its revenue is derived from output to China.

When the world's second largest economy misses on a data forecast, it generally leads to weakness in the emerging-market equity index. The selloff in developing-market equities over the past two months was partly the result of weak factory activity and economic growth figures out of China for December.

The iShares China Large-Cap (FXI) fell alongside its developing economy peers, but looks to have stabilized at the moment.

Investors now await the trade figure on Tuesday and commentary on U.S. policy from Federal Reserve Chairwoman Janet Yellen later in the week before they decide whether Chinese equities are undervalued.

FXI ChartFXI data by YCharts

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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