Repeat After Me: China is the New Europe

By which I mean that it is no longer necessary to be elated by European bailouts and despondent about European credit downgrades – because the market is now reacting to news and action out of China more than anything else.  Europe is so 2011, the Vix barely registers so much as a grunt on headlines that used to turn the NYSE into a shooting gallery (witness Friday’s action).

On the other hand, China printed an 8.9% growth number and the futures shot higher here and even in Europe, just 36 hours since S&P cut anything that wasn’t nailed down in the EZ.  And a scant 12 hours after the bailout facility itself was downgraded, the European stock bourses (yeah, I said Bourses homeboy) are all up (UP!).

Can you imagine a reaction like this just three months ago?  When we were fire-drilling out of stocks on just the rumor of a rumor of a downgrade?

Probably not, but that’s what is going on. The US stock market can shrug off Europe going forward so long as:

1.  Our data remains blah but firmly blah (un-recessionary)

2.  China doesn’t spit the bit

3.  No one blows anything up in Iran

When you think about it, this makes sense – the Shanghai Composite has been an excellent leading indicator for the S&P 500 directionally speaking for awhile now.  There’s also the whole “Dr Copper” thing – and the Doc has clearly moved his practice to China anyhow.

We now have sufficient evidence before us that Europe will suck this year (recession likely) but can mostly stay together (for the kids).  What we do not have sufficient evidence about is whether or not China will hard land – so on good data from the East we will rally and on bad data we will be crunched.  Call it the New Uncertainty.

So keep half an eye on Europe and the other full eye on China – I believe that to be the key to getting the first quarter right.


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