(Adds byline, dateline; previous LONDON)
* Equities rally as stimulus soothes second wave worries
* U.S. retail sales see record rebound
* Fed announces start of corporate bond buying program
* Bank of Japan increases support for cash-strapped firms
* Treasury and Bund yields edge higher
* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh
By Herbert Lash and Marc Jones
NEW YORK/LONDON, June 16 (Reuters) - A record rebound in U.S. retail sales, fresh support from the Federal Reserve and Bank of Japan, and upbeat trial results for a COVID-19 treatment boosted risk appetite on Tuesday, driving equity markets higher and strengthening the dollar.
U.S. Treasury yields rose and demand for lower-rated southern European debt increased on the upbeat sentiment, even as a fresh coronavirus outbreak in China helped gold edge higher in see-saw trade.
A near 5% jump overnight by Japan’s Nikkei gave Asia its best day since late March, while the major European bourses rallied at least 3%. The three main equity gauges for Wall Street rose 2% or more, as did emerging markets.
U.S. retail sales jumped the most on record in May, offering new evidence the recession triggered by the coronavirus pandemic was drawing to an end, while trial results showed dexamethasone reduced death rates by about one-third among the most severely ill COVID-19 patients.
A report overnight said the Trump administration was preparing a nearly $1 trillion infrastructure proposal, the government stimulus, after the Federal Reserve on Monday said it would start buying corporate bonds to infuse liquidity.
“It looks like we bounced back nicely in May for retail sales, which is good news. The drug results are very good news and then the spending package is good news,” Patrick Leary, chief market strategist at debt underwriter Incapital.
“All this stuff is bullish for stocks, bullish for corporate bonds,” Leary said. Congress has the ability to support the economy through their spending powers, the Fed is doing what it can through its lending powers.”
Fed Chair Jerome Powell told U.S. lawmakers as he began the first of two days of testimony that a full U.S. economic recovery will not occur until the American people are sure that the coronavirus epidemic has been brought under control.
MSCI’s gauge of stocks across the globe gained 2.55%, while the pan-regional FTSEurofirst 300 index closed up 2.90%.
Emerging market stocks rose 2.58% and Wall Street gained.
The Dow Jones Industrial Average rose 643.83 points, or 2.5%, to 26,406.99. The S&P 500 gained 69.85 points, or 2.28%, to 3,136.44 and the Nasdaq Composite added 194.73 points, or 2%, to 9,920.75.
News elsewhere contributed to the bullish sentiment.
Germany’s monthly ZEW investor sentiment survey showed investors are confident that Europe’s largest economy will be over the worst of the coronavirus impact by the end of the European summer.
The dollar was mostly stronger, with the euro down 0.47% to $1.1269 and the Japanese yen up 0.01% at 107.32.
Britain’s pound rose on a mix of better-than-feared unemployment numbers and friendlier Brexit talks.
The Bank of Japan increased its lending packages for cash-strapped firms to $1 trillion from about $700 billion, but also kept rates steady, sticking to its view that the Japanese economy will gradually recover from the pandemic.
Benchmark U.S. 10-year Treasury notes rose 4.9 basis points to yield 0.7578%.
German, French, Dutch and other core yields rose in Europe too. Riskier Italian yields fell to their lowest since the end of March and the iTraxx European crossover index, which reflects the cost of insuring against junk-rated corporate bond defaults, fell to its lowest in six days.
“In the absence of a further surge in new (coronavirus) infections in China or the U.S., the market hopes about monetary and fiscal tailwinds alongside improving sentiment indicators should prevail,” Commerzbank strategists wrote.
Oil prices rose as equity markets surged and the International Energy Agency (IEA) increased its oil demand forecast for 2020, but gains were capped by worries about a second wave of coronavirus cases.
U.S. crude recently rose 0.86% to $37.44 per barrel and Brent was at $40.26, up 1.36% on the day.
A whopping 98% of investors surveyed by BOFA believe markets are “overvalued” after world stocks roared back from March lows. But those fears haven’t stopped many from joining the rally.
The survey showed hedge fund net equity exposure jumping to 52% from 34%, the highest since September 2018. U.S. tech and growth stocks remained the “most crowded trade” for a second straight month.
Reporting by Herbert Lash; Editing by Bernadette Baum