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Stocks Rise, Even as U.S.-China Tensions Boil

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Stocks rose Wednesday, even as U.S.-China tensions percolate. Cyclical sectors lead the way, as investors continue to see fiscal and monetary support bridging the gap to what is becoming a reopened U.S. economy. 

All three major U.S. indices rose, with the S&P 500 up as much as 1%. The 10 Year Treasury yield rose to 0.71%. Yields rise when prices fall. 

This comes even as the White House says it is considering placing sanctions on some Chinese parties as a result of the country's new communist national security law, which Democratic protestors in Hong Kong have reacted negatively to. This underscores the growing tension between the two nations, and while recent developments point to a no-deal on the trade and tariffs front, the market is treating this as a longer-term headwind to keep an eye on rather than a short-term concern for stocks.  

Cyclical sectors were outperforming Wednesday. The Invesco KBW Bank etf  (KBWB)  rose 6.2%, with large cap components of the etf like JPMorgan  (JPM)  up 5.2%. The yield curve is expanding, key for bank profitability, as banks borrow short-term to lend longer-term. The spread between the 2-year and 10-year treasury yield rose to 54 basis points, up from 48 basis points on May 13, which marked the start of the recent S&P 500 rally to date of of 7%. 

Even as crude oil prices fall 1.9% to $33 a barrel, oil stocks rose. The Energy Select Sector SPDR etf  (XLE)  rose 1.4%, as oil prices have risen 32% since May 13, a critical development for oil producers’ profitability. 

The yield curve’s expansion signals investors see continued evidence that monetary and fiscal stimulus is providing a bridge to the reopening of businesses and the eventual path in the direction of full employment. The money supply has expanded at an unprecedented rate, according to research from Morgan Stanley strategists, and that liquidity has been distributed to households, businesses and corporations, as banks lend in volume. 

This supports the thesis for at least some mild inflation in the back half of 2020, a bullish cyclical development. Value stocks, many of which are cyclical, have been staging a comeback. The Vanguard S&P 500 value ef  (VOOV)  rose 1.77%. 

The biggest near-term market risk is a second wave of infections and while there hasn’t been a drastic deceleration in the rate of spread across the country, there hasn’t exactly been a re-spike. 

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