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Who’s Still Hungry (For Risk)?

All in all, not a bad day.

If you really wanted to (and I don’t, but I had to conjure up something for you folks) you could make the argument that Monday was just what the doctor ordered for a market that’s become accustomed to dramatic moves in either direction.

That is, just a solid gain to kick off the new week – nothing to write home about, but enough to lend credence to the idea that there’s still some lingering appetite for risk after Friday’s rally.

Small-caps led the way with the Russell logging a seventh gain in eight sessions, a positive sign for obvious reasons.



This is some pretty solid outperformance and marks a stark contrast with how things played out in H2 2018:



At one point, futures had rallied more than 5% off the overnight lows hit ahead of Friday’s payrolls/Powell rally.



The sector breakdown for Monday on the S&P shows more risk appetite.



Meanwhile, high yield is in the midst of a pretty powerful rally. Friday was the best day for the US junk index in four years and spreads tightened again on Monday.



You’re seeing the same thing in leveraged loans, where the benchmark has rebounded after a non-stop plunge in the last two months of 2018. Both HYG and BKLN have logged multiple impressive sessions of late, in what is probably short covering but could be interpreted as a sign that the worst is behind us – at least if you’re looking at risky credit.



Of course that’s yet to manifest itself in inflows, but one step at a time I suppose.

For the time being, dollar weakness is a good thing to the extent it helps EM and crude and reflects a dovish Fed pivot rather than acute concerns about D.C. gridlock and an imminent downturn in the domestic economy. The Bloomberg gauge is down three days in a row and is sitting at its lowest levels since October.



Crude is up six days in a row, reflecting dollar weakness, resurgent risk appetite, news that the Saudis are planning to cut exports and yada yada.



All of this comes as both Washington and Beijing attempt to send positive signals about purported “progress” on trade (e.g., more “soybean” headlines, etc.). Hanging over it all is the ongoing US government shutdown which shows no signs of being resolved.

Trump is set to address the nation on Tuesday night in what I’m sure will be a truly absurd spectacle complete with belabored rambling about the relative merits of “steel slats” versus “concrete”. If he decides to use emergency powers to get the ball rolling on construction, that would likely be a risk-off catalyst as it would set the stage for all manner of hand-wringing on Capitol Hill and, obviously, legal fights.

Tune in – the ratings will be tremendous.



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