Investing.com -- U.S. markets are showing signs of reverting to a familiar playbook, according to Barclays (LON:BARC), as investor sentiment improves following the recent easing of trade tensions with China.
“Markets seem to be returning to the 2018 playbook,” the bank’s strategists led by Emmanuel Cau said, pointing to parallels with the period when U.S. equities outperformed after a volatile start to the year driven by trade frictions.
Barclays notes that the recent truce on tariffs has helped restore U.S. equity leadership and stabilize the dollar. While concrete breakthroughs remain elusive, “positive negotiation headlines into the end of the 90-day pause in July will likely continue to feed market optimism, even if they lack real substance,” the strategists said.
That has been enough to halt the “Sell America” trend, with U.S. stocks now catching up with European peers.
But while the focus has shifted away from tariffs, markets are now turning their attention to tax policy and its implications. “Forget about tariffs, it’s all about deficits now,” Cau said, as attention pivots to the tax bill advancing through Congress.
Equities have so far shrugged off the recent rise in yields, but the 10-year Treasury hitting 4.5% has raised concerns, especially as the 30-year yield nears 5% amid debt sustainability worries.
The proposed tax cuts from U.S. President Donald Trump may support growth and equities, but Barclays warns that “if term premium keeps rising and rate volatility increases, equities may come under pressure.”
The path of the tax bill, and its effect on deficits, is now expected to dominate investor focus in the weeks ahead.
Still, falling oil prices could offer some relief. Although they may reflect softer demand, Barclays views the decline as largely supply-driven and a “silver lining for the inflation outlook, as well as for the consumer.”
However, inflation breakevens and consumer sentiment have yet to respond, meaning the benefits are yet to be felt, the strategists said.