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US stocks extend rally with central bank safety net

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Via Financial Times

US stocks have recorded their first back-to-back weekly gains since February as investors bet aggressive efforts by central banks and governments would mitigate the current economic pain and stabilise markets while the world works through the coronavirus pandemic.

On Friday, the S&P 500 rallied 2.7 per cent to close the week 3 per cent higher, extending a bounce that has lifted the benchmark index more than 30 per cent from its mid-March lows.

The latest gains came despite data showing a historic contraction in the Chinese economy. Instead, investors focused on hopes for a new coronavirus treatment and evidence that credit markets are once again open even to junk-rated borrowers.

US carmaker Ford and cinema operator AMC Entertainment both tapped debt markets to raise much-needed cash on Friday, with Ford’s offer in particular drawing strong demand. The high-yield corporate bond exchange traded fund known by its ticker HYG was up 0.5 per cent on Friday, and investment-grade corporate bond fund LQD rose 0.2 per cent.

The daily developments have been underpinned by a widespread confidence in the power of the US Federal Reserve to shore up the corporate credit market.

The central bank has created “a backstop”, said Patrick Leary, chief market strategist at Incapital, a broker dealer. “The Fed is willing to do whatever it takes to support markets and the economy.”

The positive sentiment on Wall Street followed similarly upbeat sessions for Asian and European stocks, boosted in part by reports that a drug produced by Chicago-based pharmaceuticals manufacturer Gilead Sciences has produced promising signs as a treatment against coronavirus.

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Analysts warned against overreacting to the reports ahead of seeing the full data, but said the wide range of monetary and fiscal supports unleashed by governments and central banks around the world were creating a more positive backdrop for investors.

“The broader market is in a glass-half-full environment and investors are looking for a good story,” said Michael Yee, a biotech analyst at Jefferies.

The rise in markets came despite official Chinese data showing that the world’s second-biggest economy shrank 6.8 per cent year on year in the first quarter due to disruption caused by virus-induced lockdowns, its first decline in gross domestic product since 1976.

“Day after day, we see horrific economic and fundamental data. These are expected — the markets currently discount and look through,” said Dickie Hodges, manager of Nomura’s Global Dynamic Bond Fund.

“Set against the near certainty of severe global economic downturn is a commitment by global governments to provide huge fiscal stimulus and unlimited quantitative easing by the major central banks. We have therefore become even more convinced that the worst of the sell-off is behind us and that the rally can continue,” he added.

The S&P 500 is now just 12 per cent lower than it was at the beginning of the year, having previously been down more than 32 per cent.

“If companies can access capital, then they should be able to survive the shutdowns,” said David Vickers, a portfolio manager at Russell Investments. “That confidence has gradually seeped back into markets this week.”

Other analysts have warned the bounce back may not be sustained.

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“The market may have run ahead of itself,” said analysts at Bank of America Global Research.

“The macro support measures, in the best case, can only keep the economy alive during the ‘induced coma’. We still don’t know how much longer the lockdown will last, how long the exit plans will take and what lockdown measures will remain even when economies ‘open up’,” the analysts said.

US crude oil prices on Friday dropped to an 18-year low, with energy markets still under pressure despite a landmark deal to cut global supply. West Texas Intermediate fell more than 8 per cent to $18.15 a barrel, as traders bet that oil storage will rapidly fill up globally.

Brent crude, the international benchmark, was up nearly 2 per cent at $28.36 a barrel but it has lost about 10 per cent this week.

Meanwhile, US Treasuries sold off, sending the yield on the benchmark 10-year note lower by 0.02 percentage points to 0.65 per cent on Friday.

Additional reporting by David Sheppard in London

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