• Joel

Turn-around Tuesday: What Factors Drove Risk Assets Higher?

Global equity and crude oil markets were sent higher today on a mixture of bullish factors...

1) Fed starts buying corporate bonds

Late in the US session on Monday, the Fed announced that its Secondary Market Corporate Credit Facility (SMCCF) will begin purchasing corporate bonds on Tuesday to create a corporate bond portfolio based on a broad, diversified market index of US corporate bonds to support liquidity and availability of credit for large employers. 

With the Fed now buying corporate bonds across the entire market, this ought to help keep borrowing costs for large US corporations low, hence the boost to the stock market. 

Moreover, the Fed has once again demonstrated that it is not hesitant to deploy further monetary firepower, a factor that ought to continue to weigh on USD and prop up risk assets going forward. 

2) US retail sales

Further injecting risk on feels into the market today was the latest US retail sales data release (for the month of May);

The headline numbers showed a M/M increase of 17.7% in May, much higher than expectations of a 8% recovery, and more than erasing April’s record  -16.4% decline. 

The Core number was nearly as impressive, rising at a M/M rate of 12.4% vs expectations for 5.5%, although not quite erasing April’s -17.2% decline. 

ING note that “this means that the seasonally adjusted dollar level of US retail sales is back roughly to what we saw in March, which in turn is around 8% below January's level” and that “this is much stronger than the weekly Redbook chain stores sales figures had hinted at, with today’s report clearly boosting hopes of a more V-shaped recovery.”

3) Cheap, widely available steroid found to significantly reduce Covid-19 death rate 

Global equity markets were also boosted today by the news that a life saving steroid, dexamethasone, has proven effective in the treatment of patients who are seriously ill with Covid-19.

The low-dose steroid which has been around since the 1960s was found to cut the risk of death by 35% for patients on ventilators, and 20% for those on supplemental oxygen without intubation. It's currently part of the world's largest trial testing existing treatments, according to the Associated Press, citing UK researchers.

"This is an extremely welcome result," said Peter Horby of Oxford, one of the study leaders. "The survival benefit is clear and large in those patients who are sick enough to require oxygen treatment, so dexamethasone should now become standard of care in these patients. Dexamethasone is inexpensive, on the shelf, and can be used immediately to save lives worldwide."

Note, we did see a slight pullback in risk assets at around 1530BST/1030EDT. AUD and NZD had been trading higher alongside higher equities earlier on in the day, but with the new risk off flows, combined with post-strong US retail sales data USD strength, fell well into negative territory. Here’s why…

1) Fed Chair Powell said that if market functioning continues to improve, the Fed will slow their corporate bond buying program (so he is already hinting at removing this support)and that the Fed has made absolutely no decision yet to go forward with YCC. On this, he added that the concept of using YCC is at an 'early stage' (markets clearly want YCC sooner rather than later). 

2) The outbreak in Beijing looks like it is getting worse; a Beijing City Official advised people not to leave Beijing unless it is necessary to do so, and that those doing so should have a nucleic test result. However, the City Official noted that they will not yet ask companies and factories to halt work, but will encourage working from home. Moreover, the Beijing City Government has reportedly increased its Covid-19 emergency response level to 2 from 3, according to State Media. 

3) Florida COVID-19 cases rise by 3.6% (vs. 7-day average 2.5%). Separately, in Texas, virus hospitalizations rose by today 8.3% to hit a record. Today’s data will clearly further aggravate concerns about a second wave of cases in the US - a big threat to the risk asset rally over the past few months. 


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