There's starting to be an increasing amount of talking in financial markets circles about what's happening in China and the potential implications it has for the global markets and economy. One of the guys I work with (bond guy, but he trades stock index futures for his own account) has been all over the poor performance in the Shanghai index. His view is that it's a major negative indication for the global economy in 2012. Let's take a look.
Here's a monthly chart of the Shanghai Composite Index going back to 2004.
There has obviously been A LOT of volatility in this market over the last few years. Things have calmed down considerably in the last couple, though. That sets up an interesting situation where the Bollinger Bands have gotten pretty narrow. That's usually a sign of a market getting ready for the next big directional move. The width of the Bands doesn't tell us direction, but the fact that they are point lower is a negative.
More significantly is the break of the 2010 lows. We saw a dip below those lows back in October, but with a rebound. Now the market is starting to extend down below there. There isn't much in the way of support until the index gets down near the 1800 level. That's a drop of about 20% from current levels.
The thesis of my colleague and others is that as goes China, so goes the global economy, especially the global industrial commodities (copper, oil, etc.) which feeds that country's development. Therefore, if the Shanghai index is headed for 20% or more in losses over the next few quarters that forecast performance in the Chinese economy, there could be a major decline in those markets. This has implications in the forex markets. It means downward pressure on the so-called commodity currencies (AUD, CAD, etc.), as well as more emerging market currencies, and probably upward pressure on the USD.
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