Stock Rally Tempered by China Tensions; Oil Rises: Markets Wrap

(Bloomberg) -- U.S. stocks rose, but closed sharply off their highs after Bloomberg News reported that the Trump administration is considering sanctions on Chinese officials, threatening to escalate tensions between the world’s two largest economies.

The S&P 500 ended up 1.2% at an 11-week high, giving up in the final half hour of trading almost 50% of gains that topped 2%. Stocks had soared earlier as investors poured back into risk assets on speculation the worst of the economic hit from the pandemic has passed. Megacap tech shares in the Nasdaq 100 fell on the day, while chipmakers exposed to China tumbled at the end of the session.

Traders spent much of the day pouring into riskier pockets of the market as they played catch-up to a rally that pushed socks higher by as much as 35% from March lows, even as news over the long weekend brought signs of mounting tension with China. That bid faded after the report that the Treasury Department could impose controls on transactions and freeze assets of Chinese officials and businesses for implementing a new national security law that would curtail the rights and freedoms of Hong Kong citizens.

Fresh economic data had showed that the easing of lockdown restrictions is boosting economic activity. The contours of the gains, with small-caps and energy shares leading, suggest investors who doubted its staying power are now targeting areas that have lagged behind so far. Large-cap tech shares, the group that lifted stocks from pandemic lows, trailed Tuesday.

While economic data is still awful by virtually any historic comparison, a consensus among investors is building that the worst from the pandemic is over, easing fear that the rally was a bear trap destined to come undone. Now they will also contend with an increase in China tension that could threaten trade at a delicate time for the global recovery.

Elsewhere, the Stoxx Europe 600 Index advanced, with travel stocks surging on reports that Germany plans to lift travel warnings for 31 European countries. The U.K. also announced steps toward getting back to business, sending the pound up by the most in almost a month.

Japan led the equity advance in Asia as the world’s third-largest economy reopened, and shares rose in Hong Kong, which showed signs of stabilizing after weekend unrest. Treasuries slid after the three-day U.S. weekend, alongside Germany’s government debt.

While investors’ spirits are being lifted by economic reopenings, there are also mounting signs that coronavirus infection rates are moderating. The Japanese government ended its nationwide state of emergency Monday, while Germany recorded a decline in the number of new virus cases. Signs that more euro area stimulus is on the way is also helping support the appetite for risk.

“The narrative for markets is shifting somewhat, with hopes associated with the easing of lockdown measures in many countries and still very exaggerated hopes of a vaccine being found short-term, needing to be balanced against escalating U.S./China tensions,” said Marc Ostwald, chief economist and global strategist at ADM Investor Services.

The euro strengthened ahead of negotiations this week on the form of a bloc-wide recovery fund. WTI crude oil advanced to around $34 a barrel on hopes the market may rebalance after historic output cuts.

Here are some key events coming up:

• Earnings continue with companies including British Land, Royal Bank of Canada and HP Inc.
• Thursday brings the U.S. jobless claims reading for the week ended May 23.
• Federal Reserve Chairman Jerome Powell participates in a virtual discussion on Friday.

These are the main moves in markets:

Stocks

• The S&P 500 Index added 1.2% at 4 p.m. New York time.
• The Russell 2000 rose 2.8% and the Dow Jones Industrial Average jumped 2.1%
• The Stoxx Europe 600 Index climbed 1.1%.
• The MSCI Asia Pacific Index surged 2.3%.
• The MSCI Emerging Market Index surged 1.8%.

Currencies

• The Bloomberg Dollar Spot Index sank 1%.
• The euro rose 0.97% to $1.0991.
• The British pound surged 1.2% to $1.234.
• The Japanese yen strengthened 0.2% to 107.54 per dollar.

Bonds

• The yield on 10-year Treasuries added threebasis points to 0.69%.
• Germany’s 10-year yield climbed seven basis points to -0.43%.
• Britain’s 10-year yield rose four basis point to 0.21%.
• Japan’s 10-year yield rose one basis point to 0.008%.

Commodities

• West Texas Intermediate crude gained 2.1% to $33.93 a barrel.
• Gold futures weakened 1.6% to $1,725 an ounce.

©2020 Bloomberg L.P.