Stocks jumped at the open (Dow +260 pts; SPX +1.25%) after the Secretary of Commerce said President Trump intends to delay restrictions on US companies doing business with China’s Huawei Technologies. This has been flashpoint between US and Chinese trade negotiators, with the president using it alternatively as a carrot and then a stick. Traders are enjoying the carrot today; maybe we’ll see the stick again tomorrow or next week. UBS’s Rob Sechan says 85% of stock exchange trade volume during this month’s correction has been either ETF or algo-based—in other words, driven by short-term traders. All eleven major market sectors are in the green today. The cyclical sectors like energy, tech and consumer discretionary are leading the charge, up more than 1.3%. Interest rates jumped, allowing the banks to rally as well. WTI crude oil bounced back to $55.50/barrel, and gold is down .8%. Bonds sold off on higher yields. The 10-year Treasury yield climbed back to 1.60%. Junk bond are the exception, up .25%, as they typically trade along with stocks.
China announced policy changes aimed at stimulating its sagging economy. The central bank will now set the prime lending rate for all commercial and retail loans, announcing it on the 20th of each month going forward. Lenders will be required to reference that rate from now on. Bloomberg says this should provide more transparency to the financial system in China, and should result in lower lending rates. The Financial Times says the new system should allow rates to be more market-driven.
Given the higher level of uncertainty and volatility in capital markets, Morgan Stanley’s Mike Wilson warns investors not to ignore diversification in their portfolios. “Diversification is not something you turn on and off. You have it all the time. You’re always invested in stocks.” You shouldn’t be “shooting for the moon, chasing breakouts, trying to sell everything at the…perfect time. It’s being fully invested and tilting your portfolios ahead of the changes that are going on to cushion the blow. We want to stay fully invested through the cycle.”