Trade Truce Lands in Stock Market Already Rallying on Dovish Fed
(Bloomberg) -- For investors convinced the stock market’s biggest burdens are a too-fast Federal Reserve and Donald Trump’s trade war, the last five days have brought a distinct lightening in the load.
First there were dovish words on interest rates from Fed Chairman Jerome Powell that raised hopes a bottom might form around last month’s low in the S&P 500. Now bulls are getting excited about a promise by the U.S. president and Chinese President Xi Jinping to put a temporary halt on new tariffs.
Whether it’s enough to spur lasting gains, time will tell. Investors face a medley of threats in late 2018 that go well beyond Powell and trade. Still, heading into the weekend summit, a rough consensus existed that even after the biggest weekly rally since 2011, stocks had not quite priced in a full-blown thawing in the tariff standoff.
“This is certainly quite positive,” said Matt Maley, equity strategist at Miller Tabak. “We now have the two big issues pushed to the back burner, but they’re both still there, so I don’t see a move back to the all-time highs.”
With a month left in the year, the S&P 500 is up 3.2 percent in 2018 and sits close to the midpoint of its annual range. Relative to earnings, the index trades at a multiple of about 19, cheaper than any time since early 2016.
Several high-profile strategists had been playing down chances of an accord last week, a fact that may have shaded bullishly for equity futures, which rallied Sunday night in New York. Caveats abound, including the possibility something happens on Trump’s twitter handle in the next hours or days to diminish the cheer. For now, strategists are optimistic.
“This is a strongly market positive result for the short term,” wrote Terry Haines, the head of political analysis at Evercore ISI. Before the weekend, other analysts at the same firm had seen a one-in-three chance Trump would pause or delay a January escalation of 25 percent tariffs on $200 billion of Chinese imports. On Saturday, the White house said the U.S. will leave existing tariffs at 10 percent and refrain from raising them on Jan. 1.
Something was stoking investor imaginations at the end of the week. The cash S&P 500 tacked on 20 quick points in the last three hours of Friday’s session, while several series of bullish call options on the iShares China Large-Cap ETF were among the most heavily traded equity derivatives in U.S. markets on that day.
“The markets will react to the truce favorably, and I expect to see a bounce on Monday,” said Tim Ghriskey, chief investment strategist at Inverness Counsel LLC. “It may take the pressure perhaps to the extend that we a Santa Claus rally and a nice January, but as we get closer to April 1 when the standstill agreement expires, we’ll see more pressure again."
Goldman Sachs strategists including Cole Hunter and David Kostin saw signs the mood was improving, noting gains in a basket of U.S. stocks with high China sales that advanced 2.4 percent last month, more than double the S&P 500’s gain. In a note Thursday, they said that suggests “modest optimism among investors heading into the G-20 summit, echoing the tone of our discussion with clients.”
“Accordingly, we would expect market appreciation if a surprise resolution were achieved, but limited downside in the event that the summit passes without any positive signal for future trade improvement,” the Goldman analysts wrote.
Bullish signals from Buenos Aires went beyond tariffs. Xi said he would consider approving a possible $44 billion deal for Qualcomm Inc. to purchase NXP Semiconductors NV if it’s brought to him again, the White House said in a statement. The canceled takeover was the highest-profile victim of the trade dispute between the world’s two largest economies.
Keith Parker, head of U.S. equity strategy at UBS, said about 250 points of upside could be realized in the S&P 500 if trade concerns thawed.
The market “is pricing some risk of further escalation in our view, and thus the absence of a negative G-20 outcome (i.e. agreement to just keep talking) could see the S&P 500 trade toward 2,800,” Parker wrote in a note this week. An escalation might have sent the S&P 500 to 2,550. It closed Friday at 2,760.
©2018 Bloomberg L.P.