Markets: Summers, one hawk down

Larry Summers’ unexpected decision to withdraw from contention for the job of Fed chairman may prove to be good news for equities.

Equity markets are looking good for an extra bounce following the withdrawal of Lawrence Summers from the race to be the next chairman of the Federal Reserve.

In an instant, Summers’ announcement sent the Aussie dollar shooting up over 1 cent to 93.3 cents. The US dollar also weakened against other trading partners, losing 0.6 per cent to the Japanese yen and 1.1 per cent against the New Zealand dollar.

These immediate effects of Summers’ announcement mean good news for the share market. It has been widely accepted that Summers was hawkish, with previous comments he has made casting doubt on quantitative easing.

The general consensus is Summers would prefer to manage fiscal policy as opposed to monetary policy. There was a fear Summers would be quick to wind back the current quantitative easing program, sapping liquidity from the market in an instance.

Although the US dollar is taking a beating, the fortune for equities looks to be the opposite. In the short time since Summers announced his withdrawal, traders have pushed to S&P 500 futures up over 1 per cent to reach a new all-time high.

If Summers had turned out to be as hawkish as expected, Summers in control of the Fed would theoretically see further strengthening of the US dollar due to his views on fiscal policy and inflation management.

Still in the running for chairman of the Federal Reserve is current vice chairman Janet Yellen, who now looks to be favourite, with a former vice chairman Donald Kohn still in contention.

Yellen is anticipated to carry on similar policies to those of Ben Bernanke and is favoured by markets. It has been suggested Yellen is more supportive of growth than Bernanke himself. This is decidedly different from Summers, who was perceived to be less concerned with growth.

For bond and share market investors, a Yellen success essentially means more continuity at the Fed.

Summers is well known for being President Barack Obama’s economic adviser. But he also copped criticism for trying to deregulate the banking system, while benefitting from the cash cow of Wall Street. This bothered some senators who were planning to oppose a Summers nomination to the Federal Reserve.   

The market is expecting an update on tapering on Thursday morning (local time) and is looking for guidance on the exact schedule of winding down the current liquidity program.

The difference between Summers and Yellen comes down to perception. There is still the unknown of what action the incoming chairman will take, but it is evident the market is actively considering the views of any potential candidate.

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