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Robert Burgess

The Daily Prophet: China (Almost) Sends Markets Into a Tizzy

Connecting the dots in global markets.

There was a time when the mere speculation that China might eventually pull back from its purchases of U.S. Treasuries would send world markets in a tizzy. No longer. Although bonds, the dollar and stock futures did take a hit when news broke overnight that senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of Treasuries, markets recovered all or most  of their losses during U.S. trading hours.

In other words, if China -- whose more than $1 trillion of Treasuries is exceeded only by the Federal Reserve's holdings -- was hoping to send a message to the U.S. with the  White House said close to announcing tariffs on a number of Chinese goods, it failed miserably. That can be seen in the results of the Treasury Department's auction Wednesday of $20 billion of 10-year notes. Bids from investors exceeded the amount offered by 2.69 times, the most since 2016. In many ways, traders realize China is stuck. If it tries to jawbone the Treasury market lower, it will inflict massive losses on itself given its huge holdings. Plus, at almost $15 trillion, no other government bond market comes close to the size or liquidity provided by Treasuries. Lastly, rates on U.S. debt are attractive relative to the trillions of dollars of negative yielding bonds found in Europe and Japan.

FTN Financial economist Chris Low noted that when China stopped buying Treasuries in the past, there were suggestions that politics was involved and yields surged. Ultimately, though, that led to a "hugely profitable trade" that made China's foreign-exchange managers look like "heroes" as they were then able to buy cheaply and reap big gains when the market rebounded, Low wrote in a research note.

Although history will show Wednesday was a down day for stocks, the real story was the big recovery in the S&P 500 Index, proving that no strategy is more powerful right now than "buy the dip." The benchmark fell as much as 15.23 points in early trading, or 0.55 percent, before ending the day down just 3.06 points, or 0.11 percent. Surely, the bears will say that investors are too complacent about the risks facing the economy, but it's hard to dent the positive sentiment with companies about to report robust fourth-quarter earnings and the World Bank boosting its U.S. growth estimate this year to 2.5 percent from a prior forecast of 2.2 percent. Yet even the bulls can't help being on edge after the big rally left the S&P 500 trading about 10 percent higher than its 200-day moving average. That's the biggest gap since 2013, according to Bloomberg News' Elena Popina. That doesn't mean an imminent pullback is in the cards. But it does suggest stocks are priced for perfection and any disappointment, whether it be in profits, the economic data or politics, could send equities lower.