Daily Market Update – October 24, 2012

Top News Highlights

• Benjamin Lawsky, head of the New York State Department of Financial Services, said in a letter to federal regulators that the proposed stricter capital rules would be an undue burden on community banks. Lawsky's statement gives the banks a strong ally in their attempt to push back against the proposed Basel III capital rules. The banking industry says it agrees with the concept of bigger capital cushions, but it is worried the proposal is too complex and is punitive against certain classes of banks. "Based on our experience, simpler rules are more likely to be successfully implemented by banks themselves and more efficiently monitored by their regulators," Lawsky said in the Basel letter

Economic Highlights

• In times of trouble, investors tend to flee to the comfort of the U.S. dollar -- even when the trouble is emanating from the U.S.. If Congress fails to reach a deficit reduction deal by the end of the year, it will automatically trigger big spending cuts and tax increases in 2013. This so-called "fiscal cliff" would hit the still-recovering U.S. economy hard. "We risk a recession in the H1'13 and if that happens the risk-off trade will firmly be in play, which should benefit the dollar in the same way it did during the last recession," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup
• The German economy may contract in the Q4'12, Bundesbank said. The central bank said the economy is likely to stagnate or even contract slightly in the final quarter of the year after marking a noticeable expansion in the Q3'12. GDP grew 0.3% in the Q2'12. While industrial new orders from Euro-zone have stabilized after massive declines in previous quarters, growth in demand from emerging markets had come to a standstill given the global economic dip, the bank said
• Chinese factories are losing pricing power in the worst wholesale-cost deflation since 2009, signaling corporate earnings may deteriorate further and putting a damper on global inflation pressures. "Reduced inflation pressure should expand the space for policy makers to take pro-growth actions in their countries," said Shen Jianguang, chief Asia economist at Mizuho in Hong Kong. Chinese officials are likely to reduce banks' reserve requirements ahead of a Communist Party congress next month, said Shen

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