China continues to be a potential risk factor in the background of a benign market environment for U.S. stocks. Retail sales and industrial production data releases overnight both missed expectations. A 10 year chart of these two data sets illustrates the relative weakness in the Chinese economy compared to the past decade.
First retail sales growth was its lowest since 2005:
Industrial production growth was its lowest since 2009:
Chinese policymakers have been managing expectations lower for market participants, attempting to mitigate the market’s reaction to slowing growth. However, price signals in various markets are starting to indicate concern, most notably copper this week.
As has been widely mentioned this week, the front month copper futures contract in the U.S. sits right at multi-year support:
Other industrial commodities with heavy Chinese demand, such as iron ore, have also moved substantially lower to start 2014. Whatever the view on the viability of Chinese economic data, the negative price action in industrial commodities is signaling real demand weakness, especially considering the overall strong backdrop for most commodities so far in 2014.
Chinese equities have been persistent under-performers compared to global equities for much of the past 2 years, and 2014 is off to another weak start. The Chinese stock etf FXI is approaching its 2 year low near the $32 level (marked in red):
Emerging market weakness is of course not exclusive to China, as Russia and Brazil continue in downtrends as well. Those three countries together account for about $12.5 trillion in annual GDP, or about 75% of U.S. GDP (and 15% of global GDP). That is why many macro market observers have been surprised by the resilience of developed market stocks in the face of an obvious demand contraction in a large portion of the world.
Regardless, current data and asset price trends do not indicate any imminent healing in those big three emerging markets. The big question is not whether assets directly related to them will be affected – that has already occurred. The main question for global markets is whether assets indirectly related will reflect that weakness in the coming months.