Every day I watch the relative performance of various equity markets. Since April, the Shanghai index has been the last to rally and the first to go down.

$SSEC Shanghai Composite Index

click on chart for sharper image

On recent news China Cuts Bank Reserve Ratios by .5 Percentage Points; Central Banks Cut Rates on Dollar Swap Lines global equities soared.

However, the Shanghai stock index stands alone in failing to hold the gains, a pattern I have seen and commented about for months.

Note the Shanghai Index was the last global index to rally in late October. Also note that in November the index gave up nearly the entire October rally.

Yesterday the index gapped up strong but gave back much of the gains.

The night is young, but so far today (morning in China) the index is strongly in the red, down 34 points (1.44%) to 2,352 as of 11:12 PM EST.

Chinese Manufacturing in Contraction

Earlier today I commented China Manufacturing PMI Plunges to 32-Month Low of 47.7; Reflections on Stocks Rallying on “Bad News”

Yesterday stocks rallied on news China Cuts Bank Reserve Ratios by .5 Percentage Points and Central Banks Cut Rates on Dollar Swap Lines.

However, the reason Chinese central bank reacted is hugely deteriorating conditions in China. The reason the Fed reacted is hugely deteriorating conditions in Europe.

Equities have rallied on reported “good news”. However the first irony is the global economic picture outside the US is horrendous. The second irony is bottoms are formed on bad news (and tops on good news), but central banks intervention is really bad news widely recognized as good news.

Decoupling in Reverse?

The equity markets can rally all the want on deteriorating fundamentals but it will not change the facts one bit.

Europe is in recession, Australia is in recession, Chinese manufacturing is in recession, and the US cannot carry the global economy on its own.

Note the irony in that last sentence. Peter Schiff and others mistakenly thought in 2008 the global economy would decouple from the US economy. The idea was silly then and it is silly now (in reverse).

The US will not decouple from the global economy. China is slowing and faces a hard landing, Europe is in recession, and a Fed inspired rally in commodities will end in pain given the slowdown in China and Europe. Gold may be the exception.

Mike “Mish” Shedlock
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