Chinese stocks continued to outperform the US. With the broad US market virtually unchanged at the close, the H-shares ETF FXI was up 1.25% on the day.

Chinese financials accounted for about two-thirds of the year-to-date move in the Hang Seng China Enterprises Index. The top 14 performers in the index explain 70% of its point gain year-to-date, as the Chart of the Day makes clear.

As I observed on February 28, the “alpha shift” in Chinese financials implies a structural change in the Chinese economy, rather than a simple relief rally in response to reports that the outstanding trade disputes between the US and China soon would be settled. First, it reflects a willingness by investors to take risk in China, and second, it foreshadows structural changes that will make China’s securities markets the largest in the world, and (possibly) the most profitable in which to do business.

Chart of the Day: Financials explain most of the gain in the Hang Seng China Enterprises Index YTD

China’s stock market is less a trade story than a China reform story. That helps to explain why China’s stock market has risen so much faster than those of countries where international trade dominates economic growth, for example, Taiwan and South Korea. News media Tuesday carried reports that the opening of China’s financial sector to wholly-foreign-owned institutions had already been agreed in the ongoing trade negotiations. That makes many of the brokers’ desirable takeover candidates, helping to explain their strong recent performance. But the biggest contributors to the point moves in the Chinese indices have been insurers, whose business should flourish as China’s capital markets evolve.

In US dollar terms, America’s consumer sector is roughly equal to China’s GDP, as shown in the following chart prepared by Deutsche Bank economist Torsten Slok. If the US consumer is tapped out, as some recent data suggest, then China’s stimulus is the only significant source of demand growth in the world economy.

Very little happened in the US equity market in the Tuesday New York session as investors struggled to make sense of conflicting data. After a month of uninterrupted gloom, one widely-followed US economic survey showed surprising (and confusing) resilience in February, namely the National Association of Purchasing Managers overview of non-manufacturing business.

The non-manufacturing (services) PMI printed at 59.7 in February, which means that 59.7% of respondents saw their business expanding. After January’s government shutdown, it’s not surprising that business came back, so the PMI might overstate the strength of economic activity.

The elements of the services PMI, though, are contradictory. The report shows a huge jump in the new orders index – to a near record of 65.2 – next to a decline in the employment index to 55. The orders and employment component of the PMI usually are positive correlated with the overall index, and it is rare for them to move in opposite directions. In this case, orders took a two-standard-deviation jump upwards and employment had a one-standard-deviation fall, in the other direction. At no time during the post-financial-crisis recovery have the employment and overall NAMP services index moved so radically in opposite directions.

Another positive surprise was the German retail sales report, which showed the largest monthly jump (of 3.3%) in half a century. The strong Germany number pushed the overall European number up as well. The January increase followed an equally surprising drop in December, leaving analysts to wonder whether Europe’s economy is on the mend after two quarters of virtually zero growth. February purchasing managers’ manufacturing indices for the largest European economies were reported Tuesday morning, showing a marginal improvement

It is very unusual for German retail sales to drop in September and rebound in January, after the Christmas season. The January jump in the German number is so large as to raise eyebrows. I’m not convinced that Europe’s economic doldrums are over, but it bears watching. The European stocks I like (German automakers, Scandinavian telecom equipment makers, big capital goods manufacturers) take their cue from China rather than from the European domestic market, but if European growth surprises to the upside, all the better for the likes of Volkswagen, Daimler, Siemens, BASF, and ASML.

It’s so hard to find a vector sum of all the crosswinds as US markets are utterly without direction. I calculated the realized volatility of the S&P 500 using 10-minute-interval tick data. By this highly-sensitive measure, S&P volatility stood at 45% in the midst of last December’s market crash, and has since fallen back to about 10%.