Global stock markets rally as US government and Fed stimulus hopes emerge

Traders with masks work on the first day of in-person trading since the closure during the outbreak of the coronavirus disease (COVID-19) on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 26, 2020.

Brendan McDermid | Reuters

Stock markets around the world are bouncing back on Tuesday after the U.S. Federal Reserve announced an expansion to its incursion into the corporate credit market.

The Fed revealed that it would begin buying individual corporate bonds on top of the exchange-traded funds it is already purchasing, as part of the central bank’s continuing effort to support financial markets and ease credit conditions.

The announcement caused U.S. stock markets to swing into positive territory by the close of trading on Monday, and futures are signaling a gain of almost 500 points for the Dow at Tuesday’s open.

Wall Street will be further buoyed on Tuesday morning after Bloomberg reported, citing sources familiar with the plan, that President Donald Trump’s administration is readying a $1 trillion infrastructure package, focusing on traditional road and bridge infrastructure along with 5G networks and rural broadband.

European stocks also rode the wave higher in early trade on Tuesday, with the pan-European Stoxx 600 climbing by around 2.4% as all sectors and major bourses on the continent advanced.

This followed a strong session in Asia Pacific, which saw Japan’s Nikkei 225 and South Korea’s Kospi soar by 4.9% and 5.3% by Tuesday’s close to lead broad gains throughout the region.

Worldwide central bank policy remains in focus, with Fed Chairman Jerome Powell set to testify before Congress at 10 a.m. ET on Tuesday.

With markets having heard from Powell last week as he offered a gloomy prognosis for the U.S. economy, the testimony is not expected to produce any surprises, according to Charalambos Pissouros, senior market analyst at JFD Bank.

“However, following yesterday’s announcement over corporate bonds, investors may be eager to find out whether the Fed remains willing to do more in order to support economic activity hit by the pandemic,” Pissouros said in a note Tuesday.

“If so, equities and risk-linked currencies are likely to continue their journey north, as investors keep diverting their capital out of safe havens, the likes of the U.S. dollar, the yen and the (Swiss) franc.”

The Bank of Japan overnight maintained short-term interest rates at -0.1% and the target of the 10-year government bond yields at around 0% as was widely expected, noting that the economy is expected to pick up as the impact of the pandemic subsides.

Minutes released earlier in the day from the Reserve Bank of Australia‘s June policy meeting acknowledged that fiscal and monetary support will likely be required for some time to shore up the economy amid the fallout from the coronavirus pandemic.

Tuesday’s gains mark a reprieve after markets around the world sold off in recent days as new cases and hospitalizations related to the coronavirus spiked in a number of U.S. states which have reopened their economies.

China has also seen a cluster of new infections spreading from a wholesale food market in Beijing, resulting in new restrictions in the district.

“Although China re-introduced restrictions in some areas, as long as governments around the rest of the world continue to ease their lockdown measures, and as long as data continues to suggest that the deep economic wounds due to the fast spreading of the coronavirus are behind us, we would see decent chances for risk assets to stay supported,” Pissouros said.

He added that fiscal and monetary stimulus measures are seemingly doing enough to restart the engines of the global economy, and that in order to reassess that view, governments would have to begin reintroducing “stay at home” orders to curtail a resurgence of the virus.

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