US stocks seen rallying higher on trade hopes, strong jobs data

THE momentum is now officially with the bulls. US stocks rose last week as two of the biggest diplomatic messes in recent history moved closer to détente and US jobs data was neither too hot nor too cold.

The rally is likely to continue this week if talks on trade, Brexit negotiations and earnings reports stay on track.

Last Friday's US jobs report might have been designed by stock-market bulls. Employers added almost 200,000 workers , far more than economists had predicted, while the unemployment rate held near a 50-year low.

Not only that, wage growth slowed in March, putting the report in the "Goldilocks" zone, where investors do not have to worry about a recession or inflationary pressures forcing the Federal Reserve to hike rates.

The report erased the memory of February's edition when payrolls grew by a measly 20,000 and stoked bets on cyclical sectors of the stock market.

"The 196,000 jobs added in March shows the US economy is not stalling, something investors were worried about following February's disappointing numbers," said Chris Gaffney, the president of world markets at TIAA Bank.

"This was a perfect report for equity investors as it shows the US economy is still marching along while the wage numbers will keep the Fed on the sidelines."

The jobs report was the latest manic moment for a stock market accustomed to extreme mood swings.

While the mood on stock markets typically drifts between a doomsday outlook and euphoria in the space of a few years, both extremes have been seen since the middle of last December.

At that time, the market was in deep funk, pricing in the collapse of US-China trade negotiations, a drastic slowdown in earnings growth and a series of Fed rate hikes. Also, the UK's plans for leaving the European Union were as clear as mud.

Four months later, and the bulls are in party mood again. Both US President Donald Trump and the Chinese government are hinting that a deal is imminent, corporate valuations suggest optimism about growth, and the Fed is rumoured to be thinking about rate cuts.

British Prime Minister Theresa May is still muddling through Brexit negotiations but, even there, analysts said a breakthrough is more likely than not.

Financial markets have experienced "four seasons in day" over the last few months, said strategists at brokerage Jefferies in a research note. They said markets got ahead of themselves on recession fears. As reflected in the jobs report, "a bottoming out in growth and earnings may take time to evolve".

This week, investors will hope for confirmation that decidedly mixed data at the turn of the year was a bump on the upward path rather than the start of a downhill phase for the economy.

"Retail sales will be important, given concerns over weaker-than-expected previous reports," said Quincy Krosby, chief market strategist at Prudential Financial.

Equally, investors will be eager for the view of the economy from the big banks, which will kick off the earnings season.

"The banks' reports have different perspectives...but they provide an important picture of the domestic economy, to be sure," he said.

JPMorgan, the largest US bank by assets, has already warned that its profit growth is set to slow this year in tandem with economic growth.

Momentum and sentiment are also factors in the bulls' favour. The broad Standard & Poor's 500 has now risen for seven straight sessions, one of its best streaks since the financial crisis. The relentless gains have brought the index to the brink of record highs.

The recent debut of ride-hailing company Lyft, one of the largest initial public offerings (IPOs) in recent years, also showed that venture capitalists have faith in the bull market.

The hype around such IPOs could create further momentum, as new investors excited about nascent companies pile into the stock market, attracting other big startups to launch their own IPOs.

Uber and Pinterest are among those who have already expressed an interest in stock-market debuts.

However, there are areas where the stock market is more tender. Boeing - one of the strongest-performing global industrial stocks - could face further volatility as the investigation into two recent crashes plays out.

German carmakers Volkswagen, Daimler and BMW are under pressure as a EU probe into collusion between the car giants on suppressing emissions-control technology nears completion.

Shares of widely-followed electric-car maker Tesla are also under pressure. Orders for the mass-market Model 3 in the first quarter fell far short of the company's targets. Meanwhile, chief executive Elon Musk continued a rearguard fight with the Securities and Exchange Commission over his freewheeling Twitter style, which regulators view as breaching fair disclosure practices.

These risks appear contained. For now, the most likely course for the stock market is a continuation of the rally to new record highs.