Larry Summers the next big risk for emerging markets? “Larry Summers is not an advocate of QE and the reality is that all things being equal, he will unwind QE fast”

Larry Summers the next big risk for emerging markets?

Published: Monday, 2 Sep 2013 | 10:58 PM ET

By: Dhara Ranasinghe | Senior Writer

Thought speculation about Federal Reserve tapering was bad for emerging markets? Then just wait to see what happens if Larry Summers is appointed as the next U.S. central bank chief, analysts say. They argue that if Summers replaces Ben Bernanke, whose second term as Fed chairman expires in January, any scaling back in the central bank’s asset-purchase program would be ramped up by the hawkish Summers and deal a further blow to battered emerging markets.Paul Krake, founder of the consultancy View from the Peak: Macro Strategies, said that it isn’t when the Fed starts to take back its massive monetary stimulus but who takes over as Fed chairman next year, that’s important to markets right now.

“The U.S. president is a pretty important job; but ask the Indians, the Indonesians, the Brazilians who’s had more influence over their lives and the answer would be the Fed chief,” he told CNBC.

“Larry Summers is not an advocate of QE [quantitative easing] and the reality is that all things being equal, he will unwind QE fast,” Krake added.

Emerging markets from Brazil to India and Turkey have been hit hard since May on talk of an unwinding of the U.S. monetary stimulus that has provided global markets with liquidity in the past few years.

Talk that Larry Summers, a former Treasury secretary, is the choice candidate to become the next head of the Fed has gained ground in recent weeks. The other favored candidate is Janet Yellen, currently the Fed’s vice chairman.

Break in continuity?

Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank in Singapore, said markets would view Summers becoming Fed chief as a break in the continuity in policy making.

“Markets would prefer Janet Yellen to become the next Fed chief to continue the policies we are familiar with under Bernanke,” Idris said. “A Summers appointment would be taken as a policy break and so you need to price a risk premium into emerging markets as a result and emerging markets would weaken on talk of a Summers appointment,” he said.

According to research from Bank of America Merrill Lynch (BofAML), what happens in the U.S. has a disproportionate impact on Asian markets, with the transition in the Fed chairmanship one challenge for regional markets.

“In the months preceding, and immediately after a transition of the Fed chairmanship, interest rates almost always rise,” BofAML said in a note published on Monday.

This is important because rising government bond yields in the U.S. have been cited as one of the reasons encouraging money to leave emerging markets.

“The problem for the new Fed chief is to manage market expectations and that could be a challenge for Summers,” Kumar Palghat, founder and director at Kapstream Capital, told CNBC Asia’s “Squawk Box” on Tuesday.