A Short-Lived Summers' Rally?

September 16, 2013

NEW YORK (Sept 16)  Stocks are surging back to near record levels, Treasury bond prices are higher and precious metals are rallying amid word of Lawrence Summers dropping out of the race to be next Fed chairman.

The question now is how long will the so-called Summers rally last? One research firm isn’t convinced the latest run-up has much stamina.

The thought process behind Monday’s rally is well known: Whoever succeeds Chairman Ben Bernanke is expected to continue the present course of monetary policy in the U.S. for the next few years. Any scaling back of the Fed’s aggressive steps to stimulate the economy will likely be slow and gradual. Mr. Summers might have implemented a different approach if he were selected to be Fed chairman.

The Dow recently rose 151 points, or 1%, to 15527. All but two of the 30 blue-chip components traded in positive territory, led higher by Boeing Co.BA +3.76%, UnitedHealth Group Inc.UNH +1.42% and General Electric Co.GE +1.58% The S&P 500 rose 0.9% to 1702.

The rally may reflect “some relief among investors that the nomination process is likely to be a smoother one,” Capital Economics says. “However, we do not think that the Fed’s policy stance is likely to change significantly as a result of a new chair being elected, whoever is appointed.”

Prices on Treasurys also rose, driving yields on the 10-year note to their lowest levels so far in September. In recent trade, the benchmark 10-year Treasury note rose 24/32 in price, yielding 2.80%, according to Tradeweb. The yield touched 2.794%, the lowest since Aug. 30.

Front-month gold futures rose 0.7% to $1318.10 an ounce and silver futures jumped 1.4% to $22.02.

The exit by Mr. Summers leaves Janet Yellen, the Fed’s current vice chairwoman, and Donald Kohn, the Fed’s past vice chairman, as likely top contenders for the post. Both played key roles in the Fed’s monetary policy response to the 2008 financial crisis.

“We’re not convinced that Yellen, if she is selected, will take a much more dovish approach than Summers might have done,” the firm says, while adding President Barack Obama may even select a separate candidate who hasn’t garnered much attention right now in the public spotlight.

“In any case, the whole issue of who eventually takes over at the Fed next year will be overshadowed later this week by the FOMC’s decision on what it plans to do with its monthly asset purchases in the meantime,” Capital Economics says.

The firm remains convinced the Fed will start dialing back its $85 billion monthly bond-buying program this week, a development that could chip away at Monday’s big rally.

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