Wall Street’s S&P 500 rose to new record highs yesterday after a gain of 0.8% was spurred by President Trump’s defrosting of trade relations with China after he signalled that U.S. companies could again do business with technology giant Huawei. After meeting Chinese counterpart Xi Jinping at the G20 summit in Seoul over the weekend, it was also announced that broader trade negotiations between the two economic superpowers would recommence.
Yesterday’s charge was led by semiconductor and chipmakers, for whom Huawei is a huge buyer. Qualcomm, Skyworks and Micron, three manufacturers of microchips, were among the session’s strongest gainers, helping drive the tech-centric Nasdaq Composite Index to a gain of 1.1%. Major Asian and European indices had rallied strongly earlier in the day, setting the tone before the opening bell on Wall Street.
China’s CSI index, which includes major companies from both the Shanghai and Shenzhen stock exchanges rose by a whole 2.9% – an indication of how the trade war that has rumbled on for almost a year now is even more damaging to Chinese companies than those in the West. The Euro Stoxx 600 closed to a gain of 1.7%.
Renewed market optimism was further reflected in the drop for ‘safe haven’ assets. Gold fell a whole 2% and U.S. 10-year Treasuries saw their yield tick up 3 basis points as investors lost enthusiasm for bonds.
However, there are some doubts over how solid the foundation the rebound has been built upon is. Some analysts believe yesterday’s overspill of investor optimism can be put down to a reaction to the particularly gloomy sentiment heading into the G20 meeting. Has the bounce been an overreaction to what is only a vague promise of progress? Earlier trade talks have so far shown little sign of leading to a meaningful breakthrough, with both Trump’s administration and China refusing to give much ground. Recent economic indicators out of the U.S. and more globally have also been weak.
Analysts at both Bank of America Merill Lynch and Morgan Stanley still believe that the summer ahead could see stock markets struggle and a new correction take hold. Major investments being held off until there is clarity on a trade deal mean there is little of genuine significance to act as a positive catalyst once post-G20 optimism is ground down by potentially months of gruelling trade negotiations between the U.S. and China.
Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, believes a relatively significant correction could be in the offing over the next few months:
“We still expect a 10 percent correction during 3Q as this past weekend’s agreement is viewed as a sell the news event.”
Bank of America believe that market pain on both sides of the U.S.-China divide is what will finally catalyse any deal, which its analysts think could materialise late in the summer if a deep correction takes hold.