With French elections that are now finally over, the market enjoys a nice rally. US indices reach new highs almost every day, while the market volatility has fallen to the lowest level since 2016. It seems that there’s nothing to worry about, but is it justified?

Topping the list of market worries is China, which has been on the back burner for months now. Some weaker-than-expected data, however, has put spotlight on the country’s economy. Last week, PMI manufacturing data showed signs of slowing, and China’s trade data was weaker than expected, with misses both on imports and exports. Chinese inflation data is due tomorrow.

Commodities have sold off on concerns. Copper was down about 3 percent last week amid concerns about China, and off another 1.4 percent Monday. It was steadier on Tuesday. Some of this might be some warning signs that China could be the next thing that would throw the market a curve ball. If the Chinese economy loses so much steam that its currency weakens a lot, and commodities continue to sell off, it could be a negative for other markets. The same situation was seen last year and caused a tremendous sell-off on financial markets.

First signs of worry could be seen on the China’s stock exchange. China’s Shanghai index has been under pressure but it closed slightly higher Tuesday. Chinese officials have created some of the angst themselves. They have been trying to squeeze excess from the financial system with a wave of regulations that have rippled through markets. President Xi-Jinping has called for financial stability and warned finance officials not to miss a single “hidden danger.” 

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 Shanghai stock exchange declined recenly, but the market ignored the move. source: Bloomberg

On the other hand, some risks have abated.  President Donald Trump has said he would not call China a currency manipulator, as he vowed to do when he was running for office. China is also clearly a key in potentially resolving tensions over North Korea’s nuclear program. Geopolitical risk is one of those black swans where you can’t predict the timing. You just watch. In the case of North Korea, what we’re watching more carefully is whether there is another nuclear test. As for now it seems that the situation have stabilized, but as it was said, anything could happen at any time.

To conclude, while the market is not frightened by what’s happening in China, some warnings signs are visible. In case the situation worsens, these instruments are worth looking at: copper, oil, AUDUSD, AUDJPY.