Trading activity in most markets was subdued today, yet the same cannot be said about the news flow which has been rather strong on the eve of the G-20 meeting. In Asian trading, Nikkei was up by 0.5%, while Kospi rose by 1.2%, but HK and Shanghai were lower. In Europe, stocks were generally lower, while the Euro appreciated slightly. USDCNY was fixed at 6.6695 vs. yesterday's 6.6754, after an earlier erroneous fix of 6.6495 was corrected by the PBOC.

Gold has fallen as low as $1315 per ounce today, obviously in reaction to expectations that the G-20 meeting will see leaders reaching a degree of understanding between themelves, and adopting novel measures to calm the chaotic FX market. It is pointless to speculate on this today, but our opinion is that a decisive move will only be taken if the market generates a USD shock, or if trade suddenly collapses in a process similar to the collapse of the Baltic Dry Index after the Lehman Event. Neither of this being unlikely for now, we expect that the hopes for a united front will meet some disappointment after the G-20 meeting. At the same time, gold can keep falling for a while since it has been staging a very sharp rally ever since QE2 speculations overtook the markets. The most important variable is the size of the Fed's new measures, and until then, it is perhaps not very sensible to expect strong movements.

Treasury Secretary Tim Geithner proposes a 4% upper limit to current account surpluses to be realized in 2015

Tim Geithner has been trying to prepare the ground for the advancement of some creative ideas at this weekend's meeting, but he has not found a lot of encouragement so far. In a letter that the Treasury Secretary sent to his peers at the G-20 meeting, he emphasized the importance of avoiding competitive devaluations, repeating the long-term U.S. position that exchange rates should not be a tool of managing the trade balances of nations. In a more concrete proposal, he has suggested a 2015 current account surplus target of 4% for the G-20 nation, urging that currency policies be directed towards achieving this medium-term goal. In separate comments on China, he said that he was pleased with the pace of appreciation in September, expressing a desire that the current pace be maintained, which, of course, seems extremely unlikely unless the Chinese radically alter their posture favoring gradual appreciation at their own pace.

Reactions to the current account surplus limit proposal have been generally negative today. Among regional actors, Australia was the most optimistic, calling the idea of a current account limit "constructive", while criticizing the "one-size-fits-all" approach. South Korea, which is hosting the meeting at Gyeongju, has also voiced strong support for the 4% target, as a co-sponsor of the proposal. The Japanese, who usually have a current account surplus of about double the proposed target, seem to be supportive in principle of rebalancing the current account positions of nations, but only in principle. The Finance Minister has today commented, according to a Reuters article, that a numerical target is not realistic, and went so far as to voice some suspicion that the communique will be mentioning the currency issue at all. India, China, and Germany have also taken an unfavorable stance against the U.S. suggestion, and France is being reported by news sources to be against the Secretary's plan..

So it looks highly unlikely that this idea can be refashioned into a generally acceptable form in the span of a few days. Indeed, one can't help but sense that the U.S. pressing for much more than what it is current economic and diplomatic power would allow it to attain in today's environment, but the fact that it is still the only major power actually making some attempt at resolving the FX entanglement shows once again that it remains the sole actor with enough prestige and skill to assume the leadership of the fractured international community.

Anglo-Irish offers to revalue bonds at 20% par value, CDS widen

Irish Finance Minister has invited "subordinated bondholders to make a significant contribution toward meeting the costs of Anglo". The contribution that the worthy finance minister has in mind involves the exchange of some of the outstanding bonds of the troubled bank for a government guaranteed deal that pays 3-month Euribor plus 375 bp of interest on 20% of par value of the bonds. Also, the bank wants to include an optional redemption clause at E 0.01 per E1000.

According to knowledgeable sources quoted by newswires, the ministry is essentially making a take-it-or-lose-all offer to bondholders, arguably hinting at default in case bondholders fail to accept this offer. The upshot has been the widening of another 10 percent on Anglo-Irish Bank's CDS, reaching 57-60% on an upfront basis during the day. However, activity is reported to be very light on the eve of the G-20 meeting, and reaction to the news has not been as strong as it would be, perhaps, at another day of another week.

In this environment, 3-month Euribor was quoted at 1.29 vs. yesterday's 1.25 while Libors have risen to 0.9687 vs. yesterday's 0.9625.

Next week will see the release of the preliminary US Q3 GDP numbers on October 29^th. The ECRI's weekly growth rate has been rallying from -10% around around two months ago, to -6.8% today, still remaining under the 4% threshold which would indicate that the U.S. economy still headed for a recession, and Next week's numbers should add a little clarity to the picture in this respect. We of course have the weekend G-20 meeting to focus on, and the week after the next one we'll have the FOMC meeting, which has the potential to become one of the most important economic events of this year, arguably this whole decade.