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Stocks Give Back Ground But Remain Firmly Positive - U.S. Commentary


Stocks have given back some ground after an initial move to the upside but remain mostly positive in mid-day trading on Monday. The major averages are adding to the substantial gains posted last week.

Currently, the major averages remain firmly in positive territory. The Dow is up 171.67 points or 0.7 percent at 25,710.13, the Nasdaq is up 75.41 points or 1 percent at 7,405.94 and the S&P 500 is up 17.42 points or 0.6 percent at 2,777.59.

The initial jump on Wall Street reflected a positive reaction to the highly anticipated meeting between President Donald Trump and Chinese President Xi Jinping over the weekend.

At the meeting, Trump and Xi agreed to a 90-day truce in the escalating trade war between the world's two largest economies as they work to reach a long-term trade deal.

A White House statement said Trump agreed not to raise the tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent on January 1st as planned.

In return, China agreed to purchase a "not yet agreed upon, but very substantial, amount" of agricultural, energy, industrial, and other product from the U.S.

The White House said the U.S. and China will use the next 90 days to attempt to reach an agreement on issues such as forced technology transfer, intellectual property protection, and non-tariff barriers.

If the two countries are not able to reach an agreement by the end of the time period, the 10 percent tariffs on Chinese goods will be raised to 25 percent.

In remarks to reporters aboard Air Force One, Trump called the agreement with Xi an "incredible deal," claiming it will have an "incredibly positive impact" on "every type of product."

Trump also said China will be "opening up" and "getting rid of tariffs," stating in a subsequent post on Twitter that China has agreed to reduce and remove tariffs on cars coming into the country from the U.S.

Paul Ashworth, Chief U.S. Economist at Capital Economics, noted Trump ripped up an earlier trade deal with China negotiated by Commerce Secretary Wilbur Ross.

"We suspect that since he negotiated this deal himself, Trump will be much more reluctant to torpedo it when his own personal reputation is on the line," Ashworth said.

He added, "Nevertheless, his own administration includes plenty of China hawks who are pushing the protectionist agenda, so we suspect China will have to offer a little more than the minor concessions that South Korea, Mexico and Canada agreed to reach trade deals with the U.S."

On the U.S. economic front, the Institute for Supply Management released a report showing an unexpected acceleration in the pace of growth in manufacturing activity in the month of November.

The ISM said its purchasing managers index climbed to 59.3 in November after falling to 57.7 in October, with a reading above 50 indicating growth in manufacturing activity. Economists had expected the index to edge down to 57.5.

Meanwhile, a separate report from the Commerce Department showed construction spending unexpectedly edged lower in October.

Sector News

Steel stocks have pulled back off their best levels of the day but continue to see considerable strength in mid-day trading amid optimism about Chinese demand.

Reflecting the strength in the steel sector, the NYSE Arca Steel Index is up by 2.7 percent, continuing to rebound after hitting its lowest closing level in well over a year last Tuesday.

Significant strength also remains visible among oil service stocks, as reflected by the 2.3 percent jump by the Philadelphia Oil Service Index.

The rally by oil service stocks comes amid a sharp increase by the price of crude oil, with crude for January delivery surging up $1.22 to $52.15 a barrel.

Semiconductor, retail, and computer hardware stocks also continue to turn in strong performances on the day, while some weakness has emerged among pharmaceutical stocks.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved significantly higher during trading on Monday. Japan's Nikkei 225 Index jumped by 1 percent, while Hong Kong's hang Seng Index surged up by 2.6 percent.

The major European markets also showed strong moves to the upside on the day. While the German DAX Index shot up by 1.9 percent, the U.K.'s FTSE 100 Index and the French CAC 40 Index advanced by 1.2 percent and 1 percent, respectively.

In the bond market, treasuries have turned higher over the course of the session after seeing initial weakness. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, is down by 1.6 basis points at 2.997 percent.

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