S&P 500; US Indexes Fundamental Daily Forecast -China Debt Buying Issue Raises New Concerns for Money Managers

The major U.S. stock indexes are trading lower shortly after the opening on Wednesday. Traders said the weakness is being fueled by reports that China may stop buying U.S. sovereign bonds.

In the cash market at 1539 GMT, the benchmark S&P 500 Index is trading 2744.59, down 6.70 or -0.24%. The blue chip Dow Jones Industrial Average is trading 25332.15, down 53.65 or -0.21% and the tech-based NASDAQ-Composite is at 7131.84, down 31.74 or -0.44%.

In the futures market, the March E-mini S&P 500 Index contract is trading 2744.50, down 7.75 or -0.28%. The March E-mini Dow Jones Industrial Average is 25305, down 68 or -0.27% and the March E-mini NASDAQ-100 Index is trading 6645.50, down 41.50 or -0.62%.

According to Bloomberg News, citing people familiar with the matter, officials in Beijing have recommended the Chinese government lower, or even stop, buying U.S. sovereign debt.

The Bloomberg report went on to say that Chinese officials think U.S. debt is becoming less attractive compared to other assets, adding that trade tensions between the two countries could provide a reason to slow down or halt the purchases.

Forecast

The surprise news about China is rattling the stock markets a little on Wednesday. When there is uncertainty, money managers are taught to take profits or pare positions to adjust for the unknown risks. Now that this idea is being floated out there in the investment community, these major money managers will have to come up with a risk strategy in case interest rates start to rise faster than their forecasts.

So what we are seeing today is a normal reaction by investment managers. It’s too early to tell if it will lead to a change in trend. However, the going forward, money managers may be forced to cut back on their allocation into stocks. This could cause weakness in the stock market if “the herd” starts to lower their stock holdings while increasing their debt holdings.