US stocks seen sharply higher on Summers withdrawal
U.S. stock index futures were sharply higher across the board Monday, as global stocks and bonds reacted positively to the news that Larry Summers had pulled out of the race to be the next head of the Federal Reserve.
Summers' surprise decision bolstered risk appetite as investors had expected him to take a more hawkish course regarding stimulus than other candidates if appointed. This leaves Fed Vice Chairman Janet Yellen as the front runner for the job. A well-known policy dove, Yellen would be expected to continue Bernanke's easy money policies.
"The market will, at the margin, see his withdrawal as one which prolongs unorthodox policy for longer — partly because it moves the more dovish Yellen up the favorites list for the new job," said Deutsche Bank's Gael Gunubu in a research note.
U.S. stock futures initially jumped over 1 percent on the news, and futures on the 10-year Treasury note climbed over 1 basis point, indicating a sharp decline in yields.
On the economic front, the pace of growth in New York state's manufacturing sector unexpectedly slowed in September, according to a report from the New York Federal Reserve. The New York Fed's "Empire State" general business conditions index slipped to 6.29 from 8.24 in August, shy of economists' forecast of 9.20.
Meanwhile, industrial production rose 0.4 percent in August after being flat in July, according to the Federal Reserve. The gain was in line with expectations.
Investors will be closely watching the two-day Federal Open Market Committee meeting, which ends on Wednesday. The central bank is expected to announce the start of the tapering in its monetary stimulus program. The latest Reuters poll showed economists expect the central bank cut its bond purchases by $10 billion, from the current $85 billion per month.
(Read more: Here it comes: Are you ready for the Fed to taper?)
Other market-positive news from the weekend was the commitment by the Syrian government to eradicate its chemical weapon by the mid-2014, lessening the likelihood of Western military intervention in the near-term.
"The diplomatic breakthrough has seen crude oil trade 0.8 percent weaker this morning and is probably contributing the broad risk-on overnight," wrote Gunubu.
Meanwhile, markets are watching fractious talks in Congress on budget resolution and the debt ceiling as a source of potential crisis, later this month or next.
"President Barack Obama has refused to back down over the need to raise the debt ceiling, stating that negotiating the issue would drastically change the U.S. constitution. In contrast, many Republicans are determined not to lift it unless they win concessions on the Affordable Care Act," said Bank of Tokyo-Mitsubishi's Lee Hardman in a morning note.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
TUESDAY: CPI, Treasury int'l capital, housing market index, FOMC mtg begins; Earnings from Adobe Systems
WEDNESDAY: Mortgage applications, housing starts, oil inventories, FOMC mtg announcemnet, FOMC forecasts, Bernanke press conference, Apple iOS 7 available; Earnings from FedEx, General Mills, Oracle
THURSDAY: Jobless claims, current account, existing home sales, Philadelphia Fed survey, leading indicators, natural gas inventories, Fed's Pianalto speaks, Fed balance sheet/money supply, Microsoft analyst mtg, Nike shareholder mtg, weekly rail numbers; Earnings from ConAgra, Rite Aid
FRIDAY: Fed's George speaks, Fed's Bullard speaks, Fed's Kocherlakota speaks, quadruple witching, new iPhones in stores
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