New banking rules lift global markets

[September 13, 2010]  LONDON (AP) -- A warm response to new global banking rules and robust Chinese economic data shored up sentiment in the markets Monday, with stocks up strongly and the euro climbing over a cent against the dollar.

In Europe, the FTSE 100 index of leading British shares was up 59.06 points, or 1.1 percent, at 5,560.70 while Germany's DAX rose 56.20 points, or 0.9 percent, to 6,270.97. The CAC-40 in France was 44.73 points, or 1.2 percent, higher at 3,770.55.

Wall Street was poised for a solid advance at the open shortly -- Dow futures were up 87 points, or 0.8 percent, at 10,480 while the broader Standard & Poor's 500 futures rose 9.3 points, or 0.8 percent, at 1,114.20.

The positive start to the week has come after central bankers agreed on new rules to require banks to hold more capital as a buffer against future difficulties and Chinese figures showing that growth in industrial production accelerated to 13.9 percent year-on-year in August from July's 13.4 percent increase.

The main relief in the markets over the conclusion of the so-called Basel III negotiations Sunday is that the proposals for new bank rules appear to be less onerous than many in the markets had been predicting last week.

The recommendations, which have to be ratified by the Group of 20 leading industrial and developing nations in November, will require banks to hold as much as 7 percent of their capital in reserve for a rainy day -- one of the main reasons why the world suffered its deepest recession since World War II was that the banks were badly undercapitalized when the financial crisis broke around three years ago.

Though the new ratio is way higher than the 2 percent banks held in the run-up to the financial crisis, they will have up until 2018 to implement the rules fully.

"Basel III is viewed as less stringent than investors had expected and the long implementation period takes some of the immediate pressure off banks," said Eric Viloria, an analyst at Forex.com.

Across Europe, banks were leading the march ahead Monday, including Deutsche Bank AG, which made up some of the ground lost Friday amid speculation that it was to announce a massive cash-raising exercise.

That was confirmed Sunday when Deutsche Bank announced it is planning to raise at least euro9.8 billion ($12.4 billion) to mainly finance a takeover of retail lender Deutsche Postbank AG.

Analysts said the banking rules agreement has helped underpin investor confidence at the start of a busy economic news week, particularly in the U.S.

"The week is off to a good start with strong Chinese output data, and market solace courtesy of a very gradual phasing in on Basel III requirements," said Daragh Maher, an analyst at Credit Agricole. "However, in the double-dip context, the U.S. is the principal focus."

There will be a lot of interest in Tuesday's release of U.S. retail sales in August as investors get a chance to see if the growing talk of a double-dip recession during the month reined in consumption.

The retail figures are particularly important because U.S. consumer spending accounts for around 70 percent of the world's largest economy.

The improvement in sentiment was visible in the currency markets, too, where the euro rose more than a cent, or 0.9 percent, on the day to $1.2821.

Generally when investors have a higher appetite for risk, they move out of safer assets such as bonds and the dollar into stocks, oil and other currencies.

Oil prices were higher, too, with benchmark crude for October delivery up 66 cents at $77.11 a barrel in electronic trading on the New York Mercantile Exchange. The contract surged $2.20 to settle at $76.45 a barrel on Friday.

Aside from general financial and economic factors, the markets are increasingly turning their attention towards the U.S. Congressional elections, now less than two months away.

Investors will be keeping a close watch on how the economic debate pans out -- many investors are getting a bit twitchy that many candidates will increasingly look to blame China for the U.S. economy's failure to generate as many new jobs as hoped even though the recession ended more than a year ago.

U.S. Treasury Secretary Timothy Geithner has said that the Chinese authorities have not done enough to allow their currency to appreciate against the dollar -- allowing the yuan to rise against the dollar would make Chinese goods more expensive for American consumers but also cut the price of U.S. products sold in China.

"The main risk for global markets is the threat of resurgent protectionism and a flare-up of U.S.-China trade tensions," said Neil MacKinnon, global macro strategist at VTB Capital.

Earlier in Asia, Japan's Nikkei 225 stock average rose 0.9 percent to 9,322.04 as the dollar remained above 84 yen -- last week, the dollar fell to a fresh 15-year low of 83.35 yen, which further fueled concerns among Japan's high-value exporters that they would be priced out of the international marketplace.

Meanwhile, Hong Kong's Hang Seng index added 2 percent to 21,685.73 and China's Shanghai Composite Index gained 0.9 percent to 2,686.51.

[Associated Press; BY PAN PYLAS]

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