Investing.com - U.S. markets are showing signs of returning to a familiar scenario, according to Barclays (LON:BARC), as investor sentiment improves following a recent easing of trade tensions with China.
"Markets seem to be returning to a 2018 scenario," said strategists at the bank led by Emmanuel Koo, pointing to parallels with a period when U.S. stocks outperformed the market after a volatile start to the year caused by trade tensions.
Barclays notes that the recent truce on tariffs has helped restore the leadership of U.S. stocks and stabilize the dollar. While specific breakthroughs remain elusive, "positive headlines about negotiations before the end of the 90-day pause in July are likely to continue fueling market optimism, even if they lack real substance," strategists noted.
This has been enough to halt the "Sell America" trend, and now U.S. stocks are catching up to their European counterparts.
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 the deficit now," Koo said, as attention shifts to the tax bill being pushed through Congress.
Stocks have so far ignored the recent rise in yields, but the yield on 10-year Treasury bonds reaching 4.5% has raised concerns, especially as the yield on 30-year bonds approaches 5% amid worries about debt sustainability.
Proposed tax cuts from U.S. President Donald Trump may support growth and stocks, but Barclays warns that "if the term premium continues to rise and interest rate volatility increases, stocks could come under pressure."
The path of the tax bill and its impact on the deficit are expected to dominate investors' focus in the coming weeks.
Nevertheless, falling oil prices may offer some relief. While they may reflect softer demand, Barclays views the decline as primarily supply-driven and a "silver lining for inflation prospects as well as for the consumer."
However, inflation expectations and consumer sentiment have yet to respond, indicating that the benefits are not yet being felt, strategists noted.