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Get ready for a Summers rally after exit from Fed race

Traders on the floor of the NYSE on December 1, 2008.
Getty Images
Traders on the floor of the NYSE on December 1, 2008.

U.S. stock futures surged and interest rates fell after Larry Summers withdrew his name from consideration for Federal Reserve Chairman.

Investors largely believed he was the frontrunner for the job and that the former Treasury Secretary would embark on a more hawkish course regarding the removal of Fed stimulus than the other candidates believed to be in contention.

(Read more: Summers withdraws his name for Fed chair)

Markets across Asia and Europe rallied on the news and Dow futures jumped more than 160 points in Monday morning pre-market trading. The 10-year Treasury note yield fell to 2.82 percent. The dollar fell against the yen and the euro.

(Click here to check the latest futures action.)

"The market was really anticipating Summers," said Dave Lutz, a trader with Stifel Nicolaus in Baltimore. "Rates are gonna get hit as they perceive either Kohn or Yellen as more dovish."

Pimco's Bill Gross tweeted this shortly after the news: "Summers's exit makes Monday a huge day for curve/risk on trades. Treasury 5/30 curve may steepen by 10. Stocks should do very well."

Behind Summers, surveys show Federal Reserve Vice Chair Janet Yellen and former vice chair Donald Kohn as the frontrunners. With Summers out, it's now more important than ever for the market to get a sense where these two stand on the Fed's current quantitative easing plan that has kept rates artificially low for years, boosting risk assets.

And they'd better figure it out soon as this Wednesday, current Fed Chair Ben Bernanke is expected to announce a tapering of the central bank's third round of monthly bond purchases since the financial crisis. The velocity of this tapering and whether it continues at a regular pace for the next year could me much different under Yellen, investors seem to be betting right now.

(Read more: Here it comes: Are you ready for the Fed to taper?)

"I viewed the market uncertainty of what a Summers appointment represented as a 3.25 percent move in the 10-year versus 2.85 percent with Yellen, who the market will now price as the frontrunner," said Paul Richards, head of FX distribution for UBS. "Tapering was in the price, Summers not. So the Fed now proceeds to taper Wednesday and the market handles that well as relief sets in on the Bernanke replacement argument."

The 10-year yield hit a two-year high above 3 percent last week after strong economic data and also as Summers moved firmly into the front runner spot for the Fed nomination.

"This is very bullish of bonds and stocks and very bearish of the dollar," said Dennis Gartman of The Gartman Letter. "Yellen is THE front runner."

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