Shanghai Trades Getting Noisy (FXI, EEM, FXC)

The prospect of a weekend revelation of higher inflation in China is already being priced into stocks in Shanghai. What is amazing is how much chatter on Wall Street this is provoking.

Chinese stocks have moved 2.3% lower over the last two days, largely on growing acceptance that Friday night’s November inflation numbers will reveal continued price pressure — and possibly trigger a “surprise” interest rate hike on the horizon.

But that story, while serious, does not appear to explain all the rhetoric and nerves out there. Since when is a 1.3% loss a “bad” close or a disaster? This is China and volatility is par for the course.

To explain the angst, some are pointing to the start of the annual Central Economic Working Conference, which gives Beijing’s policy leaders a forum for settling the coming year’s economic targets.

In Shanghai, watch the 2,800 level on the composite index. That is where the 200-day moving average is trending. Currently, this line is feeding some support for the Chinese market, but with the comp currently at barely 2,810, a test could come any day now.

If Shanghai cracks below that level, the 200-day line turns back into resistance, as it was for the summer and much of the fall.

Meanwhile, the big banks are moving up their inflation forecasts for China. Some like Credit Suisse are betting that the weekend’s inflation numbers drive the Peoples Bank of China to make a lot of rate hikes over the next year — rates could climb 2% to 2.25% in the next 12 months if prices keep climbing.

If Shanghai tests resistance, bad news for ETFs like the iShares FTSE/Xinhua China 25 Index (NYSE:FXI):

And as Shanghai goes, the  iShares MSCI Emerging Markets Index ETF (NYSE:EEM) often follows:

Meanwhile, the banks are scaling back their targets for the yuan. Credit Suisse, for example, now only sees 4% to 5% appreciation for the Chinese currency over the next year. This should restrain the upside for the CurrencyShares Canadian Dollar Trust (NYSE:FXC) despite any rate hikes:

Written By Tim Seymour From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.

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