Wall St nears record, global stocks lifted by hopes for Fed and US-China trade

  • Business
  • Tuesday, 18 Jun 2019

"Obviously, equities are yielding more than bonds here and that's the game that everybody has to play," said David Clott, a co-portfolio manager of the $1.3 billion Westwood Income Opportunity fund. "The low yields in the fixed-income market are making you take risk elsewhere."

NEW YORK: Global stocks rallied on Tuesday and benchmark government bond yields tumbled after European Central Bank President Mario Draghi hinted at economic stimulus, with equities getting an extra boost from confirmation that U.S. President Donald Trump would meet China's president to talk about trade.

The euro also weakened after Draghi said the ECB will ease policy again if inflation fails to accelerate, signalling one of the biggest policy reversals of his eight-year tenure.

Draghi's comments spurred talk that the Federal Reserve would also soon start easing monetary policy by cutting interest rates, with the U.S. central bank set to give its policy statement on Wednesday.

"In the U.S., it got translated into, 'Oh great, this means the Fed will have to cut,'" said Carol Schleif, deputy chief investment officer with Abbot Downing in Minneapolis. "But we don’t necessarily think they have to or should this soon."

The Fed is expected to leave borrowing costs unchanged at its meeting this week but possibly lay the groundwork for a rate cut later this year.

Trump has sought to influence the Fed to cut rates. In response to Draghi's comments, Trump on Tuesday accused the ECB president of trying to weaken the euro to gain an unfair competitive advantage.

Trump also said he would have an extended meeting with Chinese President Xi Jinping at the G20 summit later this month, as the world's two largest economies rekindle trade talks. China, which previously declined to say whether the two leaders would meet, confirmed the get-together.

"There had been some question in markets in the last few days about whether or not that meeting was actually going to happen," Schleif said. "It still remains to be seen what comes out of that meeting."

MSCI's gauge of stocks across the globe gained 1.04%.

On Wall Street, the Dow Jones Industrial Average rose 353.01 points, or 1.35%, to 26,465.54, the S&P 500 gained 28.08 points, or 0.97%, to 2,917.75 and the Nasdaq Composite added 108.86 points, or 1.39%, to 7,953.88.

The pan-European STOXX 600 index rose 1.67%, its best day since January.

Benchmark bond yields fell globally following Draghi's hints of more stimulus, with German bond yields hitting record lows deep in negative territory, around -0.32%, and French 10-year yields turning negative for the first time.

Benchmark U.S. 10-year notes last rose 8/32 in price to yield 2.0578%, from 2.086% late on Monday.

"Draghi was extremely dovish and this had a big impact on Treasuries as we anticipate the Federal Reserve," said Ellis Phifer, market strategist at Raymond James in Memphis, Tennessee.

The dollar index, which measures the greenback against a basket of currencies, rose 0.06%, with the euro down 0.18% to $1.1197.

Oil prices rose sharply after Trump confirmed his meeting with Xi.

U.S. crude settled up 3.8% at $53.90 a barrel, while Brent settled at $62.14 a barrel, up 2%.

Later Reuters reported:

Wall Street surged on Tuesday and the S&P 500 approached a record high after Washington rekindled trade talks with Beijing, boosting sentiment along with growing investor confidence that the Fed will cut interest rates this year.

U.S. President Donald Trump said he would meet with Chinese President Xi Jinping at the G20 summit later this month, and said talks between the two countries would restart after a recent lull.

Global stock markets have rallied and retreated repeatedly in recent months in reaction to comments from Trump about progress - or lack of progress - in negotiating an end to the trade conflict. Trump's statement on Tuesday pushed trade-sensitive industrials up 1.9% and technology stocks gained 1.7%. Together, they were the biggest boost to the benchmark index.

Chip companies, which have a sizable revenue exposure to China, led the rally in tech stocks, with the Philadelphia Semiconductor index surging 4.3%.

"We can't discount how big a deal it is for China and the U.S. not to go into a prolonged trade spat. I don't think we're out of the woods yet, though," said King Lip, chief investment strategist at Baker Avenue Asset Management in San Francisco.

"I’d wait for the G20 meeting to see actual discussions coming out of that before we go back into a risk-on mode," he said.

The U.S.-China trade war and its impact on economic growth have investors increasingly expecting the Federal Reserve will cut rates to preserve the U.S. economic expansion, which would be the longest on record this summer.

The Fed is widely expected to leave interest rates unchanged at its two-day policy meeting that ends Wednesday, while laying the foundation for a cut later this year. The Fed is scheduled to release its statement at 2 p.m. (1800 GMT) on Wednesday and Chairman Jerome Powell will hold a press conference shortly after.

The S&P 500 has gained 6% so far this month, and is only about 1% from the all-time high hit in early May.

The Dow Jones Industrial Average jumped 1.35% to end at 26,465.54 points, while the S&P 500 gained 0.97% to 2,917.75.

The Nasdaq Composite surged 1.39% to 7,953.88.

Comments by European Central Bank President Mario Draghi indicating the possibility of fresh rate cuts or asset purchases also lifted sentiment.

Apple Inc, Amazon.com Inc and Microsoft Corp rose between 0.8% and 2.4%, with the tech triumvirate contributing more than any other stocks to increases in the S&P 500 and Nasdaq.

Boeing Co jumped 5.4%, buoying the Dow, after the planemaker received an order for its 737 MAX jets valued at more than $24 billion at list prices; the 737 MAX has been grounded since March after two deadly crashes.

The utilities, real estate and consumer staples sectors, all of which are viewed as defensive, were the only decliners.

With about two weeks left in the second quarter, analysts on average expect second-quarter S&P 500 earnings per share to increase by 0.2%, according to IBES data from Refinitiv. In early April, that estimate stood at 2.8% growth.

The S&P 500 posted 57 new 52-week highs and 1 new low; the Nasdaq Composite recorded 85 new highs and 46 new lows.

Volume on U.S. exchanges was 7.0 billion shares, compared to the 6.8 billion average for the full session over the last 20 trading days. - Reuters

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