Stocks, bonds rally after Summers drops Fed bid
A man walks through the lobby of the London Stock Exchange August 5, 2011. REUTERS-Suzanne Plunkett
By Ryan Vlastelica
NEW YORK | Mon Sep 16, 2013 12:17pm EDT
(Reuters) - Stocks and bonds on major markets rallied on Monday after former U.S. Treasury Secretary Lawrence Summers withdrew from consideration to be the next chairman of the Federal Reserve, leading investors to believe U.S. monetary policy might stay looser for longer.
Signs of progress in reducing tensions in the Middle East, after a Russian-brokered deal on Syria's chemical weapons also helped to support stocks and bonds.
Summers' surprise decision came just before the Fed - the U.S. central bank - meets on Tuesday and Wednesday to decide when, and by how much, to scale back its asset purchases from the current pace of $85 billion a month.
Investors wagered that U.S. monetary policy would stay easier for longer should the other leading candidate for Fed chair, Janet Yellen, get the job.
The Dow Jones industrial average .DJI was up 163.25 points, or 1.06 percent, at 15,539.31. The Standard & Poor's 500 Index .SPX was up 15.48 points, or 0.92 percent, at 1,703.47. The Nasdaq Composite Index .IXIC was up 14.85 points, or 0.40 percent, at 3,737.04. Gains in the Nasdaq were limited by a 2.3 percent decline in Apple Inc (AAPL.O) shares.
European shares .FTEU3 rose 0.6 percent while the MSCI all-country world equity index rose 1.1 percent. Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale stimulus back quickly than Yellen, who is second in command at the Fed.
"His passing as a contender for the top role has left in its wake a significant risk-on rally," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
It was even possible a first Fed interest rate rise could be pushed out to 2016, rather than 2015 as currently expected, added Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen's past speeches, he said she would most probably prioritize reducing unemployment.
The benchmark 10-year U.S. Treasury note was up 22/32, with the yield at 2.8088 percent. German Bunds tracked the moves and were last at 1.870 percent, well down on last week's peak of 2 percent.
The more distant Eurodollar contracts rallied as the market pared back expectations for how quickly the Fed might finally start to tighten, as opposed to just tapering its stimulus.
Contracts from late 2014 out to 2016 all made double-digit gains suggesting a hike was now considered more likely in 2015 rather than in late 2014.
"Yellen looks like the clear front-runner and seems to be the public's popular choice," he said. "The Fed will shoot to lower the unemployment rate to the full employment level, and this means the new target could be more 5.5 percent, not 6.5 percent."
Traders are betting the Fed will keep policy easier for longer now that Summers is out of the running to succeed Ben Bernanke as chairman.
DOLLAR DIVE
The U.S. dollar index .DXY slipped 0.3 percent to 81.194, near the intraday trough of 81.029, its lowest since August 21. It fell 0.4 percent against the yen while the euro rose 0.4 percent to $1.3348. Liquidity in the yen was lacking, with Japanese markets closed for a holiday on Monday.
In the latest U.S. data, industrial output rose 0.4 percent in August, as expected, while manufacturing output rose 0.7 percent, a slightly faster rate than had been forecast.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS had gained 1.6 percent overnight as South Korean shares .KS11 added 1 percent, Australia's .AXJO rose 0.5 percent and Indonesian stocks jumped 3.4 percent .JKSE.
PUSHING OUT THE HIKE
Sentiment was underpinned by Saturday's deal between Russia and the United States to demand that Syrian President Bashar al-Assad account for his chemical arsenal within a week and let international inspectors eliminate all the weapons by the middle of next year.
Emerging market stocks .MSCIEF were up 1.6 percent and most emerging Asian currencies were on the front foot, with India's rupee leading the charge. Investors have pumped much of the cheap money from the Fed into emerging markets. <emrg frx="">
Gold fell 0.7 percent, while Brent crude lost 1.5 percent to $110.08 a barrel and U.S. crude futures sank 1.1 percent to $107.02 per barrel.
(Editing by Nick Zieminski and James Dalgleish)
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