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

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.

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

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”.

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…