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China’s Stock Market Passes US as Leading Indicator

Wednesday, 4 Aug 2010 | 12:43 PM ET

China may be the second biggest economy in the world behind the US, but it is No. 1 in terms of influence over global stock markets, analysts said.

“The Chinese equity market has shown signs of ‘leading’ global equity markets at turning points over the past three years,” wrote Geoffrey Dennis, Citigroup’s emerging markets strategist. “As a result, the 13 percent rally in the Shanghai Composite since early-July has been a major support for improved overall global sentiment over the past month.”

It’s only natural China’s stock market would take a leading role following structural changes such as a jump in listings and the allowance of short sales. After all, the economic influence speaks for itself. Among other things, China is the biggest consumer of energy products, accounts for 70 percent of iron ore demand, and in 2009, became the No. 1 auto market, according to analysts’ reports.

The Shanghai Composite Index has led the US market back from its 2010 low. It’s no coincidence that the leading US stocks during this comeback have come from the stocks in the industrial and raw material industries such as Caterpillar and Freeport-McMoRan . Ford shares are up 30 percent in one month.

“China’s rapid growth in auto sales is merely a reflection of the rise of middle class consumption patterns,” wrote Marshall Adkins, Raymond James energy analyst. “Add in increasing Chinese trucking, petrochemical and aviation consumption, and total Chinese oil demand growth in 2011 should be well north of 500,000 barrels per day and could drive over half of the global oil demand growth next year.”

It’s no coincidence then that oil topped $80 this week before retreating today.

The iShares FTSE/Xinhua China 25 Index , an ETF traded here on the NYSE, is supposed to be a direct play on the Chinese market, but it has underperformed China’s local market over the past month. The ETF contains only the large Chinese stocks that are listed as ADRs on US exchanges. What this data shows is that you may be better off buying a US index fund, industrial stocks or a broader emerging market ETF if you believe China is going higher. Citigroup sees the Chinese stock market rising five to 15 percent higher by the end of the year as fears of an economic slowdown are priced in.

"Based on a 'no double-dip' scenario, solid growth in emerging markets, low interest rates 'for longer' and attractive valuations, we remain bullish on emerging market for the long-term, including Chinese equities," wrote Citi's Dennis.

The closing bell of the New York Stock Exchange used to ripple through the rest of the world, dictating trading in Australia, Asia and Europe that followed it. No longer. The US traders’ day may be decided before he or she even wakes up.

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Trader disclosure: On Aug 4, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour owns (AAPL), (BAC), (BX), (GOOG), (INTC); Terranova owns (AMZN), (AKAM), (APA), (AGU), (ADBE), (BAX), (BBY), (BMO), (C), (COP), (CVS), (EMC), (FCX), (GOOG), (GS), (JNPR), (JOYG), (KOL), (KR), (MMM), (MOS), (MSFT), (PCP), (PEP), (PFE), (POT), (RIMM), (TER), (SKX), (SU), (UAUA), (WYNN), (XBI); Finerman owns (AAPL); Finerman's firm owns (ARM); Finerman's firm owns (LEA); Finerman & Finerman's firm owns (RIMM); Finerman's firm owns (WMT); Finerman's firm owns (DAN); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Pete Najarian owns (C); Pete Najarian owns (CTRP); Pete Najarian owns (ALL); Pete Najarian owns (GS); Pete Najarian owns (MGM); Pete Najarian owns (PFE); Pete Najarian owns (RSH); Pete Najarian owns (ETFC)

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