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S&P 500 clinches new closing high after U.S.-China trade truce

U.S. stocks rose Monday after the U.S. and China agreed to a trade truce during the G20 summit over the weekend.

The S&P 500 (^GSPC) rose 0.77%, or 22.58 points, as of market close, with the tech sector leading advances. The index briefly surpassed its previous all-time intraday high earlier Monday, reaching surging to as high as 2,977.93. It closed at a new record high of 2,964.33, eclipsing its previous closing high from June 20, and had its best start to July since 2011.

The Dow (^DJI) rose 0.44%, or 117.47 points, but curbed some gains after adding as many as 290 points earlier in the session. The Nasdaq (^IXIC) advanced 1.06%, or 84.92 points.

July’s first trading day has historically been the most bullish first day of all 12 months of the year, according to data compiled by the Almanac Trader. In the past 21 years, the S&P 500 has risen 85.7% of the time on the first day of trading in July, with an average gain of 0.42%.

Equities got a boost to kick off the second half of 2019 after a meeting between President Donald Trump and China’s Xi Jinping on the sidelines of the G20 summit in Osaka, Japan ended with a de-escalation of tariff tensions, for the time being.

President Donald Trump said he would refrain from imposing additional tariffs on $300 billion worth of Chinese goods. The move helped alleviate the threat of additional duties after hundreds of companies over the past several months came out against Trump’s preferred negotiation tool.

Wall Street had largely anticipated that the two sides would agree to pause on additional tariffs during the summit. Less certain is whether the existing tariffs on $250 billion worth of Chinese goods will be rescinded as the two sides work toward a more permanent trade deal. A report from the Wall Street Journal ahead of the G20 summit suggested Xi Jinping would request that the U.S. lift all punitive tariffs against China as a precondition for a trade agreement.

U.S. President Donald Trump meets with China's President Xi Jinping at the start of their bilateral meeting at the G20 leaders summit in Osaka, Japan, June 29, 2019. REUTERS/Kevin Lamarque

In a less expected move, Trump also reversed a blacklisting of China’s Huawei, allowing U.S. companies to continue selling to the telecommunications giant so long as they do not involve parts that could threaten national security. The decision sent chip stocks including Intel (INTC), Qorvo (QRVO), Nvidia (NVDA) and Advanced Micro Devices (AMD) higher Monday morning, as many of the companies rely on Huawei as a customer.

China, for its part, agreed to purchase a “tremendous” amount of goods to help ease the U.S. trade deficit, Trump said.

Risk assets were bid up amid the temporary trade truce. Crude oil prices (CL=F) surged in lockstep with equities Monday, with a decision by OPEC and affiliated oil producers to extend cuts to crude oil production for another nine months helping to support the rally. Safe haven assets including gold (GC=F) and U.S. Treasuries fell, and the U.S. dollar rose (DX-Y.NYB) against major peers.

Despite the optimism reflected in markets Monday, some analysts have already questioned the longevity of this weekend’s ceasefire, given the previous pattern of behavior between U.S. and Chinese leaders in the wake of the G20 summit in Buenos Aires in December.

"This is now becoming a familiar pattern in the U.S. strategy, and one not limited to its dealings with China: to threaten the imposition of tariffs by a certain date, but then to delay that date, sometimes repeatedly,” Klaus Baader of SocGen wrote in a note Sunday.

“On the fringe of the G20 Summit in Argentina in December 2018, this occurred with respect to the threatened hike to 25% from 10% of the tariffs on the $200bn list: they were first delayed and then suspended, only to be activated when talks broke down in early May – they took effect at the start of June,” he said. “The same tactic was also employed with the threatened tariffs on automobile imports, which were suspended for six months in May 2018.”

Other analysts have assumed a more upbeat take on the meeting.

“Optimistic observers of the developments over the weekend point to the fact that both leaders took time to meet and suggest that both sides may have learned enough from the failure of their earlier negotiation to avoid making the same mistakes twice,” John Stoltzfus, Oppenheimer chief investment strategist, wrote in a note Monday.

Meanwhile, the Chinese economy showed some signs of deterioration in June before this weekend’s detente. China’s Caixin manufacturing purchasing managers’ index reflected a contraction in manufacturing activity in the country in June for the first time in four months, led by a decrease in new orders. The reading of 49.4 – down from 50.2 in May – was the lowest since January for the manufacturing sector, which comprises about one-third of China’s gross domestic product.

ECONOMY

U.S. manufacturing sector activity rose unexpectedly to 50.6 in June, according to IHS Markit’s final manufacturing purchasing managers’ index for the month released Monday. This was above the reading of 50.1 previously reported, and higher than the neutral level of 50, indicating expansion. While the reading held near May’s near-decade low, it was boosted slightly by a rise in new order, IHS Markit reported.

“Although business optimism about the future lifted slightly higher, it remained close to survey lows to indicate persistent low morale,” Chris Williamson, chief business economist at IHS Markit, wrote in a statement. “Worries centered on signs of slowing demand both at home and internationally, weaker sales, and geopolitical uncertainty.”

Meanwhile, the Institute for Supply Management reported a deceleration in U.S. manufacturing activity growth in its purchasing managers’ index, which fell to 51.7 in June from 52.1 in May. June’s reading was above consensus economist expectations for a reading of 51.0, according to Bloomberg data. The index was weighed down by a decline in raw material prices, which contracted in June for the first time since February. The sub-index tracking new orders fell 2.7 points from May to a neutral level of 50.0, indicating neither growth nor contraction in June.

“Comments from the panel reflect continued expanding business strength, but at soft levels; June was the third straight month with slowing PMI expansion,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. He noted that respondents “expressed concern about the U.S.-China trade turbulence, potential Mexico trade actions and the global economy” during the survey period, which took place before this weekend’s G20 summit.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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