A currency trader watches monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul. Photo / AP
A currency trader watches monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul. Photo / AP
Stocks charged higher around the world on Wednesday following an encouraging report on a possible treatment for Covid-19.
The optimism helped the S&P 500 vault 2.8 per cent higher in afternoon trading, and it extended a rally that's brought the US stock market to the brink of its best monthin 45 years. Stocks in Europe also jumped immediately after Gilead Sciences said its experimental drug proved effective against the new coronavirus in a major US government study.
Gilead's report hit markets at the same moment that a report showed how pervasive and painful the hit has been to the economy from the coronavirus outbreak. The US economy shrank at a 4.8 per cent annual rate in the first three months of the year, its worst performance since the depths of the financial crisis in 2008.
The figure was worse than investors were expecting, and it's "merely the tip of the iceberg", said Michael Reynolds, investment strategy officer at Glenmede. Job losses have exploded since early April, as layoffs sweep the nation following widespread stay-at-home orders, and economists expect to see even worse numbers for the second quarter of the year.
But stocks have been rallying over the past month as investors look beyond the current economic devastation and focus instead on the prospect of economies gradually reopening. The S&P 500 has surged more than 14 per cent in April, and it's a day away from closing its best month since late 1974.
Some US states and nations around the world have laid out plans to relax restrictions keeping people at home and businesses bereft of customers. A drug treatment for Covid-19, meanwhile, could help life inch a little closer to "normal". Dr Anthony Fauci, the US's top infectious diseases expert, called the results on Gilead's remdesivir drug optimistic and said details will be submitted to a scientific journal. Covid-19 has killed more than 218,000 worldwide.
A man wearing face mask walks past a bank electronic board showing the Hong Kong share index at Hong Kong Stock Exchange. Photo / AP
But what got the nearly 32 per cent rally for the S&P 500 started on March 24 was massive aid from the Federal Reserve and Congress. The Federal Reserve is closing a two-day meeting on interest rates, and most economists expect it to announce in the afternoon that it's keeping short-term rates at nearly zero. More importantly, Chairman Jerome Powell may give some clues about how long the Fed will keep in place its unprecedented efforts to prop up the economy.
The Dow Jones Industrial Average was up 582 points, or 2.4 per cent, at 24,693, as of 1.30pm Eastern time, and the Nasdaq was up 3.4 per cent. Smaller stocks rose even more, with the Russell 2000 index leaping 5.3 per cent.
Small stocks got punished much more than the rest of the market when recession worries were at their height due to their more limited financial resources. But they can soar higher when pessimism is receding.
The market's gains were widespread and accelerated through the day. Big tech and communications stocks helped lead the way after Google's parent company said its revenue was stronger in the first three months of the year than Wall Street was expecting.
Alphabet jumped 9.1 per cent, which helped communications stocks in the S&P 500 rise 5.3 per cent for one of the biggest gains among the 11 sectors that make up the index.
It also raised optimism about digital-advertising trends in Facebook's earnings report, which is scheduled for after the market closes Wednesday. Facebook rose 6.9 per cent. Alphabet and Facebook are both huge stocks and make up 5 per cent of the S&P 500 by themselves, which gives their movements outsized effects on the index.
In Europe, the French CAC 40 rose 2.2 per cent after being down before the Gilead report. The German DAX returned 2.9 per cent, and the FTSE 100 in London added 2.6 per cent. In Asia, Hong Kong's Hang Seng added 0.3 per cent, and the Kospi in Seoul advanced 0.7 per cent.
Many professional investors are skeptical of the US stock market's big rally. There's still a lot of uncertainty about how long the recession will last.
The vigorous rise for stocks over the last month also implies investors see a relatively quick rebound for the economy and profits following the current devastation. But it may take a while for households and businesses to get back to how things used to be.
"My concern is that the market is starting to get a little bit more focused on the rewards and less focused on the risks right now," said Sal Bruno, chief investment officer at IndexIQ. "Maybe investors are getting a little too enthusiastic."
"I don't think you just flip the switch and everybody goes back to work right away," he said.
The yield on the 10-year US Treasury held steady at 0.61 per cent after paring earlier losses. Yields tend to fall when investors are downgrading expectations for the economy and inflation.
Oil prices are continuing their extreme swings after a collapse in demand has sent crude storage tanks close to their limits. Benchmark US oil rose 23.4 per cent to $15.23 per barrel. Brent crude, the international standard, rose 6.2 per cent to $24.15 per barrel.
