Stocks Gain After Fed Ignites Risk-On Sentiment: Markets Wrap

(Bloomberg) -- U.S. stocks edged higher in volatile trading after the Federal Reserve followed through on a pledge to buy corporate bonds under an emergency lending program.

The S&P 500 closed up 0.8% after swinging from loss of as much as 2.5% amid concern about a second wave of the coronavirus pandemic, to a gain of as much as 1.3%. Oil futures rebounded after dropping to less than $35 a barrel as BP Plc warned the pandemic will hurt long-term energy demand.

“The initial reaction seems to be that the Fed still has the market’s back even though they expect the economy to be weak for a longer time frame,” said Matt Maley, chief market strategist for Miller Tabak + Co. “The Fed is telling the markets that they want to keep credit spreads under control.”

The purchases will be made by the Fed’s Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds. BlackRock’s iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund, the largest credit ETF, jumped 1.4%, while the iShares iBoxx High Yield Corporate Bond ETF climbed 1%.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.

“What appears to be new is the individual buying in the secondary market and what looks like, at least from the announcement, the potential for a wider variety of purchases,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI.

After a fierce rally sent global equities close to their pre-pandemic levels, sentiment in markets had turned negative, with the S&P dropping last week by the most since March. Economic data across the board suggests that the global economy is still weak and there’s no sign that international travel is returning to normal anytime soon.

More than 20 U.S. states are seeing a pick-up in virus cases, and spreading cases in Beijing have also raised concern of a resurgence of the pandemic. The travel ban between the U.S. and Great Britain could persist for months, according to Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases.

In China, a string of top-tier data all showed that factory output, consumer spending and investment continued to improve in May, but there are few signs of a broad-based rebound needed to spur a V-shaped recovery.

China’s Slow Reboot Points to Hard Road Back for Global Economy

Despite the risk-off mood in markets, gold prices slumped, with prices approaching $1,700 an ounce in London.

“One thing is leading to the other. Obviously Covid-19, what happened with Beijing this weekend and a couple of states that are seeing a bit of a growth in cases,” said JJ Kinahan, the chief market strategist at TD Ameritrade. “What that really leads to is the fact that if you think abut this quote on quote optimism trade that we’ve had over the last couple weeks, the optimism trade really was about businesses getting started, going quickly. If we do have a slowdown in opening businesses, a couple of states have slowed their dates, it’s going to be very difficult for the reality of business to keep up with expectations of a few weeks ago.”

These are some key events coming up:

• Policy decisions from the Bank of Japan, Bank of England and the Swiss National Bank are due this week.
• CBOE plans to open its trading floor, which has been electronic only since March 16.
• Federal Reserve Chairman Jerome Powell delivers his semi-annual policy report to Congress.

These are some of the main moves in financial markets:

©2020 Bloomberg L.P.