Leaders-Laggards

With trade war sentiment beginning to look brighter and tariffs suspended between the U.S. and China, risk assets are finding some positive momentum again. Junk bonds had been outperforming Treasuries in the weeks leading up to today, but the U.S.-China trade deal gives them another reason to rally. With steep Chinese tariffs off the table for the time being, it’s reasonable to think that we’ll get at least a short-term dollar rally here.

Tech is finally coming back to life as the potential for de-escalation in the trade war is improving sentiment. It’s tough to say if the rally is fully justified. Short-term sentiment has pivoted back towards risk-on, but the whipsaws in utilities suggest that we’re in more of a neutral, uncertain period than a pure risk-on one. A good sign is the stabilization of the dollar.

A significant decrease in the tariffs on China would create a more optimal operating environment, but a more dovish Fed (if inflation risk is lowered) could create an opportunity for multiple expansion. Yields are beginning to head lower again, which would be more consistent with a progression towards recession and a Fed easing cycle designed to fight it. Relative to stocks, Treasuries may be falling behind, but they’re looking better overall.