G20 statement on strengthening financial system

Finance ministers and central bank heads from the G20 nations met in London on Friday and Saturday to discuss the next steps in tackling the worst financial crisis since World War Two. We, the G20 Finance Ministers and Central Bank Governors, reaffirmed our commitment to strengthen the financial system to prevent the build-up of excessive risk and future crises and support sustainable growth. We have made substantial progress in delivering our ambitious plan, which will ensure a robust and comprehensive framework for global regulation and oversight. The Financial Stability Board and the Global Forum on Transparency and Exchange of Information have expanded their mandate and membership. The regulatory bodies have agreed to more stringent capital requirements for risky trading activities, off-balance sheet items, and securitised products; they have developed proposals to address procyclicality, issued important principles on compensation and deposit insurance, and established over thirty supervisory colleges.

But more needs to be done to maintain momentum, make the system more resilient and ensure a level playing field, including the following actions:

1. Clear and identifiable progress in 2009 on delivering the following framework on corporate governance and compensation practices. This will prevent excessive short-term risk taking and mitigate systemic risk, on a globally consistent basis building on and strengthening the application of the FSB principles:

* greater disclosure and transparency of the level and structure of remuneration for those whose actions have a material impact on risk taking;

* global standards on pay structure, including on deferral, effective clawback, the relationship between fixed and variable remuneration, and guaranteed bonuses, to ensure compensation practices are aligned with long-term value creation and financial stability; and,

* corporate governance reforms to ensure appropriate board oversight of compensation and risk, including greater independence and accountability of board compensation committees.

We call on the FSB to report to the Pittsburgh Summit with detailed specific proposals for developing this framework, which could be incorporated into supervisory measures, and closely monitoring its delivery. We also ask the FSB to explore possible approaches for limiting total variable remuneration in relation to risk and long-term performance. G20 governments will also explore ways to address non-adherence with the FSB principles.

2. Stronger regulation and oversight for systemically important firms, including: rapid progress on developing tougher prudential requirements to reflect the higher costs of their failure; a requirement on systemic firms to develop firm-specific contingency plans; the establishment of crisis management groups for major cross-border firms to strengthen international cooperation on resolution; and strengthening the legal framework for crisis intervention and winding down firms.

3. Rapid progress in developing stronger prudential regulation by: requiring banks to hold more and better quality capital once recovery is assured; introducing countercyclical buffers; developing a leverage ratio as an element of the Basel framework; an international set of minimum quantitative standards for high quality liquidity; continuing to improve risk capture in the Basel II framework; accelerating work to develop macro-prudential tools; and exploring the possible role of contingent capital. We call on banks to retain a greater proportion of current profits to build capital, where needed, to support lending.

4. Tackling non-cooperative jurisdictions (NCJs): delivering an effective programme of peer review, capacity building and countermeasures to tackle NCJs that fail to meet regulatory standards, AML/CFT and tax information exchange standards; standing ready to use countermeasures against tax havens from March 2010; ensuring developing countries benefit from the new tax transparency, possibly including through a multilateral instrument; and calling on the FSB to report on criteria and compliance against regulatory standards by November 2009.

5. Consistent and coordinated implementation of international standards, including Basel II, to prevent the emergence of new risks and regulatory arbitrage, particularly with regard to Central Counterparties for credit derivatives, oversight of credit ratings agencies and hedge funds, and quantitative retention requirements for securitisations.

6. Convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the IASB is encouraged to take account of the Basel Committee guiding principles on lAS 39 and the report of the Financial Crisis Advisory Group; and its constitutional review should improve the involvement of stakeholders, including prudential regulators and the emerging markets.

Fed must not leave rates too low: Hoenig

The U.S. central bank must resist popular pressure to keep interest rates too low as the economy recovers, according to a top Federal Reserve official. Kansas City Federal Reserve President Thomas Hoenig, in remarks at a private meeting last month that were released on Saturday, also said that top U.S. banks were still too highly leveraged, and would evade demands to raise more capital. "As we become more confident that we are at the bottom of the recession and are moving into recovery, we must become more resolute in systematically reducing our balance sheet and raising interest rates," Hoenig told the annual meeting of the Kansas Bankers Association on August 6. The Fed has cut interest rates to almost zero and doubled its balance sheet to around $2 trillion to keep credit markets from seizing in panic after investment bank Lehman Brothers failed last September amid massive losses on mortgage debt. "Moving from zero to one percent, for example, is not a tight policy. I don't know what the neutral rate is, but I am certain it isn't zero," Hoenig said. "Neutral" refers to a level of interest rates that neither stimulates nor hinders growth. The Fed reiterated at its August 12 policy meeting that the weak economy would warrant exceptionally low interest rates for an extended period. Hoenig, who is regarded as one of the Fed's most hawkish, or anti-inflation officials, will be a voting member of its policy-setting committee next year. "We are carrying more debt than we have carried in most of our history, and the pressure to keep rates low is only going to increase as the economy begins to recover," he said. Hoenig said mixed signals from the economy indicate that the bottom of the recession had been reached, but predicted only a gradual recovery as businesses and households work off the consequences of the collapse of the U.S. housing market. "In this environment, one of the Federal Reserve's major challenges will be how to pull back its highly accommodative monetary policy without undermining the recovery and without igniting inflationary expectations," he said. Hoenig's speech was on the implications of leverage and debt. He said that the country's 20 largest banks had far less equity capital than their smaller rivals, controlling $12 trillion in assets but supported by just 3.5 percent of equity capital versus 6 percent for the next 20 largest firms. "Some proposals being offered would require large institutions to hold more than this level of capital," he said, referring to the 6 percent threshold. "I would suggest such proposals are wishful thinking and will not be achieved."

GBPUSD: Breaks Downside Losses, Recovers Higher.

GBPUSD- The shooting star triggered declines off the 1.7041 level came to a halt the past week putting the pair on a positive higher close at 1.6319. Though still biased to the downside as it is still trading below its broken MT rising trendline, with the mentioned recovery gains, GBP should build on that strength further with the initial target residing at the 1.6542 level, its Aug 24’09 high ahead of its Aug 21’09 high at 1.6622. Above there will put the GBP back into its broken trendline and clear the way for more upside gains towards the 1.6716 level, marking its Aug 10’09 high and then its YTD high standing at 1.7041 where a turn above there will resume its medium term uptrend now on hold. However, if the recovery now seen fades, reversal lower will follow towards the 1.6111 level, its Sept 01’09 low with a break of the latter pushing the pair further lower towards the 1.5982 level, which marks its July 08’09 low and next the 1.5798 level, its Jun 07’09 low. Overall, even though declines triggered off the 1.7041 level remains to the downside, that weakness is now being challenged by a recovery higher.

Directional Bias:

Nearer Term -Bearish
Short Term –Mixed
Medium Term –Bullish

Performance in %:

Past Week:: +0.76%
past Month: -2.55%
Past Quarter: +14.74%
Year To Date:: +12.03%

Weekly Range:

High -1.6411
Low -1.6111

EURUSD: Continues To Hold Above Its MT Rising Trendline

EURUSD- With declines to as low as 1.4176 reversed and a neutral candle printed the past week, EUR continues to maintain above its medium term rising trendline initiated at the 1.2456 level. This leaves the pair biased to the upside towards its YTD high sited at the 1.4446 level where a decisive penetration will put it on the path to further upside gains towards the 1.4719 level, its Dec 18’08 high and possibly higher targeting the 1.4875 level, representing its Sept 21’09 high. On the other hand, downside targets are located at the 1.4176 level, its Sept 01’09 low and the 1.4088 level, representing rising trendline. Below there though not expected at the current price levels could drive the pair further lower towards the 1.3747 level, its Jun 16’09 low. On the whole, we maintain that while the pair holds above its rising trendline, outlook for further upside gain remains

Directional Bias:

Nearer Term –Mixed

Short Term – Bullish

Medium Term –Bullish

Performance in %:

Past Week: +0.05%

Past Month: +0.55%

Past Quarter: +5.89%

Year To Date: +2.32%

Weekly Range:

High -1.4378

Low -1.4176

MPC expected to keep rates on hold

Bank of England policymakers are expected to pause for breath when they meet this week after the shock decision last month to pump an extra £50 billion into the economy. The nine-strong Monetary Policy Committee made an unexpected move to increase efforts under its Quantitative Easing (QE) programme to £175 billion in August. But it was even more of a surprise when minutes of the meeting revealed that Bank Governor Mervyn King had been out-voted in calling for an even greater money supply boost. It emerged that Mr King and two MPC colleagues - David Miles and Tim Besley - had preferred a £75 billion expansion in August, taking the total to £200 billion. According to the minutes, they warned that insufficient action would cause inflation to remain below target for a sustained period of time and might harm public confidence in the recovery, causing it to falter. But the majority of committee members were concerned that too big an increase could have economic implications that were uncertain and difficult to rectify. Recent encouraging indicators for the UK economy added to caution over the need for greater stimulus. Economists believe that it is unlikely the MPC will step-in with more money for the economy so soon after increasing the QE limit, while it is also forecasted to keep interest rates at their historic low of 0.5% for some time. The MPC has been keen to stress that the effects of QE will take time to filter through, which adds to the theory that they will likely sit back and wait before taking further action. But Howard Archer, economist at IHS Global Insight, said more QE cannot be ruled out.

Dollar Falls on Bets Investors Seek Higher Yields as G-20 Meets

The dollar dropped against most of its major counterparts on speculation investors betting on a quick recovery in the global economy bought higher-yielding assets as Group of 20 finance ministers convened. The Brazilian real and South African rand posted the biggest advances against the greenback among the most-trade currencies this week as U.S. employers slowed the rate of job cuts in August. Treasury Secretary Timothy Geithner reaffirmed his commitment to supporting the economy before conferring with G-20 officials in London. The U.S. government is scheduled to sell a combined $70 billion in notes and bonds next week. “The policy backdrop is exceedingly supportive,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “All the positive comments from Geithner and the G-20 authorities over the weekend will set us up for a nice bounce in risk.” The dollar fell 0.6 percent to 93.01 yen yesterday, from 93.60 on Aug. 28. The U.S. currency was little changed at $1.4311 per euro. The real climbed 2.2 percent to 1.8401 versus the U.S. currency, and the rand advanced 2.1 percent to 7.5908. U.K. Chancellor of the Exchequer Alistair Darling and German Finance Minister Peer Steinbrueck were among the G-20 officials saying yesterday it’s premature to unwind the emergency measures put in place to fight the crisis. The euro erased its gain versus the dollar on Sept. 3 as European Central Bank President Jean-Claude Trichet said the economic recovery in his region will be “rather uneven” after holding the target lending rate at a record low of 1 percent.

‘Extremely Dovish’

“Trichet sounded extremely dovish,” a team of Commerzbank AG analysts including Ulrich Leuchtmann in Frankfurt said in a report yesterday. The Federal Reserve signaled in minutes of its August meeting published on Sept. 2 that it’s trying to prepare investors for an end to some of its asset purchases as the U.S. economy shows signs it’s beginning to recover from its worst slump since the Great Depression. Geithner told reporters the same day in Washington that it’s still “too early” for G-20 nations to implement exit strategies. Finance ministers meet this weekend in London, while the Bank of England and the Reserve Bank of New Zealand decide on monetary policy next week. Mexico’s peso declined 0.9 percent to 13.3716 against the dollar this week on speculation the government will fail to get congressional support to raise taxes as it seeks to rein in next year’s budget deficit. The peso slumped 3.1 percent last week.

Mexico’s Budget

President Felipe Calderon, who is preparing to send Congress the budget proposals on Sept. 8, said last month that he may seek a combination of debt, higher taxes and lower spending to stem the swelling budget deficit. Standard & Poor’s has warned the nation must create new sources of revenue to offset declining oil income if it’s to avoid a downgrade of its debt rating before the end of the year. S&P rates Mexico’s foreign debt BBB+, the third-lowest investment-grade rating. The euro rose briefly yesterday after the Labor Department reported at 8:30 a.m. in Washington that job cuts slowed to 216,000 in August. The currency approached the lowest level this week about 30 minutes after the report and resumed gaining from about 11:40 a.m. to its intraday high of $1.4327. “There’s too much uncertainty about how this will play out,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “From a recession point of view, we still have a long way to go. Just look at the job losses. It’s not like any recovery we saw since 1980.”

U.S. Jobless Rate

The unemployment rate climbed to a 26-year high of 9.7 percent, and the Labor Department revised its estimate for job cuts in July to 276,000, from 247,000 previously. Canada’s dollarthree-month loans in dollars fell this week, declining for a 13th straight day yesterday to 0.31 percent, according to the British Bankers’ Association. The corresponding rate for funds in yen was higher at 0.38 percent. strengthened 0.4 percent to C$1.0871 per U.S. dollar as the government reported employment rose last month by 27,100, compared with economists’ median forecast of a drop of 15,000. The unemployment rate increased to 8.7 percent. The dollar fell against the rand for a third week in its longest stretch of declines since May. The three-month Johannesburg interbank agreed rate is more that 20 times higher than its U.S. counterpart at 7.1 percent. The London interbank offered rate on

‘New Carry Currency’

“Judging by Libor rates, the dollar’s the new carry currency,” said Jessica Hoversen, a fixed-income and foreign- exchange analyst in Chicago at MF Global Ltd., a brokerage firm. “It’s the cheapest.” In the carry trade, investors borrow in nations where interest rates are low and buy assets where returns are higher, profiting from the difference. The Australian dollar climbed 1.2 percent this week to 85.15 U.S. cents and advanced 0.6 percent to 79.21 yen. The South Pacific nation’s three-month bank-bill swap rate is 3.42 percent. Gains in U.S. Treasuries were limited this week as the government prepared to sell $38 billion of 3-year notes, $20 billion in 10-year securities and $12 billion in 30-year bonds over three straight days beginning Sept. 8. The yield on the 10- year note fell less than 0.01 percentage point to 3.44 percent.

Markets to stay wary on stimulus after G20 pledge

Financial markets are likely to remain buffeted by uncertainty over government policy despite an unprecedented pledge by the world's top finance officials to cooperate as the global economy emerges from recession. At a meeting in London at the weekend, finance ministers and central bankers from the Group of 20 nations said fiscal and monetary policy would stay expansionary as long as needed to ensure recovery. That assurance could support fresh risk-taking in the markets this week, providing a moderate boost to global equities and prompting sales of the U.S. dollar in favor of higher-yielding currencies such as the Australian dollar. For the first time, the G20 officials said there should be some coordination of policies to avoid destabilizing economies when governments eventually start winding down costly stimulus schemes launched during the crisis. This was important for long-term investors, who fear volatility in the currency and interest rate markets if some cash-strapped countries cut back fiscal spending and hike interest rates much sooner than others. But the G20 did not explicitly address big issues blamed for imbalances in the global economy, such as the value of China's yuan. That raised questions over how much political will the group can really muster to coordinate policies. And in some ways, the G20 seemed less united than it did when it met at the height of the crisis in April. While the April meeting produced a broad consensus on reform to financial regulation, the latest meeting bickered inconclusively over issues such as curbing excessive pay packages for bankers. If the G20 has trouble setting common rules to regulate the finance industry, it may find it impossible to agree on sharing the fiscal burden of engineering a sustained economic recovery. "The spirit of coordination is confidence-boosting, but in reality withdrawing fiscal stimulus will be difficult to coordinate," said Lena Komileva, head of market economics for major developed economies at money broker Tullett Prebon. "Investors still fear an uncoordinated exit could create stealth competition and contribute to increased volatility in government bond yields. It may be the fiscal equivalent of competitive currency devaluation."

GROWTH

As the G20 met, there were fresh signs of improvement in the economic outlook. Documents obtained by Reuters showed the International Monetary Fund had revised up its forecast for the world economy this year and next. It now forecasts a contraction of 1.3 percent in 2009, a bit better than its April forecast of a 1.4 percent shrinkage, and growth of 2.9 percent in 2010, revised up from 2.5 percent previously. But the strengthening outlook carries its own risks; facing less pressure to cooperate urgently to avoid a global economic collapse, G20 nations may focus more on narrow national interests as they plot "exit strategies" from stimulus steps. That may explain why G20 policymakers said almost nothing specific at the weekend about the "cooperative and coordinated exit strategies" which they promised. Instead, they merely said they would work with the International Monetary Fund and the Financial Stability Board, an international forum, to develop such strategies. Asked if coordination meant central banks might hike interest rates in unison, just as they cut together during the crisis, British finance minister Alistair Darling simply said countries did not have to do things on the same day, but did have to work together to ensure they did not hamper recovery. British Prime Minister Gordon Brown said sustaining the economic recovery would mean "avoiding unsustainable imbalances between countries," such as trade imbalances. But once again, the G20 did not make any concrete statement on adjusting the exchange rates of the dollar and the yuan, which are among the biggest factors affecting trade flows. China, with the sustainability of its recovery still uncertain, is not expected to let the yuan appreciate much any time soon.

UNCERTAINTY

Analysts believe uncertainty about how the global recovery will be managed may partly explain the surge of the spot gold price to near record highs over the past two months. During the same period the CBOE Volatility Index, a measure of investors' willingness to take on risk, has stopped trending lower after sliding almost continuously since early this year as financial markets recovered. The index is roughly where it was just before Lehman Brothers collapsed last September, but remains well above levels that prevailed in the years before the credit crisis began developing in 2007. Sarah Hewin, senior economist at Standard Chartered Bank, said some investors were hoping for clear information from the G20 meeting about how exit strategies would be carried out, and would be disappointed that there was none. "We should see more good news on the economy in the near term and those economies that have yet to move into positive growth, such as the United States and Britain, should see positive growth in Q3," she said. "But the issue is that some of the stimulus is going to run out, so the markets are likely to continue fluctuating between optimism and caution."

G-20 Urged by IMF, Europe to Coordinate When Reversing Stimulus

Group of 20 nations were urged by the International Monetary Fund and European governments to coordinate when they unwind emergency measures introduced to fight the global financial crisis. As G-20 economic policy makers prepare to meet in London on Sept. 4-5, German Finance Minister Peer Steinbrueck told his counterparts in a letter that failure to align so-called exit strategies risked “distortions of competition.” John Lipsky, the IMF’s No. 2 official, said in an interview that a lack of cooperation “could create strains and costs for other countries.”

The concern is that having committed more than $2 trillion in fiscal packages and aiding banks such as Citigroup Inc. and Royal Bank of Scotland Group Plc, failure by the G-20 to move in lockstep when reversing the assistance could fan inflation, lead to uneven debt burdens or distort markets. “These kinds of policies will be more effective if they’re unwound in a coordinated way rather than an uncoordinated way,” Lipsky, the IMF’s First Deputy Managing Director, said in Washington. “In many areas such as bank guarantees or other specific governmental support for markets, often these have spillover effects.”

G-20 finance ministers and central bankers are convening this week to shape an agenda for a Sept. 24-25 summit of their leaders in Pittsburgh amid signs the world economy is pulling out of its worst recession since World War II. Business activity in the U.S. improved in August more than forecast, the Institute for Supply Management-Chicago Inc.’s business barometer showed today.

‘Essential’ to Coordinate
“There cannot be a one-size-fits-all solution,” Steinbrueck said in the letter, which was seen by Bloomberg News. “However, it is essential that we coordinate our action internationally.” French Finance Minister Christine Lagarde cautioned against a premature withdrawal of support. “It would be irresponsible not to discuss exit strategies, but we’re not out of the crisis,” she told reporters in Paris today. While it’s too early to begin implementing exit plans, the 186-member IMF, which provided emergency loans to countries from Iceland to Hungary during the crisis, is devising a road map for how economies can reverse their stimulus efforts, Lipsky said.
Governments must also unite when introducing new financial rules to prevent future turbulence, U.K. Chancellor of the Exchequer Alistair Darling said today. “In this global world our markets are interdependent, and without strong international financial regulation, one country’s financial system can be played off against another,” Darling wrote in the Guardian newspaper.

Market Contribution
In his letter, Steinbrueck also said he wants to discuss at the G-20 how financial markets can be brought to make a “greater, internationally coordinated contribution” to financing the costs of coping with the economic crisis. Adair Turner, the chairman of the U.K. Financial Services Authority, last week proposed a “Tobin tax” on financial transactions. Lagarde said she backed taxing finance so long as it didn’t create distortions. “I’m all in favor of better regulation and of a financial or fiscal levy on all financial instruments, but not for some, detrimental to others,” Lagarde said. Central banks including the U.S. Federal Reserve and the Bank of England are already pursuing divergent policies. The U.K. central bank this month voted to increase its bond purchase program by 50 billion pounds ($81 billion) to 175 pounds, while the Fed is letting its Treasury-buying expire. The Bank of Israel unexpectedly increased interest rates on Aug. 24, the same day that Hungary’s central bank cut its benchmark. “Differentiation between countries is likely to become a bigger theme again for markets,” Joachim Fels, co-chief global economist at Morgan Stanley in London, said in an Aug. 26 report. The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

Oil drops below $70

Weaker stocks and a stronger dollar push crude futures down more than 4%.

Oil fell more than 4% to below $70 a barrel on Monday as a drop in China's key stock index dented optimism about the pace of economic recovery and the U.S. dollar strengthened. China's key stock index dived 6.74% on Monday to a three-month closing low and recorded its second-biggest monthly loss in 15 years. European equities edged down and U.S. shares opened lower. "It's negative sentiment given the very weak Chinese market," said Eugen Weinberg, analyst at Commerzbank. "This is definitely bad news for the commodities sector, especially oil and metals."

U.S. crude for October fell $3.12 to $69.62 a barrel, having fallen as low as $69.46 in intraday trade.
"The sharp drop in Chinese markets is causing concerns and is inevitably making some investors rethink on the risks to China's economy and question their assumptions on the country's growth rate and energy consumption," said Daniel Liu, a commodities strategist at MG Global Singapore. Jitters about the Chinese economy, the world's second-largest oil consumer, also weighed on other Asian stock markets.
The dollar was up slightly against a basket of currencies, reducing the appeal to some investors of oil and other dollar-denominated commodities.

The Organization of the Petroleum Exporting Countries meets to review output on Sept. 9 in Vienna. Several ministers and officials from the group have said it is likely to leave output targets unchanged. Even though OPEC agreed 4.2 million barrels per day of supply curbs late last year and has kept output targets steady so far in 2009, actual production has been rising in recent months according to industry surveys. In a further sign of that trend, Abu Dhabi, the main producer in OPEC member the United Arab Emirates, will lift supply to Asia in October, the state oil firm said on Saturday. Despite the indications of higher supply from some in OPEC, oil has rallied from a low of $32.40 in December 2008, which was the weakest in nearly five years, to a 2009 high of $75 a barrel last week.