If it wasn’t obvious before, the markets really want to hear some good news about a trade deal. Overnight futures were down over 1% in the aftermath of the announcement of increased tariffs after the close on Friday before reversing sharply on the pre-open announcement that China wants to restart trade negotiations. Never mind that the story was not confirmed by Chinese leadership – the markets heard what they wanted after a nerve-wracking week.
There is some residual skepticism nonetheless. As of mid-day Monday, stock and bond markets portrayed different pictures. Treasury yields are essentially unchanged. If there was a clear consensus about trade optimism throughout the economy, we would expect to see rates rise. We are also seeing the dollar strengthen against the Euro, Yen, and the Renminbi. The latter rise is most perplexing since a real improvement in the US/China trade picture should resuscitate the Chinese currency.
My takeaway is that there is simply more optimism ingrained into stock traders vis-à-vis their fixed income and currency counterparts. Stock traders have learned to buy dips, so it’s not surprising that they would fixate on a positive story after a painful dip in the prior session. As always, investors should keep their eyes on a broader set of signals rather than being fixated on a select set of indices and their component stocks.
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