US STOCKS-Wall Street rallies as first trade deal domino falls

Updates to afternoon US trading

By Chuck Mikolajczak

NEW YORK, May 8 (Reuters) - U.S. stocks rallied on Thursday as investors cheered a new trade agreement forged between the United States and Britain, while U.S. President Donald Trump indicated upcoming talks with China would be more substantial than initially thought.

Britain agreed to lower its tariffs to 1.8% from 5.1% and provide greater access to U.S. goods as part of the deal, while a 10% baseline tariff on goods imported from the UK into the U.S. remains in place.

Airline stocks jumped after the U.S.-UK agreement exempted plane parts made by Rolls-Royce RR.L from tariffs, with the S&P 500 passenger airlines index .SPLRCALI up 6%, led by a 7% jump in Delta Air Lines DAL.N.

U.S. Commerce Secretary Howard Lutnick said the UK would buy $10 billion of Boeing BA.N aircraft, sending the planemaker's shares up 4.2% as the best performer on the Dow.

Trump also said he expects substantive negotiations between the U.S. and Beijing on the trade front this weekend and wouldn't be surprised if a deal was reached.

"The biggest lesson is that 10% is the minimum tariff. A deal with the UK was low hanging fruit considering the US runs a trade surplus with the UK. It’s not a template for other trade deals," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"The language around Xi and China helped turn things around. It’s not just a meeting to meet, it’s a substantive meeting. That could speed things along."

The Dow Jones Industrial Average .DJI rose 519.21 points, or 1.26%, to 41,633.18, the S&P 500 .SPX gained 71.48 points, or 1.27%, to 5,702.76 and the Nasdaq Composite .IXIC gained 306.09 points, or 1.73%, to 18,044.25.

Nearly all of the 11 major S&P sectors were higher, led by consumer discretionary .SPLRCD and industrials .SPLRCI.

The domestically focused Russell 2000 small cap index .RUT climbed 2.3% to hit its highest level since April 2, the day the tariffs were initially announced.

Semiconductor stocks .SOX gained 1.9%, building on the 1.7% rise in the prior session after a spokesperson said the Trump administration was planning to rescind and modify a rule that curbed the export of sophisticated artificial-intelligence chips.

The U.S. Federal Reserve held interest rates steady on Wednesday and flagged heightened risks of inflation and unemployment, further clouding the economic outlook for the world's largest economy.

Markets still see the first cut of at least 25 basis points from the Fed at its July meeting, although expectations have dipped to 60% from 92% a week ago, according CME's FedWatch Tool.

On the economic front, weekly initial jobless claims fell more than expected last week, suggesting for some analysts the labor market remains on stable footing, but a separate report showed worker productivity dropped in the first quarter for the first time in nearly three years.

Among others, U.S.-listed shares of Arm ARM.O dropped 4.8% after the chipmaker forecast first-quarter revenue and profit below Wall Street estimates.

Tapestry TPR.N rose 3.6% after the luxury group raised its annual forecasts while Krispy Kreme's DNUT.O shares plummeted 26.7% after the restaurant chain became the latest to withdraw its full-year forecast.

Advancing issues outnumbered decliners by a 2.75-to-1 ratio on the NYSE, and by a 2.49-to-1 ratio on the Nasdaq.

The S&P 500 posted 18 new 52-week highs and four new lows, while the Nasdaq Composite recorded 50 new highs and 88 new lows.

(Reporting by Chuck Mikolajczak, additional reporting by Purvi Agarwal and Johann M Cherian in Bengaluru; Editing by Aurora Ellis)

((charles.mikolajczak@tr.com; @chuckmik.bsky.social))