A day after stocks set fresh record highs on excitement about a possible U.S.-China trade deal, investors still seem to be sailing along on momentum from those trade winds.
China hasn’t officially confirmed trade deal news
Decisive UK election results reduce Brexit uncertainty
U.S. retail sales show less growth than expected
(Friday Market Open) A day after stocks set fresh record highs on excitement about a possible U.S.-China trade deal, investors still seem to be sailing along on momentum from those trade winds. But the water might be getting a little choppy because China hasn’t officially confirmed the news ahead of a deadline that would see new tariffs implemented on Sunday.
In other geopolitical news, UK Prime Minister Boris Johnson’s party won a decisive election victory, removing some uncertainty from the market about Britain’s exit from the European Union. President Trump said Johnson’s win paves the way for the United States and Britain to strike a new trade deal after the Brexit.
In U.S. economic news, November retail sales increased less than expected, casting some doubt on a segment of the economy that has been a source of optimism for investors. Retail sales for the month rose 0.2%, less than the 0.5% expected in a Briefing.com consensus.
High hopes for a trade deal were the driving force behind a stock market rally on Thursday, when all of the three main U.S. indices reached intraday record highs and the S&P 500 Index (SPX) and Nasdaq Composite (COMP) posting their highest-ever closes.
Market participants welcomed media reports indicating that an interim trade deal between China and the U.S. had been all but finalized. President Trump also Tweeted that a deal is very close between the world’s two largest economies.
The news comes ahead of tariffs that are scheduled to go into effect Sundayon around $160 billion worth of Chinese goods, which are mainly consumer items, threatening price increases for U.S. shoppers, who’ve been the power behind recent healthy economic data.
With the reported deal agreed in principle, those duties wouldn’t take effect and the U.S. could reduce existing levies by half while China would buy more U.S. farm products, representing a big step toward ending the trade war between the world’s two largest economies that has hampered corporate decision making, weighed on global economic growth projections, and been the biggest headwind facing Wall Street for more than 17 months.
Optimism about this phase-one trade deal getting done has been a big reason stocks have hit a string of record highs recently, in addition to a dovish Federal Reserve and an earnings season that was largely better than expected.
But Thursday’s rally made it apparent that Wall Street investors and traders hadn’t fully priced in a deal, and who knows if the market will rally more if a deal does get signed. But that’s a big “if,” considering the history of the back-and-forth trade news flow. We’ve seen the market rally before on optimism surrounding trade, only to fall back when the news flow went the other way.
Most of the SPX sectors were glowing green at closing time, with Financials leading the way with a 2% gain. The sector got some help as investors dumped U.S. government debt, pushing yields on longer dated debt securities higher. Apparently the optimism about a trade deal prompted the selling in Treasuries as investors felt comfortable enough to sell safe-haven assets and buy riskier equities.
In the same vein, gold prices pulled back as the safe-haven metal lost some of its allure amid the risk-on mood on Wall Street. And Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) also pointed to an increase in risk appetite, falling 7%.
The Energy sector gained ground as oil prices rose on the trade deal news. If China and the U.S. can strike a deal, that bodes well for increased business activity around the globe, which would boost demand for oil used to power manufacturing activity and transportation of goods and people.
With risk appetite rising, it wasn’t too surprising to see pullbacks in defensive equities sectors. Real Estate lost 1.45%, Utilities dropped 0.49%, and Consumer Staples eased by 0.08%.
CHART OF THE DAY: A TALE OF TWO COMMODITIES. News that China and the United States were nearing a trade deal boosted optimism on Wall Street, whetting investor appetite for riskier assets including crude oil (/CL - candlesticks), which was also helped by the encouraging prospects for demand if a deal is signed. Crude oil futures touched the $60 mark for the first time since mid-September. Meanwhile, gold (/GC - purple line) which is often considered a safe-haven investment, pulled back in response to the ebbing of some of the trade-related fear. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
A Thanksgiving Blip? While the overall mood among investors and traders seemed to be optimistic Thursday amid news that a trade deal could be signed soon, there was some mildly troubling news on the jobs front. U.S. weekly first-time unemployment claims rose more than expected to 252,000. That was 40,000 above a Briefing.com consensus and represented the highest claims figure since 2017. But to keep things in perspective, the previous reading of 203,000 represented a seven month low, and the fresh data could have been skewed by the Thanksgiving holiday, according to a Reuters report. And keep in mind that the weekly data can be volatile even without a holiday. The latest four-week moving average for initial claims rose by just 6,250. “The key takeaway from the report is that the latest (weekly claims) figure is outside the range of what has become typical reporting for this series, so it may be discounted as aberrant,” Briefing.com said. “However, the slowly rising uptick in the four-week moving average for initial claims implies that we may have seen the bottom for this cycle.”
Could The Porridge Warm Enough ... The potential of a partial U.S.-China trade deal has us wondering about the possible return of a Goldilocks economic scenario. Remember when U.S. GDP was going gangbusters and inflation wasn’t problematically high—essentially meaning the economy wasn’t too hot or too cold? Well, if a trade deal injects more certainty into corporate America, it seems like the economy could start doing better, even though it’s not doing badly now. The latest GDPNow forecast from the Atlanta Fed puts Q4 GDP at 2%. And the latest jobs report shows continued strength in the U.S. labor market, which bodes well for the U.S. consumer to continue helping the domestic economy be a bright spot in the global economic landscape.
To Bring Back Goldilocks? Meanwhile, recent core CPI data show inflation at 2.1% on an annual basis and the most recent core PCE Price Index, which is the Fed’s preferred inflation gauge, showed an annual rise of 1.6%. So we have two inflation readings that are bracketing the Fed’s 2% strike zone. If the headwinds created by the trade war dissipate and the U.S. economy gets a boost, that would likely increase PCE inflation closer to where the Fed wants it to be. Meanwhile, GDP could also rise, warming the proverbial porridge to a temperature that’s just right.
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