Summers Out as Fed Chair Nets Bond Buying

By Tom Luongo in Currency Articles, LiveWire Economics Blog | September 16, 2013 14:00 | Tags: , , , ,

The news that Larry Summers has withdrawn his name from contention for being Ben Bernanke’s replacement as the Chairman of the FOMC had an immediate effect on the markets, sending equity futures rising along with bond prices.  The benchmark 10 year US Treasury Note yield dropped nearly 90 basis points and is trading at an effective yield of 2.79% as bond traders who have been front-running the tapering of QE are not tripping over themselves to cover shorts and potentially front-run Janet Yellen’s expected dovish monetary policy.

2.80% on the 10 year yield is an important level, technically.  A close below that this week would signal that any short-covering rally in bonds will have some legs but it should be short-lived, as more QE will only continue to undermine the U.S. fiscal position.

Bonds being bought means a weaker US Dollar right now. And and USDX dropped 0.50 and is flirting with the 81 level right now as the Euro pushes back towards $1.34 and the Yen has broken back below ¥99.

Equity futures are spiking and commodity prices are under pressure again in a simple risk-off momentum trade.   S&P 500 futures are flirting with the 1700 level in pre-market activity.  With Summers out more QE will mean more hot money chasing momentum higher in equities and keeping investment capital out of commodities as their fundamentals are still poor with production and supply numbers, on the whole, still outpacing growth in key markets like iron ore, coal, copper and, in some places, oil.

 

About Tom Luongo
Tom is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.


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