Summers out = markets up
US markets rally on news that Obama's presumptive pick to replace Ben Bernanke has bowed out. But why?
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
They don’t like him, they really don’t like him. On Sunday, Larry Summers, the former treasury secretary for Bill Clinton and the putative favourite to replace Ben Bernanke as the chair of the U.S. Federal Reserve, unexpectedly withdrew his name from consideration for the position. Summers said his candidacy had become too controversial (more so among Democrats than Republicans, ironically) and suggested that his announcement as Bernanke’s replacement might cause uncertainty that could be bad for the economy and its still-vulnerable recovery.
American markets responded favourably to the news, posting strong triple-digit gains in early trading today. Why? Summers was notably more hawkish in terms of the pace and structure of tapering than the other front-runner, current Fed vice-chair Janet Yellen. But Barry Knapp, the head of equity strategy at Barclays, told BNN those differences are overstated – and overrated. “I suppose, on balance, this does justify a little bit of a rally in the belly of the treasury curve, but it doesn’t justify a rally in equities at all. We don’t think that it really mattered how aggressive the Fed was or wasn’t with respect to starting the exit strategy in terms of an equity market correction. 1983, 1994, 2004 were very different cycles – 1994 being aggressive, the other two much more being passive – but the stock market sells off eight to nine per cent in all three occasions. It’s really just a function of hitting that inflection point that causes the sell-off, not what the Fed’s actually doing, whether it’s 10 or 15, treasuries or mortgages – it almost doesn’t matter. The market is due for a correction.”
One company that isn’t participating in the rally is Bankers Petroleum (TSE:BNK), which was hit with a claim filed in the Commercial Court of England and Wales by BP Oil International over the termination of a crude oil sales contract between the two parties. BP is seeking damages of US$54 million. Bankers, for its part, believes it was within its legal rights to terminate the contract, and intends to “vigorously defend the claim.”