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Stocks Rise as Partial Trade Deal Lays Groundwork for Truce on Additional Tariffs

James Hyerczyk

The major U.S. equity indexes rose last week with the rally primarily driven by optimism that U.S. and Chinese trade officials made sufficient progress in negotiations to bring the two economic powerhouses closer to a permanent end to their more than 15-month trade dispute.

At the end of the week, President Trump announced that both sides had agreed to a partial trade deal or phase one of a series of partial trade deals. It wasn’t the ground-breaking news that many investors had hoped for, however, it day lay the groundwork for a truce on additional tariffs.

In the cash market last week, the benchmark S&P 500 Index settled at 2970.27, up 0.6%. It’s up 18.5% for the year. The blue chip Dow Jones Industrial Average finished at 26816.59, up 0.9%. It’s posted a 15.0% gain so far this year. The technology-based NASDAQ Composite closed at 8057.04, up 0.9%. In 2019, it’s up 21.4%.

What’s the Deal with the Partial Deal?

U.S. equities were unpinned at the end of the week after President Trump said China and the U.S. reached the first phase of a substantial trade deal that delays tariff hikes that were to kick in this week.

Late in the session on Friday, Trump told reporters at the Oval Office that phase one of the trade deal will be written over the next three weeks.

As part of this phase, China will purchase between $40 billion and $50 billion in U.S. agricultural products. Trump also said the deal includes agreements on foreign-exchange issues with China. In exchange, the U.S. agreed to hold off on tariff hikes that were set to take effect Tuesday.

Additionally, Treasury Secretary Steven Mnuchin said both sides struck an “almost complete agreement” on currency and financial services issues. Phase two of the deal will “start almost immediately” after the first one is signed, Trump said.

Big Tech, Banks and Chipmakers Liked the News

Despite quite a few calls for caution, at the end of the trading session, the data revealed that Big Tech, Banks and chipmaker investors liked the news. Since stock investors tend to discount future events, they were probably happy because the tariffs that were set to begin on October 15 had been suspended.

The previous tariffs are still in place, but they have been priced into the market. On September 11, President Trump announced that he was delaying plans to impose an additional 5 percent duty on $250 billion worth of Chinese goods on October 15. These tariffs will be suspended with the partial deal in place.

Stocks rose on the news because many investors had sold on September 11 so it’s catch up time for them.

At the end of the session, Facebook, Amazon and Google parent Alphabet were all up at least 0.5%.

Last week’s rapid rise in Treasury yields caused by investors exiting their bond market hedges, made bank stocks more attractive with Bank of America and J.P. Morgan Chase surging more than 1.6% each.

Finally, chipmakers, which had been the center of attention due to tariffs and sanctions against Chinese communication giant Huawei, rose broadly. Among the winners, Micron Technology gained more than 4%, while Xilinx climbed 3.7%.

This article was originally posted on FX Empire