Stocks, bonds jump after Summers drops Fed bid

By Ryan Vlastelica

NEW YORK (Reuters) - Stocks and bonds on major markets rose on Monday after former U.S. Treasury Secretary Lawrence Summers withdrew from consideration to be the next chairman of the Federal Reserve, leading investors to believe U.S. monetary policy might stay looser for longer.

Signs of progress in reducing tensions in the Middle East, after a Russia-brokered deal on Syria's chemical weapons also helped to support stocks.

Summers' surprise decision on Sunday came just ahead of the Fed's policy meeting on Tuesday and Wednesday, when the U.S. central bank is expected to begin to scale back its asset purchases from the current pace of $85 billion a month.

With the withdrawal of Summers, investors wagered that U.S. monetary policy would stay easier for longer if the other leading candidate for Fed chair, Janet Yellen, the Fed's current vice chair, should get the job. Ben Bernanke's term as Fed chairman expires in January.

The Dow Jones industrial average <.DJI> was up 117.88 points, or 0.77 percent, at 15,493.94. The Standard & Poor's 500 Index <.SPX> was up 9.62 points, or 0.57 percent, at 1,697.61. The Nasdaq Composite Index <.IXIC> was down 4.34 points, or 0.12 percent, at 3,717.85.

The Nasdaq stock index rose for much of the session, but turned negative in afternoon trading, pressured by a 3.2 percent decline in Apple Inc shares. The Dow and S&P500 also ended off their highs of the session after President Barack Obama stood firm in warning Republicans in Congress he will not negotiate over an extension of the U.S. debt ceiling as part of a budget fight.

"We are still riding positively on the Summers announcement, however with the debt ceiling deadline less than a couple of weeks away, there will be heightened sensitivity to it," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.

"We are still up and the market is still riding a wave higher and until there is something tangible to create a sense of fear, the trend remains solid."

European shares <.FTEU3> rose 0.7 percent while the MSCI all-country world equity index <.MIWD00000PUS> rose 0.8 percent.

With Summers' withdrawal, it was even possible a first Fed interest rate rise could be pushed out to 2016, rather than 2015 as currently expected, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen's past speeches, Rupkey said she would probably prioritize reducing unemployment.

"Yellen looks like the clear front-runner and seems to be the public's popular choice," Rupkey said. "The Fed will shoot to lower the unemployment rate to the full employment level, and this means the new target could be more (like) 5.5 percent, not 6.5 percent."

The benchmark 10-year U.S. Treasury note was up 4/32, with the yield at 2.8736 percent. German Bunds tracked the moves and were last at 1.887 percent, well down on last week's peak of 2.0 percent.

The more distant Eurodollar interest rate contracts rallied as the market pared back expectations for how quickly the Fed might finally start to tighten policy, as opposed to just tapering its bond-purchase program.

Contracts from late 2014 out to 2016 all made double-digit gains suggesting a hike was now considered more likely in 2015 rather than in late 2014.

DOLLAR SLIDE

The U.S. dollar index <.DXY> slipped 0.2 percent to 81.28, near an intraday trough of 81.029, its lowest level since August 21. It fell 0.2 percent against the yen while the euro rose 0.3 percent to $1.3336. Liquidity in the yen was lacking, with Japanese markets closed for a holiday on Monday.

In the latest U.S. economic data, industrial output rose 0.4 percent in August, as expected, while manufacturing output rose 0.7 percent, a slightly faster rate than had been forecast.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> gained 1.6 percent overnight as South Korean shares <.KS11> added 1 percent, Australia's <.AXJO> rose 0.5 percent and Indonesian stocks jumped 3.4 percent <.JKSE>.

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GRAPHICS:

Currencies v dollar in 2013: http://link.reuters.com/tak27s

Asset returns in 2013: http://link.reuters.com/dub25t

Euro zone debt crisis: http://r.reuters.com/hyb65p

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PUSHING OUT THE HIKE

Investor sentiment was also underpinned by Saturday's deal between Russia and the United States to demand that Syrian President Bashar al-Assad account for his chemical arsenal within a week and let international inspectors eliminate all the weapons by the middle of next year.

Emerging market stocks <.MSCIEF> were up 1.4 percent and most emerging Asian currencies were on the front foot, with India's rupee leading the charge. Investors have pumped much of the cheap money from the Fed into emerging markets.

Gold fell 1.3 percent, while Brent crude lost 1.8 percent to $109.67 a barrel and U.S. crude futures sank 1.9 percent to $106.21 per barrel.

(Editing by Nick Zieminski, James Dalgleish and Leslie Adler)

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