Trade Truce Is Good Enough for a Full-on Risk Rally, for Now

(Bloomberg) -- It's not the grand bargain investors once hoped for, but a truce in the U.S.-China trade conflict proved enough to ignite a rally and rotation in European stocks.

The Stoxx Europe 600 rose 0.7% as of 9:29 a.m. in London, heading for its biggest gain in almost two weeks. The moves were large predictable: trade-sensitive sectors including technology, autos, energy and even banks outperformed, while more defensive shares were the biggest laggards. Germany's DAX, which has long been especially sensitive to commerce, is on track for a bull market with a jump of as much as 1.8%.

A meeting between the U.S. and Chinese presidents concluded at the Group of 20 summit on Saturday with the American leader confirming there will be no new tariffs on China. Pundits mostly agreed this was hardly a major breakthrough, but for now the lessened threat of a further escalation was consoling enough for traders, especially on the heels of easing signals from global central banks.

“For equity markets, in the short term, I think this should represent a moderately positive reaction as the probability of an agreement for a U.S.-China trade deal has increased and there is clearly no escalation,” said Roger Jones, head of equities at London and Capital Asset Management. “However, I am skeptical that this will be anything more than just words as ultimately there is an ongoing power struggle between the two countries for global dominance.”

But trade aside, economic data don't exactly point to a cyclical upswing, which might explain Europe's persistently low bond yields. A purchasing managers' index for euro-area manufacturers on Monday slipped further into contraction in June as new orders slid and business confidence remained subdued. The stocks' benchmark retreated from a gain of as much as 1.3% after the news.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, John Viljoen

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