Lawrence Summers took his name out of the Fed Chair race and emerging markets soared, including five Indian stocks.
With Federal Reserve Chairman Benjamin Bernanke's term drawing to a close, the market is frantically responding to every new clue as to who the potential successor will be. We at Kapitall Wire were fairly certain that the nominee would be Vice Chairman Janet Yellen.
Yellen's "dovish" policies, prognostication of the financial crisis, and popularity among senate Democrats seemed to make her a logical choice for a controversy-weary President, despite him having another person in mind for the job. Early this morning investors got an important, and surprising clue about the country's economic future when Lawrence Summers officially took his name out of the race.
[Read more from Kapitall: Video Game Stocks Countering Mobile with Price Cuts]In a personal letter to President Obama, Summers worried that his nomination would bring "acrimony" to Washington, and even jeopardize the fragile recovery. While sources close to the pair have said that the letter was both offered and accepted begrudgingly , the markets responded with joy . That's because Yellen appears to offer some degree of security and stability to the markets which Summers, an outsider with a reputation for strong opinions (and the occasional gaffe ) does not. Whoever replaces Bernanke will most likely have to address the current policy of quantitative easing (QE). The last time the US wound down QE was in 1994 when a strengthening of the dollar, coupled with a fall in liquidity, sent Asian economies plummeting. The importance of the next Fed Chair cannot be understated. Appointed by the President and confirmed by the Senate, the Federal Reserve's Board of Governors and its Chairman cannot be removed from office once they are in place. They often serve multiple terms under different Presidents – and can be considered one of the most important, bi-partisan appointments an American President can make. With Summers out of the running, investors in Asia seem more reassured that QE will stay in place a bit longer. They see QE as vital to keeping their currencies stable and helping their stock markets recover. That's because many emerging economies in Asia have large credit deficits. In India especially, that number is high, with foreign capital investment at 7% of the GDP . If the extra liquidity that Indian markets have become accustomed to were to suddenly drop off, India could face a serious credit crisis akin to the one in South Asia in 1997. Back then, Thailand was forced to unpeg its currency from the dollar and Malaysia had to freeze its funds. Emerging markets seem reassured that Yellen would not initiate an abrupt end to QE during her term – sending stock prices up across almost every sector. With that in mind, we searched for stocks based in India, traded on US exchanges, that might be responding positively to Summers' withdrawal from the Fed Chair race. We found five companies, operating in finance and technology, that have all seen a bump in share price after hearing the news.