Lawrence Summers withdrawal from Fed race gives boost to world shares

Janet Yellen, perceived as the heir to Bernanke's legacy, is now a front runner to replace him

PUBLISHED : Monday, 16 September, 2013, 10:00am
UPDATED : Tuesday, 17 September, 2013, 4:07am

The US dollar slid while stocks and bonds rallied yesterday as investors saw the withdrawal of Lawrence Summers from the race to head the US Federal Reserve as suggesting a more gradual approach to tightening monetary policy.

Summers was perceived in the markets as relatively unenthusiastic about the Fed’s aggressive bond-buying programme, which has helped push down interest rates to spur lending and economic growth following the financial and economic crisis five years ago.

Summers’ withdrawal followed a growing chorus of criticism about his suitability for the Fed job, including from some members of the Senate committee that would need to back his nomination.

The Fed’s stimulus, which involves buying US$85 billion a month in Treasurys and mortgage bonds, is expected to be scaled back soon, possibly this week after the Fed concludes its two-day policy meeting.

Summers’ withdrawal means Fed vice-chair Janet Yellen is considered a front runner to replace Ben Bernanke when his term concludes early next year. Investors wagered that US monetary policy would stay easier for longer should Yellen get the job.

“Janet Yellen is widely perceived as being the heir to Bernanke’s legacy,” said Michael Hewson, senior market analyst at CMC Markets. She would bring continuity to US monetary policy, “as opposed to the uncertainty that would surround a Larry Summers candidacy”.

Further boosting the appetite of investors were signs of progress in Syria after a deal aimed at averting US military action, all of which helped propel world shares to a near five-year high.

Germany’s DAX was the standout in Europe, advancing 1.2 per cent to 8,613, just shy of its record high, hit earlier in the day, of 8,626.11. The FTSE 100 index of leading British shares rose 0.6 per cent to close at 6,622.86.

In the US, the Dow Jones industrial average was up 1.1 per cent at 15,546.08 while the S&P 500 index rose 1 per cent to 1,704.84.

In Hong Kong, the Hang Seng Index gained 1.5 per cent to 23,252.41 at the close, its biggest advance since September 2 and the highest close since May.
The index was also boosted by the victory of pro-business groups in Macau’s election on Sunday. The gains were in line with a positive day all over Asia.

“The markets are having a bounce on the back of the Larry Summers news and the ongoing Syria talks,” Kevin Lilley, head of European equities at Old Mutual Global Investors.

The US dollar weakened against all its major peers with the yen gaining 0.7 per cent, reaching the strongest level this month. The euro appreciated 0.7 per cent to US$1.3380.

“Clearly, the dollar doesn’t like the idea it could be Yellen at the helm because of the interpretation that QE could be in place for longer,” said Jane Foley, a currency strategist at Rabobank.

It was even possible a first Fed interest rate rise could be pushed out into 2016, rather than 2015 as currently planned, added Chris Rupkey, of Bank of Tokyo-Mitsubishi UFJ.

Reuters, Associated Press