Looking For Cues

Putin put his saber back in the scabbard. Or so he says. One way or another, as the elections in Ukraine approach, (May 25), the rhetoric has been turned to "keep warm." Cooler, business heads seem to be prevailing.

This week is also a quiet week for data in the U.S. following a flurry of releases last week that left us pretty much where the week began. Tapering will most likely continue. Interest rates will remain stable. Keep in mind that even when QE3 goes to $35 billion per month, that's an annualized purchase of $420 million.

Inflation showed a producer-prices blip, but as we said on that occasion, one month does not inflation make. We'll have to see how it translates to consumer prices first, anyway.

Arriving on the radar scene, though, is China.

China's adventures in the South China Sea are earning them the enmity of a half dozen countries, none of which do the Chinese want to really reckon with. Japan, Vietnam (as France and the United States discovered painfully), South Korea and the Philippines are the vanguard of the parties feeling injured. Australia, while remaining quiet, is certainly also on guard.

Except for Vietnam, all the east Asian countries aligned in the struggle with China over unproven oil are close allies of the United States. If the situation boils over, Vietnam would find the U.S. a de facto ally.

The Chinese are acting in an incredibly short-sighted manner. That seems to be par for the course for the Asian giant these days.

The indictments of five military officers from that country involved in industrial espionage is a very serious matter. China needs to watch its step.

A country that cannot innovate because of a closed loop political and social system will never win the long-term battle. Stealing industrial and business secrets tells us that China has given up already.

If the United States were to punish China in a serious manner - by restricting trade - China would be an enormous loser. Its trade surplus with the U.S. runs slightly north of $25 billion per month. It would come at a very inopportune time for China since U.S. manufacturing is nearing even cost for cost on manufacturing goods. Parts of Europe are not far behind.

The fact of the matter is, too, that what the U.S. exports to China, while far smaller in dollar value, is of much more import to China's strategic economic interests. China sells the U.S. low-cost, low-tech products for the most part. (Granted some international high-tech companies have plants in China but the bulk of Chinese products are low tech.)

If you were to lump the North American markets and the southeast Asian markets together, China's losses could be enormous.

China's reactionary, go-it-alone moves in the South China Sea remind us of old U.S. foreign policy in Latin America. It's ham-handed, oblivious of national feelings in the affected countries and practically guaranteed to make long-term enemies. It took the United States 100 years to learn the lesson.

But then again, Americans were not facing technologically advanced, militarily capable countries with powerful allies. China should tread lightly all around.

As always, wishing you good trading,