Investing.com – Barclays says the ‘Sell America’ narrative has re-emerged in rates and currency markets, but a full-fledged regime shift has not yet arrived. U.S. and global equities have continued grinding to new highs, cushioned by what the bank describes as a robust earnings season. <\/p>\n
“Uncertainty over the Fed path, JPY carry trade unwind and AI capex sustainability has revived the ‘Sell America’ narrative. But this is more felt in rates & FX than in equities, given strong earnings,” Barclays strategists led by Emmanuel Cau wrote in its weekly market commentary. <\/p>\n
The bank identifies a tangled knot of macro forces bearing down on the dollar and long-end rates simultaneously. The combination of higher long-end yields and a weaker dollar since the most recent FOMC meeting has left investors struggling to attribute cause. <\/p>\n
“It is difficult to disentangle how much of this reflects renewed concerns around Fed credibility versus a broader re-emergence of the ‘Sell America’ narrative among investors we interacted with, underpinned by data,” Cau wrote. Gold’s rebound alongside dollar weakness, according to the bank, is consistent with a partial revival of the trade. <\/p>\n
On the rates side, Barclays notes that markets are still pricing one Fed hike by year end even as financial conditions have tightened meaningfully since the FOMC. Yet the bank argues that a fair amount of hawkishness may already be embedded in yields: easing oil prices following lower U.S.-Iran tensions and relatively benign unit labour cost trends both reduce the urgency for further tightening, in Barclays’ view. <\/p>\n
Its FX team adds that the risk premium in the dollar should nonetheless remain above pre-FOMC levels, following what it characterises as a more dovish shift in Fed messaging. Japanese yen dynamics add another layer of complexity. Barclays highlights that JGB yields now sit materially above the levels seen during the 2024 carry unwind, and that coordinated yen stabilisation efforts are weighing on both the dollar and the Treasury market. <\/p>\n
Record yen shorts and still-large carry positions are flagged as a structural source of ongoing elevated volatility across FX and rates. “So in aggregate, we think there is a complex and overlapping set of macro forces that are proving less supportive for the dollar and rates complex,” the bank wrote. <\/p>\n
Despite all of that, equities have not broken. Barclays points to its own flows data, which shows little evidence of a significant rotation away from U.S. stocks into the rest of the world, unlike the pattern seen last year. <\/p>\n
The bank references a Q2 earnings season it has characterised as ‘higher and broader’ as the key pillar of equity resilience. The recent breakout to new highs in U.S. and global equity indices, Barclays argues, signals that a full-fledged ‘Sell America’ regime has not yet returned. <\/p>\n
Hence, Cau remains constructive on equities but stops well short of complacency. <\/p>\n
“We continue to expect equities to grind higher and broader, but with scope for elevated volatility given the number of known unknowns still in play, including elevated positioning, questions around AI capex sustainability, uncertainty over the Fed path keeping rates in the danger zone for equities, potential carry trade rotations, and historically weak pre-midterm seasonality.” <\/p>\n
Europe is flagged as continuing to work well as a portfolio diversifier, even though inflows into European equities have yet to gather meaningful steam. <\/p>\n
Barclays warns that a stronger-than-expected jobs report or the upcoming CPI print could quickly revive concerns that the Fed is behind the curve, reopening the debate over whether the central bank’s recent messaging was a policy mistake or a pragmatic pivot. <\/p>\n
With positioning elevated and the carry trade still a latent source of volatility, the bank’s constructive equity call hinges on that macro backdrop staying relatively contained. <\/p>\n
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