Global stocks rally on rising hopes for US stimulus measures

Global equities have rallied on growing expectations the US will deploy a new round of stimulus measures to steady the world’s biggest economy.

London’s FTSE 100 gained 2.3 per cent in morning trading on Tuesday, while the regional Euro Stoxx 600 added more than 2 per cent, pushed higher by Frankfurt’s Xetra Dax rising 2.7 per cent. Futures markets tipped US stocks to add to gains when trading begins on Wall Street, with S&P 500 futures up 1.1 per cent.

A report by Bloomberg that the Trump administration is preparing a $1tn infrastructure spending package to stimulate economic growth helped to fuel the upbeat mood in the markets, said Jim Reid, strategist at Deutsche Bank. "The prospect of further stimulus was already known," he said, "however the size and timing was more up in the air".

Infrastructure

Much of the spending would be earmarked for infrastructure such as roads and bridges, but some would go towards improving America’s digital network through improved rural broadband and 5G wireless infrastructure, Bloomberg reported. It remained unclear how the Trump administration would fund the measures.

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The heightened expectations for fiscal policy come as the US central bank has expanded its interventions to prop up the economy and financial market. The Federal Reserve said on Monday it would begin purchasing a “broad and diversified portfolio” of individual corporate bonds, having previously bought exchange traded funds that track corporate debt.

The Fed’s move helped shift attention from concerns that rising Covid-19 cases in parts of the US and China would thwart efforts to kick-start the world’s largest economies. The plan could help reduce borrowing costs for American businesses.

Corporate bond markets also rallied after the Fed announcement. Some investors and analysts had grown concerned that the facility – first announced three months ago – may not be enacted, given that the volatility caused by the outbreak of coronavirus had subsided.

The Fed shifted its bond-buying plan to creating an index that abides by its eligibility criteria, instead of companies self-certifying that they were eligible. Analysts and investors had warned that the initial plan could have resulted in few companies signing up for the new facility because they would not want to signal that they were in distress.

Promise

"We view this largely as the Fed following through on their promise to start ETF and individual bond secondary market purchase," noted Matthew Mish, an analyst at UBS. "A marginal positive for those that doubted the Fed would go ahead."

Jay Powell, the Fed chair, is due to deliver the central bank's semi-annual monetary policy report to Congress on Tuesday.

A top European Central Bank official raised investors’ hopes of a further expansion in stimulus measures in the euro zone. Fabio Panetta, executive director of the ECB, said in an interview with Le Monde newspaper that the central bank was ready to consider “if necessary” buying “fallen angel” bonds that had recently lost their investment-grade rating.

In Asia-Pacific, Japan’s Topix index rose more than 4 per cent, while Australia’s S&P/ASX 200 gained 3.9 per cent and Hong Kong’s Hang Seng climbed 2.4 per cent.

In South Korea, equities trading was briefly suspended after Kospi 200 futures rose more than 5 per cent from the previous day’s close, triggering a short cool-down period. The index closed up 5.5 per cent.

Shares in Tokyo rose sharply after the Bank of Japan said it expected it would pump ¥110 trillion (€890 billion) into the economy through various support programmes, up from a previous estimate of ¥75 trillion.

However, traders in Japan’s capital played down the impact of the central bank’s move on equity markets.

“Domestic Japanese media may try to spin that this big afternoon rally was something to do with what the BoJ said after its meeting,” said one Tokyo-based trader.

“But this is being driven by expectations that basically the US will do what it takes to keep market sentiment strong.”

Infections

The bullish sentiment came despite China’s health authorities reporting 27 new coronavirus cases in Beijing at the end of Monday, accounting for the bulk of 40 new infections in the country.

The yield on US 10-year Treasuries, viewed by investors as a haven during times of uncertainty, rose 0.04 percentage points to 0.743 per cent. Bond yields rise as prices fall.

Oil prices nudged higher on Tuesday after rallying the previous day. Brent crude, the international benchmark, was up 1.6 per cent at $40.37 (€35.87) a barrel. West Texas Intermediate, the US marker, advanced 1.4 per cent to $37.64 a barrel. – Copyright The Financial Times Limited 2020