Global Macro: Summers' Exit, Fundamentals Boost Markets

TheStreet.com

NEW YORK (TheStreet) -- News of the withdrawal of candidate Larry Summers to be the next Federal Reserve chairman helped boost markets on Monday.

Summers was assumed to be a hawk on monetary policy, and investors feared he would have driven interest rates higher sooner than expected. Liberal Democrats favor Janet Yellen, the current Fed vice chairman.

Markets moved higher on Monday also on fundamentals and Fed expectations.

The first chart below is of SPDR S&P Homebuilders . Homebuilder stocks have steeply fallen since May, when it was first announced that the Fed was thinking about reining in monetary stimulus. As uncertainty has arisen over the exact amount the Fed will cut from its monthly bond purchases, however, the market has bought back Treasuries, pushing rates down and leading to more demand for cyclical sectors such as homebuilders.

A head-and-shoulders pattern has developed on the homebuilders' chart, but the threat of violence in Syria and less aggressive estimates over the amount of tapering have driven prices higher off of support levels.

Although the threat of higher mortgage rates still weighs on homebuilder stocks, the inability of prices to break down yet means tapering hasn't completely driven investors out of the sector.

The next chart is of iShares MSCI Emerging Markets . Like homebuilder stocks, emerging-market equities are tied to U.S. interest rates and dollar strength.

As investors have priced in a smaller-than-expected cut to current bond purchases, the dollar has weakened and funds have continued to flow into emerging economies. There is less fear over liquidity drying up, which means excess capital can be allocated toward riskier investments such as emerging-market equities.

Although the price of the index below looks slightly overbought, there is still room to the upside till prices reach overhead resistance. On the other hand, uncertainty over the exact amount to be cut from Fed purchases this Wednesday could mean a selloff until the Fed announcement.

Either way, loose monetary policy looks bullish for both emerging-market and homebuilder stocks.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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