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CREDIT COMMENTARY
Sep 16, 2013
Summers exit boosts risk assets
Credit markets started the week on a positive note after the race to be next head of the US Federal Reserve moved in a positive direction.
Larry Summers, currently an economic adviser to President Barack Obama, announced over the weekend that he no longer wanted to succeed Ben Bernanke as Fed chairman. Summers was perceived as one of the favourites to win the nomination, so his withdrawal came as something of a surprise.
Risk assets were boosted by the news, with the Markit iTraxx Europe rallying 3.5bps to 94.5bps. Summers was widely viewed as more hawkish than the other contenders, particularly Janet Yellen, the current vice-chairwoman of the Fed.
If Yellen does secure the position, she is expected to conduct monetary policy in a similar manner to Bernanke; in other words, loosely.
The news was timely for the markets ahead of the QE tapering that will probably be implemented later this week. Emerging markets, which have underperformed in recent months due to the uncertainty in US policy, bounced back today.
Indonesia (233bps, -19), Turkey (203bps, -11) and Brazil (162bps, -11) all rallied in response to the news. However, the fundamental problems in several emerging market countries - significant current account deficits and low savings rates - still exist and could pose problems in the months ahead.
As well as the expected QE tapering, investors will be anticipating the German elections over the weekend, where Angela Merkel is forecast to win another term. Activity in the CDS market this week will be affected by the index roll on Friday.
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