Stocks & bonds rally, dollar dips as Summers quits Fed race

Reuters

By Marc Jones

LONDON (Reuters) - The U.S. dollar slid while bonds and shares rallied on Monday as investors saw the withdrawal of Lawrence Summers from the race to head the Fed as suggesting a more gradual approach to tightening monetary policy.

Further whetting risk appetite were signs of progress in Syria following a Russian-brokered deal aimed at averting U.S. military action, all of which helped propel world shares to within a whisker of a five-year high.

The threshold was expected to be crossed later with futures prices pointing to gains of over 1 percent for both the S&P 500 and Dow Jones when Wall Street resumes for the week.

European bourses were already there, as gains of 0.9 percent on London's FTSE and Paris's CAC 40 and 1.2 percent on Frankfurt's Dax lifted the FTSEurofirst 300 0.8 percent to follow up a strong day in Asia.

Summers' surprise decision came just before the U.S. Federal Reserve 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 (53 billion pounds) 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.

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 currently second in command at the Fed.

"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, senior currency strategist at Rabobank.

"The weakness of data more recently, the retail sales on Friday for example, has also bought home that we are still a little way from the U.S. having a resilient recovery ... so I think Summers' withdrawal has touched a bit of a raw nerve."

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, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen's past speeches, he said she would most probably prioritise reducing unemployment.

"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."

DOLLAR DIVE

The dollar slipped to a near four-week low against a basket of currencies, with the euro up more than half a U.S. cent at $1.3370 after hitting its highest in almost three weeks and sterling at an eight-month high.

The greenback proved more resilient against the yen, which was hampered by its status as a safe haven and pared early losses to stand at 98.84. Liquidity was lacking with Japanese markets closed for a holiday on Monday.

Following recent wobbles in U.S. jobs and retail data, 1315 GMT industrial production and capacity utilization figures will give a fresh view of the health of its economy.

MSCI's broadest index of Asia-Pacific shares outside Japan had gained 1.5 percent overnight as South Korean shares added 1 percent, Australia's rose 0.5 percent and Indonesian stocks climbed 1.7 percent.

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.

In debt markets, futures for the U.S. Treasury 10-year note leapt three-quarters of a point following Summers' withdrawal from the Fed race, a sizable move, as investors took yields - which move inversely to prices - lower.

Cash yields dropped to a month-low, going as far as 2.8031 percent. German Bunds tracked the moves and were last at 1.872 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.

Emerging market stocks 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.

Gold recouped some of last week's losses, rising to $1,327 an ounce from around $1,308 and growth-sensitive copper lifted off a five-week low. Brent crude lost over $2 to $109.42 a barrel, while NYMEX crude shed $1.50 to $106.70.

(Editing by Catherine Evans/Ruth Pitchford)

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