China Markets Offset Revisited: Decoupling

Several times over the past months we have taken a look at the relationship of the equities in China (represented by the Shanghai Index) and the S&P 500. The premise we started with was that the initial mass stimulus injection by China into their economy was 120 days prior to the first package introduced to the U.S. during the recession.

On a relative basis, China’s stimulus was much lager and therefore more impactful on the markets. Even so, there was a good correlation of markets if we offset the two by the 120 days.

In fact, there was a relatively tight pattern that was able to be somewhat predictable, until this summer.

As China tightened in a effort to control inflation, the U.S. continued on a very easy monetary policy. The difference can be easily seen in the reaction of the two markets. Unless something changes, it would appear that the pattern is now broken.