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Optimism About Trade Leads To Rally On Wall Street - U.S. Commentary


Extending the upward trend seen over the past several sessions, stocks moved sharply higher during the trading day on Friday. With the continued advance, the major averages reached their best closing levels in well over a month.

The major averages ended the day firmly in positive territory. The Dow soared 336.25 points or 1.4 percent to 24,706.35, the Nasdaq jumped 72.76 points or 1 percent to 7,157.23 and the S&P 500 surged up 34.75 points or 1.3 percent to 2,670.71.

Reflecting the four-day winning streak, the major averages moved substantially higher for the week. The Dow spiked by 3 percent, while the Nasdaq and the S&P 500 shot up by 2.7 percent and 2.9 percent, respectively.

The rally on Wall Street comes as traders continued to express optimism about trade talks between the U.S. and China.

Adding to the positive sentiment, a report from Bloomberg News said China has offered to go on a six-year buying spree to ramp up imports from the U.S.

An official familiar with the negotiations told Bloomberg that China would seek to reduce its trade surplus with the U.S. by increasing annual goods imports by a combined value of more than $1 trillion.

The Bloomberg report came on the heels of yesterday's Wall Street Journal report indicating the U.S. is considering lifting tariffs on Chinese goods.

The Wall Street Journal report on Thursday said the U.S. is weighing easing tariffs in an effort to calm markets and give China an incentive to make deeper concessions.

People close to internal deliberations told the Journal that Treasury Secretary Steven Mnuchin proposed the idea of lifting some or all tariffs in a series of strategy meetings.

The people said the aim of easing the tariffs is to advance trade talks and win China's support for longer-term reforms.

The positive news on trade overshadowed a report from the University of Michigan showing a substantial deterioration in U.S. consumer sentiment in the month of January.

The preliminary report said the consumer sentiment index plummeted to 90.7 in January from the final December reading of 98.3. Economists had expected the index to dip to 97.0.

With the much steeper than expected drop, the consumer sentiment index tumbled to its lowest level since hitting 87.2 in October of 2016.

"Consumer sentiment declined in early January to its lowest level since Trump was elected," said Surveys of Consumers chief economist Richard Curtin. "The decline was primarily focused on prospects for the domestic economy, with the year-ahead outlook for the national economy judged the worst since mid 2014."

He added, "The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies."

Meanwhile, a separate report from the Federal Reserve showed industrial production increased by slightly more than expected in December, as jumps in manufacturing and mining output more than offset a sharp pullback in utilities output.

The Fed said industrial production rose by 0.3 percent in December after climbing by a downwardly revised 0.4 percent in November.

Economists had expected industrial production to edge up by 0.2 percent compared to the 0.6 percent advance originally reported for the previous month.

Sector News

Oil service stocks moved sharply higher over the course of the trading session, driving the Philadelphia Oil Service Index up by 3.8 percent to its best intraday level in well over a month.

The rally by oil service stocks came amid a significant increase by the price of crude oil, with crude for February delivery surging up $1.73 to $53.80 a barrel.

Substantial strength was also visible among transportation stocks, as reflected by the 2.6 percent spike by the Dow Jones Transportation Average.

Trucking company J.B. Hunt Transport Services (JBHT) posted a standout gain after reporting better than expected fourth quarter results.

Computer hardware stocks also showed a significant move to the upside, resulting in a 2.6 percent jump by the NYSE Arca Computer Hardware Index.

Semiconductor, tobacco, banking, and networking stocks also moved notably higher, reflecting broad based buying interest.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved notably higher during trading on Friday. Japan's Nikkei 225 Index surged up by 1.3 percent, while Hong Kong's Hang Seng Index jumped by 1.3 percent.

The major European markets also showed strong moves to the upside on the day. While the German DAX Index spiked by 2.6 percent, the U.K.'s FTSE 100 Index and the French CAC 40 Index shot up by 2 percent and 1.7 percent, respectively.

In the bond market, treasuries moved notably lower amid the continued strength on Wall Street. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 3.5 basis points at 2.784 percent.

Looking Ahead

Following the Martin Luther King Jr. Day holiday on Monday, quarterly earnings news is likely to be in the spotlight next week.

Johnson & Johnson (JNJ), Travelers (TRV), IBM Corp. (IBM), Procter & Gamble (PG), Ford (F), Bristol-Myers (BMY), and Intel (INTC) are among the slew of companies due to report their results.

Traders are also likely to keep an eye on reports on existing home sales and leading economic indicators as well as any developments on the trade or government shutdown fronts.

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