After a run of losing sessions for major international stock markets on fears of a potential second wave of Covid-19, Wall Street last night swung back to gains. Comments made by the Federal Reserve indicating that the USA’s central bank is ready to further prop up the economy with cash injections combined with comparatively upbeat economic data to lift the mood.
Earlier in the day the UK’s benchmark FTSE 100 gained a strong 2.9% on Tuesday and during the U.S. session later in the day the S&P 500 added 1.9%. The Wall Street index, one of the big 3 that also includes the Dow Jones industrial average and tech-centric Nasdaq, is now only 3.3% off its January level. The FTSE 100 still has further to go, down 17.2% on its 2020 starting position as of yesterday’s close. The positivity has so far held today with the FTSE 100 showing a 0.65% gain as of midday.
Yesterday’s positivity was sparked by a Monday night statement from the Fed that it would adopt a new tactic when injecting newly printed money into the U.S. economy. The funds will be used to buy the bonds issued by individual companies, rather than the traditional approach of investing in pooled bond investment vehicles.
The move is considered as a major upgrade on what has already been a huge economic stimulus programme launched by the Fed, which has been heavily engaged in asset buying since March. The scale and speed of the reaction went a long way to easing early international financial markets panic during the early phase of the coronavirus pandemic.
Stephen Innes, chief global markets strategist at Axicorp commented for The Times:
“In case the generosity of the Fed was in any doubt, it is not. Global equity markets are recovering quickly.”
However, it may still be early to say we are already out of the woods and further volatility can be expected over coming weeks. The fragile nature of investor confidence was highlighted this week by the Bank of America’s June fund manager survey. The survey showed that a net 78% of the fund managers who responded think the stock market is currently “overvalued”. That’s the highest level on record since the survey began in 1998 and illustrates the danger of any new waves of uncertainty being likely to quickly result in new bear runs.
However, economic data also added to yesterday’s good mood when U.S. consumer spending figures showed a faster recovery than had been anticipated. Retail sales for May were up nearly 18% month-on-month. That’s also the most significant one-month leap recorded since records began in 1992. The extent of the improvement has to be taken within the context of the 15% slump in April retail sales but has added to optimism that a ‘V-shaped’ recovery is still achievable.
Heavy infrastructure spending may also boost the U.S. economy over coming years after Bloomberg reported the drafting of a new $1 trillion infrastructure plan that will focus on roads, bridges and the nationwide roll-out of 5G technology.
Fed chairman Jerome Powell did, however, caution that full economic recovery was only likely once there is public confidence that the coronavirus has been contained to the extent any new outbreak is unlikely.
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