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10Y China S&P 500

Will China’s Move To Cease Buying U.S. Debt Trigger An S&P Correction?

It's certainly possible.

Could news that China is set to halt (or at least “slow”) their purchases of U.S. Treasurys be just the excuse people need to do a bit of profit taking in overbought equities? It’s certainly possible.

The weekly RSI for the S&P is the most overbought since 1959:

Overbought

And this is among the longest stretches without a 5% drawdown in recorded history:

Boom

(Goldman)

If you recall, one of the biggest worries is that a bond tantrum triggers a multi-asset drawdown as equities fail to reliably diversify (i.e. the stock-bond return correlation flips positive) spelling the end of the longest bull run for balanced portfolios in a century.

The latest fund manager survey from BofAML’s FX and rates strategy team (appropriately called “What If Goldilocks Throws A Tantrum?”) shows that “the majority of respondents see a 2018 bond market tantrum as likely or very likely”:

Tantrum1

And while “inflation surprise” was widely seen as the most likely trigger, it’s possible that some news out of left field ends up being the proximate cause. “The news is out of left field, startling traders who were used to predictable events,” Bloomberg’s Andrew Cinko wrote this morning, regarding the China/USTs headline.

“The news that officials reviewing China’s FX holdings have recommended slowing or halting purchases of Treasuries may be the excuse U.S. equity investors need for a little profit-taking,” Heather Burke goes on to suggest, before adding that “the biggest risk for stocks is a messy, uncontrolled drop in bonds.”

We’d be remiss if we didn’t note that it would be exceedingly amusing if the catalyst for an end to Donald Trump’s beloved equity rally ended up being China losing confidence in U.S. assets…

Xi

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9 comments on “Will China’s Move To Cease Buying U.S. Debt Trigger An S&P Correction?

  1. In a word….. NO !!

    US debt and currency are crap. As I said last year, the US dollar is eventually going to zero. No joke.

    Institutional money must park somewhere. Liquid. Stocks are the “best” choice. No stock crash.

    But, if you’re a US pensioner or middle/lower class person, your standard of living is headed into the ditch eventually. A can of cat food will become like an expensive “gourmet” meal for you. The legacy of a massively-indebted, overstretched, imperialistic, war-mongering, globally-disliked, short-sighted, produces nothing-of-value, increasingly socialist/fascist police state.

    • OMG a random internet stranger said twice that the USD is going to zero !!! You’re wrong on so many levels I couldn’t possibly have enough space to argue. Thanks for the good laugh though.

      • You don’t need any space to argue. Just put your money into the market so I can take it.
        As you likely think dollar crash means market is wrong too, lol. UsdJpy below key support

        • if the dollar goes to zero in a literal sense, the world ends. so just keep that in mind. you won’t be thinking about trading in that scenario. you’ll be roaming around trying to find food and fuel.

          • Okay, so I meant it as a figure of speech, not literally. And actually it’s a RISING dollar, not a plunging dollar, that should be feared and will break the international monetary system. Wait a few years and then maybe we’ll see.

          • Remember like the dollar surge in 2015.
            Falling dollar is overall stimulative because there are so many dollar loans around the world (synthetically short the dollar). Rising dollar crushes dollar borrowers and creates havoc – especially when combined with dollar interest rate increases (think prior to Plaza Accord).

  2. So it turns out this was the year to short the 10 year. I still wouldn’t be long on the dollar

    • Yes, USD is clearly in a down channel. But if you look at the latest COT, positioning particularly in long euro was extreme at week’s end. So before the primary trend continues, one might expect a brief dollar retracement first to flush out some weak handed dollar shorts – which is what we saw for the first 2.5 days this week until a few hours ago with the China news. If that’s the end of the dollar bounce, then it’s worse than I thought.

      As for the 10 yr TBond, there still might be more room to short it (or maybe not, haha). However, there are probably better bonds to short such as the lower yielding ones in Europe. Or even better, trade the spread between the 10-yr treasury and Bund…, which is a bet on the narrowing of historically stretched spreads, instead of a bet on the direction of rates – as the former is a higher probability call IMO. This narrowing of transatlantic yield spreads has been a major factor driving EURUSD higher lately, by the way.

      For more on the spread trade, read Kevin Muir’s entry posted here last month and at MacroTourist.

  3. Pingback: ‘If Someone Powerful Wanted To Push The VIX Up’: Is This Why China Is ‘Halting’ U.S. Treasury Purchases? – Biiwii.com

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