Investors Look To Risk After Summers Leaves Fed Chair Contest

by
Reuters
Investors took the withdrawal on Sunday of former Treasury Secretary Larry Summers as a candidate to head the U.S. Federal Reserve as a green light for risk, betting the bank's next chief would extend an era of easy money that has flooded global markets with cash.

Investors took the withdrawal on Sunday of former Treasury Secretary Larry Summers as a candidate to head the U.S. Federal Reserve as a green light for risk, betting the bank's next chief would extend an era of easy money that has flooded global markets with cash.
 
Markets viewed Summers' move as leaving Fed number two Janet Yellen, a well-known advocate of looser monetary policy to support the U.S. recovery, the favorite to take the chairmanship.
 
Still, Yellen's nomination remains uncertain, leaving open the possibility that markets would react differently should one of several other possible nominees be chosen.
 
U.S. stock index futures and Treasury futures <TYc1 > rallied as a result of the news, and investors and analysts said those gains will likely extend further into the Monday session.
 
"My first thought was that the markets will rally on this," said Scott Frew, managing partner and owner of Rockingham Capital Advisors in Hartford, Connecticut. "There's certainly a perception that Yellen is more dovish than Summers."
 
The Fed has taken extraordinary steps to try to buoy the world's largest economy both during and after the financial crisis.
 
Currently the bank is buying $85 billion per month in Treasuries and mortgage-backed securities, its so-called quantitative easing program.
 
That wave of easy money has helped take U.S. stocks to record highs and yields on U.S. government debt to record lows. Global markets have also benefited, with dollars flowing around the world.
 
But the view that the Fed could withdraw its stimulus soon has rocked global markets, taking benchmark U.S. Treasuries yields to two-year highs - underscoring how the U.S. central bank's every move affects investors big and small all over the world.
 
Yellen has been a forceful advocate of the aggressive steps taken under current Chair Ben Bernanke to spur U.S. economic growth, earning her a reputation as a policy "dove" who would tolerate a bit more inflation to drive down unemployment that she deemed too high.
 
Analysts said a Yellen nomination would boost markets because of that sense of continuing Bernanke's approach.
 
"I expect not only a rally in stocks but also a decrease in yields, as the Fed remains in the same path Bernanke set" under a Yellen nomination, said Michael Yoshikami, CEO and Founder at Destination Wealth Management in Walnut Creek, California.
 
But Yellen's nomination - and her perceived dovishness - are hardly guaranteed, with other options such as Donald Kohn, Timothy Geithner or Roger Ferguson possibly in the mix.
 
"The Obama administration has shown little, if any, enthusiasm for Yellen, however, so we're not convinced she will necessarily get the nod," noted Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
 
The Federal Open Market Committee meets on Sept. 17 and 18 and will discuss whether to slow the bank's asset purchase program.