By Luciana Lopez
NEW YORK, Sept 15 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 succeed the current
chairman, Ben Bernanke.
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
Currently the bank is buying $85 billion per month in
Treasuries and mortgage-backed securities, its quantitative
That wave of easy money has helped take U.S. stocks to
record highs and yields on U.S. government debt to record lows.
On a total return basis, the S&P 500 stock index is
up 20 percent so far this year - its best return since 2009,
when stocks began recovering from their swoon during the
financial crisis in which they lost more than half their value.
The Fed's efforts to keep interest rates low have sent
investors scurrying for yield. High-yield debt - known as junk
bonds because of their low ratings - has sold steadily, with the
Merrill Lynch US High Yield Master II Index surging
about 126 percent from 2009 through 2013.
Globally, investors have borrowed in dollars to invest in
higher-yielding markets abroad, the so-called carry trade.
MSCI's 45-country world index is up about 12
percent so far this year.
But the view that the Fed could withdraw its stimulus soon
has rocked global markets, taking benchmark U.S. Treasuries
yields to above 3 percent recently, a more than
two-year high - underscoring how the U.S. central bank's every
move affects investors big and small all over the world.
A spike in rates is worrisome because U.S. government debt
is used as a benchmark around the world for everything from
obscure derivatives contracts to mortgage rates.
If, in fact, yields rise too high, some economists fret the
U.S. recovery could be derailed. Mortgage applications in the
latest week fell, as 30-year mortgage rates matched a year-high
of 4.8 percent - well over 100 basis points from
earlier in the year.
Yellen has been a forceful advocate of the aggressive steps
taken under 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.
Markets had already been leaning back into riskier assets
such as stocks on a raft of strong U.S. economic data and eased
worries about a military strike on Syria.
Investors in funds based in the United States poured $12.8
billion into stock funds in the latest week, according to data
from Thomson Reuters' Lipper service.
But Yellen's nomination - and her perceived dovishness - are
hardly guaranteed, with other options such as Donald Kohn, Roger
Ferguson or Timothy Geithner - who has said he does not want the
job - 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