Trader Talk

China weakness calls into question stock valuations

Ian Waldie | Bloomberg | Getty Images

The biggest drop in Chinese exports in 4.5 years...the biggest trade deficit in two years in China...had a clear impact on the stock market today.

Commodity stocks of all stripes, along with the stock markets of countries with significant commodities business (China, Brazil, Australia, South Africa, Peru, etc.) were all down. Europe also closed down, with the German market down roughly 3 percent in the last two days.

Of course, many have said this was part of a predictable cycle of building inventory going into the Chinese New Year, but the concern is that recent weak data there supports a broader slowdown story.

There are reports that inventory continues to build, vague rumors of banks not getting paid from the mills, iron-ore traders not getting paid. Banks said yesterday that they were going to start intervening at the ports. Buyers want extensions to the banks and the banks are refusing.

The concern is that China GDP is not going to be 7.5 percent, it's going to closer to, say, 6 percent.

China, remember, accounts for the majority of world steel production, so a drop like that is significant for commodity producers.

Higher cost producers hit hard. When markets have over capacity, you look at the higher cost producers, and many of them are in the United States. Cliffs Natural Resources (CLF), for example, makes no money with iron ore at $100, which is about where it is now. That's why U.S. producers are getting hit so hard.

Other iron ore producers in other countries can make money at lower prices. Australia, for example, has a weaker currency, lower shipping costs, and a general lower cost structure. So companies like BHP Billiton (BHP) and Rio Tinto (RIO) all have lower costs.

This issue of China growth is part of a larger conversation. Remember, stocks are at all-time highs. The primary argument to keep stocks going in 2014 is a lift to global growth, with the U.S. helping to lead the way.

But if you take out China, that makes the lifting much more difficult.

And it calls into question stock valuations worldwide.

By CNBC's Bob Pisani