Boundless Fed QE fuels 2% equity bounce, calms dollar
By Sujata Rao
LONDON (Reuters) – Global equities rebounded almost 2% on Tuesday, off near four-year lows, and the dollar slipped as investors pinned hopes on unprecedented stimulus steps by the U.S Federal Reserve and other policymakers to ease strains in financial markets.
While the measures such as the Fed’s offer of unlimited bond-buying won’t immediately mitigate the economic devastation inflicted by the coronavirus outbreak, they will launch more dollars into world markets, allowing companies, funds and banks to access cash to pay creditors, supplier and end-investors.
The prospect had not cheered Wall Street for very long on Monday, with losses of 2-3% on major indexes, but the mood improved on Tuesday, possibly as many other central banks and governments looked set to join the fray. Wall Street futures pointed to stocks opening 4% higher <ESc1>, while a pan-European equity index also rallied a similar amount.
“Today there is a strong recovery connected to the move that the Fed has introduced this massive weapon,” said Francois Savary, CIO of wealth manager Prime Partners, noting the Fed had needed to resolve funding markets seize-ups as a priority.
“The key issue at the end of the day is that we need to deal with a credit markets that is completely closed. First they needed to stop this increase in bond yields… second, they needed to make sure that there is a return of liquidity in the credit then it will be equities – in that sequence.”
The Fed will not only buy unlimited amounts of assets but also expand its mandate to corporate and municipal bonds and backstop a series of other measures that analysts estimate will deliver $4 trillion-plus in loans to non-financial firms.
There were also signs of progress in Congress on a $2 trillion U.S. stimulus deal, which Treasury Secretary Steven Mnuchin hoped was “very close”.
Other countries are unveiling their own measures – South Korea’s ravaged market climbed 8.6% <.KS11> after the government doubled a planned economic rescue package to 100 trillion won ($80 billion).
In China, mainland stocks posted their biggest gain in three weeks with a rise of almost 3% <.CSI300> while Japan’s Nikkei <.N225> soared 7%, its biggest daily rise since Feb 2016.
Not everyone was optimistic the buoyant mood would last noting, for instance, that global coronavirus infections now top 350,000 with scores of countries in lockdown. China too posted a rise in new infections brought in from abroad.
(GRAPHIC: China’s coronavirus cases JPG – https://graphics.reuters.com/HEALTH-CORONAVIRUS/0100B5L544N/china-coronavirus-milestone.jpg)
“Markets are continuing to bounce up on the latest policy announcements and then sliding back down as the economic reality of the situation re-emerges,” Deutsche Bank strategist Jim Reid said.
Still, the plan calmed nerves in bond markets, where yields on two-year Treasuries hit their lowest since 2013. Ten-year yields were at 0.8339%, from last week’s peak of 1.28% <US10YT=RR>. Yields inched higher on Tuesday as equities rallied.
ALL ABOUT THE ECONOMY
Just how much the virus is ravaging the global economy is evident in a series of growth forecast downgrades and advance readings of purchasing managers indexes (PMI) across the world’s biggest economies.
German activity plunged to the lowest since the 2009 crisis, driven by a record services contraction, while French activity hit all-time lows. Japan posted its biggest-ever services decline.
“Economies around the world are going offline and that is devastating for economic activity, it’s creating the most robust dislocation in financial markets in living memory,” said George Boubouras, head of research at K2 Asset Management in Melbourne.
For now however, the prospect of massive Fed funding pushed the greenback 0.5% lower against rivals, off three-year peaks <=USD>. It fell similarly to the yen <JPY=> and slumped 1% versus the euro <EUR=>.
Commodity and emerging market currencies also benefited, with the Australian dollar up almost 2% to $0.59315 <AUD=D3> and well off 17-year lows.
There was some relief on the market volatility front too. A gauge of expected euro-dollar swings eased below 12%, from above 14% on Monday <EUR1MO=FN>, and a measure of U.S. equity volatility slipped to one-week lows around 57 points <.VIX>.
(GRAPHIC: Volatility is back on Wall Street png – https://fingfx.thomsonreuters.com/gfx/editorcharts/USA-STOCKS/0H001R8G0C9N/eikon.png)
(Reporting by Sujata Rao; Additional reporting by Karin Strohecker in London, Wayne Cole in Syndey and Scott Murdoch in Hong Kong; Editing by Alex Richardson)