US STOCKS surged to records last week as fears about a trade war between the US and China - the world's two largest economies - faded and as financial stocks surged alongside Treasury yields.
This week, there could be more swings in trade-sensitive sectors such as industrials and raw materials after The Wall Street Journal reported that China had called off a planned round of mid-level talks in Washington that were slated for this week.
The financial sector will be susceptible to any unexpected developments in the Federal Reserve's midweek policy statement.
The yield on the 10-year Treasury note, which acts as a benchmark for mortgages and many other forms of consumer loans, finished the week at 3.06 per cent, near the highest levels since May.
"We've been over the 3 per cent level before and had trouble holding it…we'll see what happens after the Fed talks," said Joe Kinahan, chief market strategist at TD Ameritrade.
"If we went to 3.25 per cent, that might be a little bit scary. If we're between 2.8 and 3.1 per cent, we've been playing in that area a lot."
The Treasury market is behaving as if the central bank is sure to raise rates by a quarter percentage point this month and again, said Oliver Pursche, chief market strategist at broker-dealer Bruderman Brothers.
US President Donald Trump's decision to impose a lower tariff on US$200 billion of Chinese goods - 10 per cent, rather than the 25 per cent he had threatened earlier - was seen by investors as foreshadowing compromises with China and other trading partners.
Similarly, China's asymmetrical response, targeting only US$50 billion of goods was seen as an act of restraint.
"Clearly, the market is expecting that calmer heads prevail," said Mr Pursche. "As such, given the strength of economic backdrop, the market is ignoring" the trade war.
"There are three plausible outcomes," said Mr Pursche. "Number one: things get worse and it really starts impacting the economy and that's kind of the bad scenario."
The second would be "status quo" - things don't get worked out but they don't get worse and economic growth offsets the impact of tariffs".
In this scenario, the US labour market would maintain its strength, which has resulted in the fewest layoffs in roughly 50 years.
The third scenario would be an eleventh-hour deal between the US and China, removing what most economists agree is the biggest overhang on the global economy for the foresesable future.
"I don't know how you want to assign probability, but two out of the three scenarios are kind of positive for stocks, and that largely explains the sentiment and why investors are going to keep pouring money into stocks," said Mr Pursche.
The bears, of course, are focused on the risk that US economic growth will slow alongside the pace of global trade. That was certainly the case in the 1930s.
The US is still planning to impose the full 25 per cent tariff, unless China complies with its demands on trade.
Beijing is unlikely to be forced back to the negotiating table. China's disclosure that it would lower tariffs for "most favoured nations" could be an indication that it's preparing for unilateral disarmament in the trade war.
Or, it could be a sign that it's trying to plug the gap in US imports by enticing other nations to increase their trade with China.
Some observers see the US and China as laying the groundwork for a new Cold War, each seeking to dominate a rival trading bloc and using their rivalry to establish a "polar" balance of power worldwide.
Several Wall Street brokers have warned that conditions are ripe for a change in market momentum.
Among the concerns: the rapid increase in Treasury yields, signs that sales of US homes are slowing and another wave of speculative mania.
"Existing home sales have peaked, reflecting declining affordability, greater price reductions and deteriorating housing sentiment," said analysts at brokerage Bank of America Merrill Lynch Global Research, in a note to clients.
While they say demand for newly built homes could offset weakness, the used-home market is far bigger.
The Dow Jones Industrial Average had its strongest week since July and finally broke through the record high set in January. Global markets have a similar atmosphere as at the turn of the year, when a rapid runup was followed by a stock-market correction.
There's even a new bubble primed to pop. At the end of 2017 and start of 2018, speculators dived into bitcoin and other cryptocurrencies, inflating one of the fastest and most pronounced speculative bubbles in history.
In September, some of the same traders drove up the price of marijuana stocks in general and Canadian cannabis purveyor Tilray in particular, more than doubling its share price to US$300 at one stage last week, giving it a market value of US$30 billion - more than some of the world's largest airlines.
The stock collapsed late in the week, and the company is now worth about US$11 billion.
To the bulls, Tilray's volatility was a meaningless one-off. To the bears, the speculative implosions were a harbinger of what is to come for the broad stock market. Momentum is on the bulls' side for now, but it could well shift this week.