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Morning Notes For September 13th 2010 at Trader’s Narrative

Morning Notes For September 13th 2010

The following is a guest post by a buy-side analyst working in a US asset management firm. The author’s comments are in italics. I welcome your feedback in the comments:

  • Regulators looking to rein in the sort of risk-taking that caused the last financial crisis reached a compromise in Switzerland yesterday that more than doubles capital requirements for the world’s banks while giving them as long as eight years to comply. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends. Bank shares gained after the Basel Committee gave firms as much as eight years to comply with stiffer capital requirements, more time than some analysts predicted – Bloomberg - the 7% minimum is a dramatic, but not unexpected, increase from the current 2%. If a bank’s capital ratio falls below 7% or would fall under 7% when the bank is stress tested, then it will be forced to raise capital. If it falls below 4.5%, then it will be put into ‘resolution.’
  • China’s yuan rose to a record after data showed faster manufacturing growth. – Bloomberg

Chinese Renminbi vs USD spot price
renminbi US dollar cross Sep 2010
The “revaluation” resumes.

  • Boehner on Tax Cuts – House Republican Leader John Boehner said he would vote for middle-class tax cuts even if it means eliminating reductions for wealthier Americans. “If the only option I have is to vote for some of those tax reductions, I’ll vote for it.” – Bloomberg
  • Steve Job, a strategist at Nomura, said investors should buy structured notes to tap into a steep increase in food prices over the next five to 10 years. – Bloomberg
  • Eisenhower-Era Yields Seen in Pimco View of Fed Bond investors are growing more convinced that Federal Reserve Chairman Ben Bernanke will push Treasury yields down to the levels of the 1950s with another round of asset purchases. Goldman Sachs Group Inc. and Pacific Investment Management Co. project the Fed will resume quantitative easing by purchasing U.S. government debt as soon as this year to prevent what they see as a 25 percent chance the economy will slip back into a recession. Bank of America Corp. says the central bank will send the 10-year note yield to a record low of 1.75 percent in the first quarter of 2011. – a lot of strategists are suddenly very comfortable forecasting a continued decline in yields.
  • The recovery in Europe is lagging the improvement in the U.S., recent GDP data indicate. As a result, European Central Bank President Jean-Claude Trichet probably won’t be able to maintain his relatively hawkish tone, while Federal Reserve Chairman Ben Bernanke becomes increasingly dovish.

US recovery compared to other countries

  • Geithner interview in the WSJ – the Treasury Secretary warned that the economic recovery was at risk unless Washington took action; one of the biggest risks to the outlook is “Washington Paralysis”. The Congress should take action quickly to pass Obama’s recent initiatives.
  • Business decision making paralyzed by tax uncertainty – while the outlook for economic growth remains a big factor in business and individual decision making, the issue of taxes is fast becoming critical. Small businesses have said the tax uncertainty has prompted them to hold off on hiring and investment decisions. WSJ
  • US jobs outlook – top US economist (Alan Krueger, the Treasury’s chief economist) says the US jobs outlook is actually progressing a bit better than the prior two recessions (in ’90-91 and 2001). FT (free registration required)
  • WSJ economists survey – 3 of 5 respondents anticipate the Fed will resume large-scale securities purchase in the face of a deteriorating economic outlook (although a majority doesn’t think this would be a good idea). Respondents have been trimming their ’10 and ’11 growth forecasts – Q3 and Q4 growth now seen +1.9% and +2.4% (prior forecasts were 3% for each) (WSJ)

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