Markets Rally as Trade and Brexit Uncertainties Recede -- Update

By Steven Russolillo and Joanne Chiu

Global stocks rallied Friday as signs of progress in resolving two major overhangs -- the U.S.-China trade spat and Brexit -- bolstered investors' risk appetite late in what is already a banner year for markets.

Futures linked to the Dow Jones Industrial Average climbed 0.4%. The index for blue-chip stocks gained 0.8% on Thursday after President Trump said the U.S. and China were nearing a deal, while the S&P 500 closed at a record high. Mr. Trump has agreed to a limited trade agreement with Beijing that will roll back existing tariff rates on Chinese goods and cancel new levies set to take effect Sunday, The Wall Street Journal reported Thursday.

In the U.K., the FTSE 100 index rose over 1% after a resounding election victory for Prime Minister Boris Johnson's Conservative Party overnight raised hopes for a quick divorce from the European Union. The pound rallied 0.2% against the dollar on Friday to trade at $1.3416, its highest level since June 2018.

"The geopolitical risks thought to be strangling world economic growth, incredibly, just in the last 24 hours, seem to be closer to getting resolved in a big, big way," said Chris Rupkey, chief financial economist at MUFG. "The outlook in 2020 looks better than it has in months."

Mr. Rupkey said he expects stocks around the world to keep rallying and bond yields to rise further.

The pan-continental Stoxx Europe 600 index advanced 1.1%.

In Asia, Japan's Nikkei 225 jumped 2.6% on Friday, putting the benchmark on pace for one of its best days of the year. Hong Kong's Hang Seng Index gained 2%. The Shanghai Composite in China rose 1.2%.

The WSJ U.S. Dollar Index fell 0.3%. A U.S.-China trade deal, Britain's possible orderly exit from the EU, and looser monetary policy in the U.S. and Europe together set the stage for a "decent selloff" in the dollar, according to Mansoor Mohi-uddin, senior macro strategist at NatWest Markets.

To be sure, previous breakthroughs in both trade and Brexit have proven to be false dawns. Trade tensions have dragged on for almost two years, while Britain's divorce from the EU has been bogged down in the country's Parliament since the June 2016 referendum.

Still, the elevated political uncertainty, which is also fueled by U.S. impeachment proceedings, hasn't stopped many stock markets from enjoying an exceptional year.

The S&P 500 has rallied 26%, on pace for its best annual performance in six years. The rally has been underpinned by the Federal Reserve, which has cut interest rates three times this year to shore up growth, a reversal after four increases last year. Earlier this week, it kept rates steady and showed no appetite to raise them soon.

The about-face has rippled through global markets. The Stoxx Europe 600 has risen 21% this year, while indexes in mainland China, Japan and Taiwan are up by double-digit percentages. The MSCI All Country World index has risen more than 20%.

Some observers are concerned about how much more markets could rally from here. Eli Lee, head of investment strategy at Bank of Singapore, said investors should expect modest returns in the coming years, given already-rich equity valuations. "Although the bull market won't die in 2020, there are good reasons for return expectations to be moderate," he said.

-- Anna Hirtenstein in London contributed to this article.

Write to Steven Russolillo at steven.russolillo@wsj.com and Joanne Chiu at joanne.chiu@wsj.com

(END) Dow Jones Newswires

December 13, 2019 04:06 ET (09:06 GMT)

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