Jittery investors searching for ideas on where major U.S. equity benchmarks are heading might want to take a look at the Chinese yuan, according to new research by Societe Generale.
"China's economy and the yuan remain a major source of uncertainty for markets, a sharp weakening in the RMB (yuan) would likely cause a rebound in volatility and decline in the ," Laure Fauchet, a thematic strategist at Societe Generale, told CNBC via email.
The research looks at the percentage change, from the month before, for both the S&P 500 and the yuan, rolled every day. While the French bank caveats that it is not necessarily a robust forward indicator for the S&P, it does show a correlation between the two assets with the Chinese currency often moving ahead of the U.S. index.
Starting last summer, growth concerns from China alongside tightening policy from the Federal Reserve and a plunge in oil prices have sparked steep falls in equity markets. A near 4 percent devaluation of the yuan last August sent Chinese - and emerging market - stocks into free fall, with investors pulling out money from an economy that is still coming to terms with slowing growth.
China has enjoyed a debt-fueled boom in the last decade but the People's Bank of China (PBoC) is now trying to manage a transition to a more consumer- and services-focused economy. Another hefty devaluation at the start of the year sent shares into another tailspin and has roiled developed market indexes.
Societe Generale warned that the recent stabilization of the Chinese currency should be watched closely, as any reversal in the yuan would likely cause a sharp correction in stock markets. The central scenario from the bank envisions the USD/CNY exchange rate to reach 6.80 in 2016 in a largely gradual and controlled manner. It was trading at 6.4947 on Monday morning. However, the bank also states there is a "large and growing risk" that the rate could trade up to 7.50 this year.
Meanwhile, Bob Parker, a senior adviser for investment strategy and research at Credit Suisse, suggests that the correlation between the two markets is a little more nuanced. He believes that the S&P 500 is arguably suffering large of bouts of selling pressure because of its enhanced liquidity.
He also underlines that that it's likely to be Chinese cash that is being withdrawn for the S&P 500, which is in turn causing it fall.
"When Chinese investors lose confidence in their own economy/markets, capital outflows from China accelerate," he explained. This then leads to a central bank which has to prop up the currency by selling some of the country's huge reserve piles, he added.
"Part of their reserves will have been/are in U.S. equities so as the reserves fall, they are natural sellers of the S&P," Parker said.