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The Fed Saves the Day Again with bond purchases - DAILY MARKET UPDATE

Chart of the Day: S&P 500 (daily candlesticks)

   Fed announces it will buy individual corporate bonds
•    BOJ Meeting Preview
•    US stocks reverse early losses to finish higher
•    Econ data = Germany CPI, UK unemployment, US retail sales


Shares in Asia are setting up for a more buoyant start to trading on Tuesday after a soft start to the week. US stock markets reversed steep early losses after the Federal Reserve said it would by individual corporate bonds. The price of investment grade bonds picked up too (yields fell) as investors front-ran the future Fed purchases. 

The US dollar was a mirror image to stocks, reversing early gains as a haven- helping the likes of the pound and euro higher – with the Aussie dollar a notable outperformer. Commodities including gold and oil both turned higher as the dollar sank. 


The men on the trading floor may not have been to school, but they have Ph.D.’s in man’s ignorance.” – Michael Lewis, liar’s Poker

Corporate Bonds

Today’s announcement marks another escalation in the Federal Reserve’s intervention in the workings of financial markets. The Fed had previously announced it would buy corporate bond ETFs – including those of non investment grade companies (junk bonds). In a significant tweak to its previously announced plans, it will now buy the individual bonds directly. 

The program involved is the $250 billion Secondary Market Corporate Credit Facility (SMCCF) – which was the one the Fed announced on March 23, which helped put a bottom in the stock market which has rallied heavily ever since. The latest Fed policy upgrade has conveniently come just after stocks had their worst week since March. 

The policy tweak made today will mean the Fed has the means to influence not just broader credit markets but specific individual companies via what it referred to as the “broad, diversified portfolio” of corporate bonds that it will create.

BOJ Preview

The latest move from the Fed will benefit the Bank of Japan too via its affect on markets, and may enable the BOJ to sit on the fence. USD/JPY has been trading mixed but has tended to rise when broader sentiment is positive, also a reason the BOJ won’t need to act to defend against an overly-strong yen. 

We suspect the Bank of Japan pivots more dovish to keep up the tone set by the ECB and now the Fed. One way to do this would by adding a specific timeline for how long it will keep rates down and bond purchases going, much like the Fed just did via its quarterly forecasts.


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