European Stocks Defy Trade Storm Clouds

(Bloomberg) -- Sometimes, it’s worse to travel than to arrive.

The Stoxx Europe 600 is set for its best day in more than a month as higher U.S. tariffs hit Chinese goods Friday, while Hong Kong stocks climbed 1 percent. This comes after the S&P 500 rebounded from its session low on Thursday to close just 0.3 percent weaker.

Of course, much of this is because it’s been a brutal enough week already. The U.S. and European benchmarks are set for their sharpest five-day decline since the depths of the fourth-quarter meltdown, as markets braced for increased American tariffs on more than $200 billion of Chinese imports and as Beijing vowed to retaliate. Shares might also have enjoyed a boost from China’s world-famous Plunge Protection Team, as the Shanghai market rallied amid speculation state funds stepped in.

“After this week’s decline in markets, some risk is now already priced in,” Mark Haefele, global chief investment officer at UBS Wealth management, wrote in a note. “Markets would be reassured by a measured response from China, indications over a new time frame for a conclusion to talks, and an absence of preparations for further tariff hikes from the U.S.”

Fundamentally, investors still see the tariff hike as mostly a negotiating tactic -- though given how much shares have jumped in 2019, it’s not hard to see pessimism spreading if a truce isn’t reached soon. A breakdown in talks could see U.S. equities drop 10 to 15 percent and the Chinese market lose 15 to 20 percent, Haefele added.

Global equity funds posted $21 billion of outflows in the week through May 8, the most this year, amid renewed trade tensions, according to a Jefferies report citing EPFR Global data. Futures are pointing to a fifth straight day in the red for the S&P 500.

Still, markets are enjoying a reprieve for now before the New York open, with U.S.-China talks due to resume later on Friday in Washington. In Europe, cyclical sectors that were the hardest hit this week saw the sharpest rebounds, led by technology and financial services.

“Market participants had already anticipated the new U.S. tariffs,” said Stephane Ekolo, equity strategist at TFS Derivatives in London. “The fact that the negotiations are still continuing can be taken as a good omen.”

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen

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