European stocks outperform Wall Street as China trade row intensifies

By Josephine Mason and Thyagaraju Adinarayan

LONDON (Reuters) - Since U.S. President Donald Trump's tweets derailed U.S.-China trade talks ten days ago, European stocks have outperformed Wall Street in a sign that investors are pinning their hopes on the region's battered equities weathering the protracted trade spat.

Both the pan-European STOXX 600 and the S&P 500 have fallen since May 3, the trading session before Trump slammed China on trade and threatened more tariffs on billions of dollars of imports from the world's No. 2 economy.

But the European benchmark has outpaced its U.S. peer by about 0.4 percentage points since then.

(Graphic: Europe resilience chart May 14, https://tmsnrt.rs/2W4c2O2)

Though only a small margin, that's a marked change from the past year during which the index has lagged the U.S. market by 9%, as investors have worried about Italy's bulging budget deficit, slowing economic and corporate growth and Britain's chaotic exit from the European Union.

The index also displayed resilience to heavy losses overnight on Wall Street after Beijing retaliated against Washington's latest salvo in the trade row.

Hopes the euro zone economy is through the worst and bottoming out, relatively low valuations and optimism that a U.S.-China deal will soon be brokered are helping fuel the gains, said Lukas Daalder, BlackRock's chief investment strategist for the Netherlands.

There's also some relief that the White House may be too distracted by the Beijing battle to wage another trade war in Europe.

"There's a bit of sentiment around that. It means we're not going to be in rough territory immediately, but that's a silver lining to a really dark cloud," said Daalder.

Slightly encouraging economic data and a better-than-feared first-quarter earnings season have helped soothe investor worries about the region, Paul O'Connor, head of the UK-based multi-asset team at Janus Henderson, said.

Both agreed, though, it's too soon to expect a major rotation of cash back into the region. O'Connor said macroeconomic data still needed to improve significantly.

BlackRock remains 'underweight' EU in favour of the United States because of the trade war and the European parliamentary elections later this month.

(Graphic: Europe outperforms Wall Street May 14, https://tmsnrt.rs/2W4gqwu)

(Reporting by Josephine Mason, Thyagaraju Adinarayan and Helen Reid; Editing by Mark Potter)