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Stocks close higher after big rebound on China hopes

CNBC logo CNBC 5/10/2019 Yun Li
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Stocks staged a massive reversal Friday after President Donald Trump said conversations with China over trade will continue and his relationship with President Xi remains strong.

The Dow finished the day 114 points higher at 25,942, roaring back from a 358-point loss earlier in the session that came in the wake of a tariff increase by the U.S. effective just after midnight. The S&P 500 eked out a 0.37% gain to close at 2,881 and the Nasdaq rose 0.08% to end at 7,916 after stocks rallied from their lows.

Stocks hit session highs after Trump's late Friday tweet and closed near those levels. The president also noted that the trade talks with China were "candid and constructive." Trump said the new tariffs on $200 billion worth of Chinese goods "may or may not be removed" in the future.

Major averages began paring some of their losses midday after Treasury Secretary Steven Mnuchin said China trade talks were "constructive." Chinese Vice Premier Liu He also said the talks went "fairly well," according to reports.

Despite Trump's tweet, Mnuchin later told CNBC no official talks are planned as of now.

"It's really likely that it gets resolved and if it does, you've got to believe we'd be back at highs very quickly," said Jim Paulsen, chief investment strategist at The Leuthold Group. "Because around it, there's a good story – a lot of green shoots, rates are staying low and better earnings."

While a Trump tweet pushed stocks higher into the close, it was an earlier tweet by the president that helped send the market to its low of the session. Trump said in a early morning Twitter post there's "absolutely no rush" on a trade agreement with China. The comments came after he slapped higher tariffs — from 10% to 25% — on $200 billion worth of Chinese goods. Apple, which has growing China revenue exposure for the iPhone, was still down 1.4% on Friday.

The president added that tariffs will make the United States much stronger and that "China shouldn't renegotiate deals with the U.S. at the last minute."

Trump's "bark is worse than his bite a lot of the times," said Arian Vojdani, investment strategist at MV Financial. "We might see him try to come down a little hard, but ultimately people really don't think we are going to see that drastic trade war play out ... The administration is very keen on markets and they don't want to see pain."

Companies that are hinging on a trade resolution remained under some pressure. Friday's drop in Apple brings its weekly loss to nearly 7%. Chipmakers took a big hit on fears of an escalated trade war as the VanEck Vectors Semiconductor ETF posted its worst week of the year and longest losing streak since October 2018.

Ride-hailing giant Uber began trading on the New York Stock Exchange Friday at $42 per share, after pricing at $45 per share. The stock finished the day 7.6% lower.

Still time for a deal?

Some market participants are holding onto the hope that the new tariffs are not applied to Chinese exports that are already in transit before the deadline, so that provides some additional time for the two sides to reach an agreement.

"A 'grace period' was included on these tariff increases, so that goods currently in transit to the U.S. from China aren't subject to the new 25% tariffs, just the old 10% tariff," Tom Essaye, founder of Sevens Report, said in a note on Friday.

"That grace period was not included in previous rounds of tariffs and is likely an olive branch of sorts to the Chinese side. Given shipping times, goods sent from China today will take two weeks or so to reach the U.S., so if a trade deal is stuck in that time frame, the pain of the 25% tariffs will never be felt," he added.

Yet some believe the trade battle is poised to drag on longer.

"We continue to expect the two sides to reach a trade deal eventually, but this is unlikely to happen in the short term as the war is not painful enough for either side," Zhiwei Zhang, Deutsche Bank's chief Asia economist said in a note on Friday. "China is not likely to give in quickly. The damage to China's economic growth is around -0.2% on an annualized basis, which is manageable."

Trump started this week's market turmoil with two tweets Sunday evening, threatening to hike tariffs on more Chinese exports as Beijing tried to renegotiate.

CNBC's Eustance Huang and Kate Rooney contributed to this report.

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