Financial Update For Feb. 19, 2010

• TSX +59.35 finished higher for a seventh straight session, led by gold mining shares,
• DOW +83.66
• Dollar +.34c to 96.02cUS
• Oil +$1.73 to $79.06US per barrel.
•
Canada to oppose global bank tax
Paul Vieira, Financial Post

OTTAWA -- Canada will officially oppose international efforts to get the world's major economies to impose a global bank tax, government sources tell the Financial Post.

This could potentially ignite a major divide among Group of 20 leaders at their summit meeting in Toronto this summer, and further thwart efforts to implement uniform financial regulations in the post-recession era.

Senior Canadian officials are in the midst of crafting a public response to be released shortly, say sources with knowledge of the plan. An official response is required, they say, due to recent public musings from Gordon Brown, the British Prime Minister, that the G20 countries were close to a deal on a financial services tax -- the so-called "Tobin" tax.

Canada is co-head of the group this year with South Korea.
"Canada is going to oppose any tax on financial transactions," said one source, adding the tax runs counter to the Conservative government's reputation for lower taxes.

Prime Minister Stephen Harper, as well as Finance Minister Jim Flaherty, want to use their influence as host of the next G20 meeting, in Toronto in June, to kill the proposal. The sources suggested the G20 would not agree to measures or policies unless all leaders sign on.

When he was at the World Economic Forum in Davos last month, Mr. Harper used the global stage to denounce "excessive" and "arbitrary" proposals from countries, such as Britain and France, to regulate the financial-services industry in the aftermath of the global financial crisis.

Among the proposals Mr. Harper was referring to is a levy on financial transactions, designed to make banks pay for the bailouts governments posted in 2008 and 2009 to deal with the financial crisis and to dissuade banks from making risky bets in the future.

Individually, U.S. President Barack Obama has proposed a levy on banks with assets of higher than US$50-billion, while Mr. Brown has taxed bonuses earned by London's top bankers.
Last week, Mr. Brown told the Financial Times he envisaged a G20 deal on a bank tax at the Toronto summit.
Mr. Brown said he believed backing for a global bank tax had gained momentum after Mr. Obama introduced a similar levy.
"People are now prepared to consider the best mechanism by which a levy could be raised," Mr. Brown said in the interview. "I'm interested in the way support is building up for international action."
Mr. Brown's comments have clearly irked Canadian officials. It was only a few weeks ago that Mr. Flaherty and other Group of Seven finance and central officials met in Iqaluit, and appeared to be united in finding a common front of global financial reform. As a show of unity, they agreed to commission a study on the usefulness of a bank levy.
Mr. Brown proposed a global transaction tax at a G20 meeting he hosted in Scotland last November, only to draw stiff opposition -- from, among others, Timothy Geithner, the U.S. Treasury secretary.
Canada's plan to officially quash talk of a bank-tax deal is the latest hiccup in efforts by global leaders to map out a uniform regulatory scheme in the post-crisis world. Leaders from the G20 had agreed to implement uniform rules to prevent companies from seeking out countries with less-stringent regulation. Working groups, such as the Financial Stability Board, are in the midst of developing rules that would apply, such as the levels of capital banks would need to keep on their balance sheets.
But now, despite Mr. Brown's musings, countries appear to be as divided as ever. http://www.financialpost.com/news-sectors/economy/story.html?id=2583353
Fed seeks to calm markets after discount rate rise
Emily Kaiser and Mark Felsenthal, Reuters
WASHINGTON/MEMPHIS, Tennessee -- Federal Reserve officials moved to calm speculation that a surprise rise in its emergency lending rate could bring forward broader policy tightening, saying borrowing costs in the economy would stay low.
Fed Chairman Ben Bernanke flagged the move last week, saying the central bank aimed to widen the spread between its main policy rate that remains pegged near zero and the discount rate at which banks can borrow from the Fed.
However, no one in markets expected it to act so soon and the timing of the move -- well ahead of the March 16 policy meeting -- prompted investors to price in a greater likelihood of a rise in the benchmark fed funds rate late this year.
The dollar jumped and government bonds and bank stocks fell after the Fed raised the discount rate by 25 basis points to 0.75 percent even as it cast it as a response to improved financial market conditions and not a change in monetary policy.
"This is a significant and likely symbolic move that will impact on market sentiment," Robert Rennie, a strategist at Westpac in Sydney said in The Dealing Room, a Reuters Messaging chat room.
"The emergency easing cycle began with discount rate cuts - it was all about easing liquidity to banks. So the move to raise the discount rate means the long journey toward normalization has begun."
Thursday's move is the first increase in any of the Fed's lending rates since the financial crisis blew up in 2007 and the first rate change since December 2008.
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.
OVERBLOWN EXPECTATIONS
While investors initially brushed aside the Fed's assurances that no tightening for the broad economy was on the cards, warnings from a senior Fed official that markets have gone too far in their tightening bets finally did sink in.
St. Louis Federal Reserve Bank President James Bullard said investors belief in high probability of a rise in the Fed's benchmark rate this year was "overblown" and that the discount rate rise should not be seen as a policy signal.
"The discount rate move is part of a normalization process which is akin to our discontinuing many of our liquidity programs," Bullard, who votes on the Fed's interest rate-setting panel this year, told reporters in Memphis. "It does not indicate anything one way or the other about what we might eventually do with the federal funds rate," he added.
The dollar pared gains and treasury futures trimmed losses, after Bullard's comments and reminders from fellow Fed officials that cheap credit was still the order of the day.
"Monetary policy -- as evidenced by the fed funds rate target -- remains accommodative," Dennis Lockhart, Atlanta Fed president, said in a speech. "This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile."
Still, share markets in Asia were on the defensive as the Fed's action, which follows China's moves to curb lending, served as a reminder that the period of cheap cash that fueled last year's stock market rally may be slowly drawing to an end.
RETURN TO NORMAL
Before the financial crisis, the discount rate was typically a full percentage point above the federal funds rate. Thursday's decision begins to move it back nearer to its traditional premium and it said it would assess over time whether it needed to further widen the spread between the two rates.
The central bank's view of the economy has brightened in recent months as job losses eased, consumer spending strengthened and businesses stepped up purchases of equipment and software. The Fed has warned, however, that recovery from the deepest U.S. recession since the 1930s will probably be sluggish and has said it expects to keep the federal funds rate near zero, where it has been since December 2008, for "an extended period."
In its statement on Thursday, it said the economic and policy outlook remained broadly unchanged from late January, when its policy committee reiterated that low-rate pledge.
Some other central banks around the world have begun to tighten policy. Australia led the way last year and its central bank chief signaled on Friday more rate increases in months ahead while China surprised markets twice in the past two months by lifting banks' mandatory reserves.
In the United States, however, the Fed has said record low interest rates are still warranted with the unemployment rate near 10 percent.
"I don't think the Fed dares (to) increase the fed funds or policy rate in the face of unemployment at double-digit type of levels," Bill Gross, the manager of Pimco, the world's biggest bond fund, told Reuters after the Fed announcement.
Other changes announced on Thursday included shortening the typical maximum maturity for primary credit loans to overnight from 28 days, effective March 18, and raising the minimum bid rate for the Fed's Term Auction Facility, another scheme put in place to foster market liquidity.