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S&P 500 futures rise as tariff thaw extends best gain since 2011

US stock futures surged as a cessation of hostilities between the US and China in their trade war helped bulls build on the biggest weekly advance in seven years.

[NEW YORK] US stock futures surged as a cessation of hostilities between the US and China in their trade war helped bulls build on the biggest weekly advance in seven years.

December contracts on the S&P 500 jumped 1.8 per cent as at 12.30pm in Tokyo, while futures on the Nasdaq 100 Index rallied 2.3 per cent. The cash S&P 500 climbed 4.9 per cent in the five days through Friday, fuelled by a dovish take on interest rates from Federal Reserve chairman Jerome Powell.

Investors bracing for disappointment at the G-20 summit instead got a pledge from US President Donald Trump to delay new tariffs for 90 days as trade negotiations are redoubled. The US had previously threatened to push ahead on Jan 1 with higher levies on US$200 billion worth of Chinese goods.

"Powell's comments were a net positive for the markets, and the trade truce will be another stimulus," Walter Hellwig, senior vice-president at BB&T Wealth Management, said.

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"Together, they alleviate the two main concerns the markets have had for months and set the stage for a year-end rally. It's a big difference from where we were last weekend."

Seven days ago, the S&P 500 had just capped its second straight down week and stumbled into a correction, capping a 10 per cent drop from its last record close in September. In addition to trade and central-bank worries, investors have been beset by concerns the rate of global growth is slowing and that 2019 earnings estimates for US companies are too high. A stomach-turning drop in oil prices from above US$75 a barrel to around US$50 now has also tested conviction about the economy.

Weekend developments may provide "short-term relief, but in reality it's just ‘kicking the can down the road'", said Michael Mullaney, director of global markets research at Boston Partners.

"Near-term focus will now shift back to the Fed and what they do with the dot plot this month. My instinct is that investors will be expecting a more dovish alteration to the current 'vote' distribution. If that doesn't happen, the market will be pressured again."

Nothing that happened this weekend was ever likely to sound an all-clear for markets, Dennis Debusschere, Evercore's head of portfolio strategy, wrote last week. Volatility has been a fact of life for anyone owning US equities since January, a stretch that featured two 10 per cent corrections and more single-session declines of at least 3 per cent than happened in the previous three years.

"If a trade war ‘ceasefire' is reached at the G-20, it would provide a boost to risk assets near term," he said. "But the damage from trade spats along with the general weakening of global growth remains a medium/long-term headwind."

With a month left in the year, the S&P 500 is up 3.2 per cent in 2018 and sits close to the midpoint of its annual range. Relative to earnings, the index trades at a multiple of about 19, cheaper than any time since early 2016.

Several high-profile strategists had been playing down chances of an accord last week, which may be contributing to the steepness of the rally in futures. Caveats still abound, including the possibility something happens on Trump's twitter handle in the next hours or days to diminish the cheer. For now, strategists are optimistic.

"This is a strongly market positive result for the short term," wrote Terry Haines, the head of political analysis at Evercore ISI. Before the weekend, other analysts at the same firm had seen a one-in-three chance Trump would pause or delay a January escalation of 25 per cent tariffs on US$200 billion of Chinese imports. On Saturday, the White House said the US will leave existing tariffs at 10 per cent and refrain from raising them on Jan 1.

Still, something was sowing optimism at the end of last week. The cash S&P 500 tacked on 20 quick points in the last three hours of Friday's session, while several series of bullish call options on the iShares China Large-Cap ETF were among the most heavily traded equity derivatives in US markets on that day.