(Bloomberg) — U.S. stocks pared gains that took them to a nine-week high on a report that the Trump administration is considering sanctions on Chinese officials, threatening to escalate tensions between the world’s two largest economies.
Stocks soared earlier as investors poured back into risk assets on speculation the worst of the economic hit from the pandemic has passed. West Texas Intermediate crude pushed toward $34 a barrel. The S&P 500 rose as much as 2.3% as it topped 3,000 for the first time since early March. It pulled back to 1.6% on the latest China headlines.
Fresh economic data showed that the easing of lockdown restrictions is boosting economic activity. The contours of the rally, with small-caps and energy shares leading, suggest investors who doubted its staying power are now targeting areas that have lagged behind so far. Large-cap tech shares, the group that lifted stocks from pandemic lows, trailed Tuesday.
While economic data is still awful by virtually any historic comparison, a consensus among investors is building that the worst is over, easing fear that the rally was a bear trap destined to come undone. Instead, traders are concerned they’ve missed the best of the gains and are seeking returns in the riskiest corners of the market, overlooking rising tensions between Washington and Beijing and a looming earnings recession.
“The fear of missing out is definitely a big factor in this,” said David Spika, president of GuideStone Capital Management, which has about $12.5 billion in assets under management.
Equities briefly pulled back from session highs after the head of Merck & Co. suggested it may take longer than many expect to develop a vaccine and White House economics adviser Larry Kudlow said the president is displeased with China, raising concern political tensions will intensify.
Elsewhere, the Stoxx Europe 600 Index rallied, with travel stocks surging on reports that Germany plans to lift travel warnings for 31 European countries. The U.K. also announced steps toward getting back to business, sending the pound up by the most in almost a month.
Japan led the equity advance in Asia as the world’s third-largest economy reopened, and shares rose in Hong Kong, which showed signs of stabilizing after weekend unrest. Treasuries slid after the three-day U.S. weekend, alongside Germany’s government debt.
While investors’ spirits are being lifted by economic reopenings, there are also mounting signs that coronavirus infection rates are moderating. The Japanese government ended its nationwide state of emergency Monday, while Germany recorded a decline in the number of new virus cases. Signs that more euro area stimulus is on the way is also helping support the appetite for risk.
“The narrative for markets is shifting somewhat, with hopes associated with the easing of lockdown measures in many countries and still very exaggerated hopes of a vaccine being found short-term, needing to be balanced against…
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