Trade Thaw Sends Stocks Surging and Street Says Rally Isn’t Over

(Bloomberg) -- Signs of progress in U.S.-China trade talks sent stocks to the biggest gain in a week and had Wall Street handicappers making odds on a bigger rally to come.

The S&P 500 Index climbed to within 1.8% of a record after President Donald Trump said the two sides agreed to the outlines of a deal that could be signed as early as next month. The equity benchmark rose 1.1% Friday, closing off its session highs since several of the thorniest trade problems remain unresolved. Equities also got a boost from signs of progress in Brexit negotiations.

At JPMorgan Chase & Co., strategists led by John Normand estimated there is 10% upside or more in the stock market under a “blue sky” scenario where agreements are reached in both cases, based on the way past geopolitical crises played out.

Outstanding issues are likely to be resolved because a trade truce with China would strengthen Trump’s bid for next year’s re-election while both the U.K. and European economies are too weak for their leaders to accept a no-deal outcome, the strategists argue. They boosted the odds for an Oct. 31 Brexit deal from 5% to 50% amid news that U.K. prime minister Boris Johnson made a vital breakthrough in talks with Irish leader Leo Varadkar.

Apple Inc., which sells millions of iPhones in China, rose to an all-time high. The Stoxx Europe 600 Index jumped the most since January. Crude oil surged following an explosion on an Iranian tanker and Pentagon plans to ramp up the deployment of U.S. forces to Saudi Arabia. Gilts tumbled and the pound had the biggest two-day gain in a decade.

While the strategists admitted details on the trade situation are “too scarce to rethink forecasts,” they urged investors to start positioning for a favorable outcome. Further progress is likely to revive risk appetite from investors who have sought shelter in fixed income and low-volatility stocks.

“There is still a peace dividend to be earned after this week’s moves,” the strategists wrote in a note. “Geopolitics created a growth slump and sank asset prices and bond yields, so less uncertainty should drive a growth revival and market reversals, as long as valuations and positions do not already reflect positive outcomes.”

If history is of any guide, they say, investors should brace for a rotation into emerging markets, cyclical and value shares while preparing for losses in assets such as developed market bonds, U.S. dollar and Japanese yen.

Investors embraced the progress on trade talks after conflicting headlines roiled markets this week, even if the accord falls short of a comprehensive agreement that would put an end to the trade war.

“We could break through all-time highs if investors really perceive peace to this latest round,” said Diane Jaffee, senior portfolio manager at TCW, which oversees $200 billion. “Even though the market is rising today, there’s still a lot of skepticism embedded here. A lot, a lot, a lot.”

Elsewhere, equities rallied throughout Asia, with shares in Hong Kong getting an extra lift as protesters discussed scaling back vandalism ahead of demonstrations this weekend.

Here are the main moves in markets:

Stocks

• The S&P 500 Index added 1.1% at the close of trading in New York.
• The Stoxx Europe 600 Index surged 2.3%.
• The MSCI Emerging Market Index climbed 1.8%.
• The Shanghai Composite Index climbed 0.9%.

Currencies

• The Bloomberg Dollar Spot Index dropped 0.5% to a two-month low.
• The euro increased 0.4% to $1.1046.
• The British pound jumped 1.8% to $1.2667.
• The offshore yuan climbed 0.4% to 7.0736 per dollar.
• The Japanese yen fell 0.4% to 108.43 per dollar.

Bonds

• The yield on 10-year Treasuries gained nine basis points to 1.75%.
• Germany’s 10-year yield climbed three basis points to -0.45%.
• Britain’s 10-year yield jumped 12 basis points to 0.70%.

Commodities

• West Texas Intermediate crude gained 2.3% to $54.80 a barrel.
• Gold decreased 0.6% to $1,484.57 an ounce.

--With assistance from Sophie Caronello and Sarah Ponczek.

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh

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