(Bloomberg) -- European markets awoke on Thursday to their favorite kind of news: progress on U.S.-China trade talks.
Headlines that both sides have agreed to roll back tariffs in phases add to the recent burst of optimism about a deal between the two superpowers, sending European equities closer to an all-time high.
Boosted by a rally in cyclical sectors such as miners and carmakers, the Stoxx Europe 600 Index is now less than 2% away from its 2015 record and trading at its most overbought level since March.
“The latest news is positive for equities. Thus far the tariff impact has been felt by U.S. firms, not the consumer or the Chinese in our view, thus a staggered reduction in tariffs will help those firms fundamentally as well as generally just boosting sentiment,” said Benjamin Jones, a senior multi-asset strategist at State Street Bank.
The trade conflict has been one of the biggest headaches for investors this year: stocks had barely recovered from a slump in May as the U.S. and China locked horns, before they wobbled again in August as U.S. President Donald Trump escalated the trade war with a broadening of tariffs. Since then, European equities have been on the rise, outperforming the U.S.
If the Stoxx 600’s 0.4% gain on Thursday seems a tame reaction, keep in mind it’s been climbing for the past four days in anticipation of the standoff easing. Trade-sensitive sectors have been on fire in the past month, with miners and autos leading the advance. Tech stocks have also outperformed.
Given that the Stoxx 600 is already up 20% this year, some are questioning whether there’s room for further gains in the near term. The strength of the rally may be setting investors up for disappointment, said Lars Kreckel, global equity strategist at Legal & General Investment Management in London.
“Our main approach has been and remains: it’s impossible to predict the next twist of the trade war.”
And worries haven’t gone away yet about the health of the European economy and the impact on the outlooks of companies affected by the trade dispute. So it remains to be seen whether stocks will keep climbing going into the holiday season.
“The momentum could be enough to push markets a bit higher,” said Andreas Lipkow, strategist at Comdirect Bank. “After that, it could be more difficult for further price gains if there is no positive economic news from Europe.”
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