What do you think is the short term outlook on the US markets now that China has raised interest rates again? Do we see a sell off in commodities? A rise in the Dollar index? A sell off in the US markets tomorrow morning? Did the Chinese just give the US investor a lead brick for Xmas?
Higher rates in China means even more speculative capital/hot money is going to flow into the country. Since China will not let the yuan float upward, this means they must print billions of yuan to buy up the foreign currency flooding their way. China cannot slow the flow of credit in their economy with higher rates as long as the yuan stays pegged. Just the opposite, in fact. Eventually, the whole thing is going to be a spectacular, for-the-ages collapse (think Japan 1990, the world 2008) in some commodity prices, the share price of companies that produce said commodities (FCX will probably trade in the teens again), the value of the Aussie $, and probably bond yields ... but not until the Chinese get serious about slowing the speculative credit pulsing through their economy (hiking int rates by 25 bp is not being serious). I would fade any move down in equities or industrial commodities in the morning.
Higher rates will attract foreign capital that will allow them to replace dollars with euros in their currency reserves.