Positive unemployment numbers from Australia, satisfatory debt auction results from Hungary where more bonds were sold than originally planned, encouraging German IFW survey results, as well as the announcement by the U.S. President of an additional $50 billion for infrastructre spending coupled to an extension of tax cuts for richer Americans boosted sentiment in the Asian and European sessions today. European markets were up, as was Shanghai, Nikkei, KOSPI, and Australian stock markets. In China, however, even as the Shanghai index was up, bank shares and property developers were lower on continued uncertainty relating to the real estate bubble, and potential central government measures to deflate it.

The EURUSD saw some fluctuations during the day, with a slight upward bias, but remained little changed through the U.S. session. Gold prices were lower by a little, while 3-month Euribor continued to ease, reaching 0.879%.

China continues its adamant line, U.S. Congress plans a hearing on

Lawrence Summers and his team met with the PBOC chief Zhou XiaoChuan and discussed the Yuan issue, according to statements issued by both sides today (although the American statement did not directly address the currency subject, presumably to help the Chinese avoid "losing face"). Not much seems to have been achieved, judging from statements, apart from the laying out of a groundwork for the next few months' calendar of brisk activity.

But just across the sea, the Renminbi issue seems to be acquiring a new dimension. A few weeks ago, we had noted the increasing volume of PBOC's Japanese Government Bond (JGB) purchases, and how this was raising brows in Tokyo. The tone of this displeasure was certainly higher today, as Finance Minister Noda declared his intention to be in close cooperation with Beijing over yen purchases, adding, cryptically, that he "did not know the true intention" of the purchases. The prime minister also added that they were "closely monitoring" China's purchases.

These comments reflect Japan's attempt to seek other ways in addressing the yen trend, short of any form of intervention, which will be very negative for U.S. Japan relations. There is nothing much that they can do in order to reverse the yen trend in the long term, but there is a lot that can be done to compel the Chinese to abandon their unacceptable currency policies, forcing the Yuan appreciate instead, and thereby indirectly improving the competitiveness of Japanese producers against their Chinese counterparts.

On their part, the Chinese are buying the yen not to cause problems to Japan, but only because they have few other choices in diversifying from the USD, about the stability of which they seem to be worried. With the Euro's survival in doubt, Yen is one of the most obvious choices for diversification, notwithstanding the disastrous consequences of this policy for the Japanese economy.

As the reader can see for himself, the Renminbi problem is a pretty complicated and difficult issue that will not be solved any time soon. Yet the costs of leaving it alone are getting higher with each passing day. In another sign of the heating atmosphere in Capitol Hill, the House Ways and Means Commission will meet to discuss the Chinese currency policy next week on September 15th. Democratic Representative Sandra Levin, in annoucing the meeting, explained that China's unfair undervaluation of the currency costs the U.S. jobs and economic growth. And of course, with elections approaching, she is aware that she must at least appear to be something about these costs.

USDCNY was fixed at 6.7817 today, almost 100 points below yesterday's rate.

Ireland's Anglo-Irish Bank may cost up to $35 billion to Irish government (further from FT)

In a report released this week, the S&P assesses the estimates of the Anglo-Irish Bank that its bailout will cost the Irish government about euro $25 billion, which is equivalent to 19% of GDP, and then refutes them by proposing its own number of $35 billion. The Irish finance minister is adamant that while the burden is unnerving, a default is out of the question.

The numbers are truly staggering, but the main problem of Ireland is that it is on a sinking ship (though it may itself be one of the largest holes.). Speculators are basically convinced that they can force the staggering economies of peripheral Europe to tip over the edge with the application of gentle force, and Ireland is one of the first on the line because of its reckless, crazy policies.

The Irish property bubble, along with that of Spain, had never been a secret to market participants. Articles and studies on the irrational pricing of Dublin property in the heyday of the Irish boom ofthis decade could be found in economic studies and reports by magazines such as the Economist not infrequently. Such warnings were regarded as being overly alarmist by many, but the numbers are not complicated. Now that Ireland has made the unwise choice of taking the burden of that incredible balloon, it is but a matter of time before they will be begging for help from the ECB, and afterwards, the major economies of Europe.

Speculation on Basel Rules, as ECB's Mersch says that the new regulations must be applied globally

There iS a bit of unclarity at the moment with respect to the final version of Basel III, regulating the various aSpects of bank capital requirements. At the moment, banks are expected to hold about 7.5% (Tier I Capital, or Core Capital Ratio) of risk-weighted assets as collateral for their obligations in high quality assets, cash, and its equivalents. Basel III is a set of rules designed to reform capital requirement levels for banks for the purpose of avoiding a recurral of the issues that lay at the core of the subprime crisis.

According to rumors based on reports by the German newspaper Die Zeit, and others, the new proposals for Basel III foresee a gradual implementation of capital adequacy requirements. An absolute minimum at 6% will be the basic Tier I Ratio, but it will be supplemented by a conservation buffer of 3%, meaning that between 9% and 6 % banks will be prevented from paying dividends, bonuses and engaging in share buybacks. Then there will be another 3%, a so-called anti-cyclical buffer, according to the Financial Times newspaper, which will be added on top of the conservation buffer to raise the capital adequacy ratio to as high as 12% during the boom phase.

The proposal is obviously aimed at creating a more robust and safer banking sector in the future, and from a longer term viewpoint, it seems like precisely the kind of tough regulation that would contribute to the prevention of future crises. That is from the point of view of a regulator or an academic. But from the point of view of a trader, coupled with Eurozone-wide fiscal and tightening austerity measures, such a significant increase in capital requirements would be a bearish development for stock markets, risk sentiment, and of course the Euro. Banks will obviously need to retain a larger amount of their earnings, and reduce the volume of lending just as governments rein in spending to deal with solvency worries. What is more, as ECB Governing Council member Mersch noted today, the new regulations would have to be implemented on a global basis in order to be effective. Otherwise, in a world where a crisis in one area quickly threatens to become a contagion in no time, prudence in one region (such as the Basel II rules compliant Eurozone) will hardly lead to a general improvement in the risk profile of the global financial system. And of course, it is exceedingly unlikely that the present U.S. administration, or the Federal Reserve leadership are going to be interested in these strict rules any time soon, given that they are already too shy of withdrawing even a small portion of the massive stimulus injected into the economy over the past 2 -2.5 years.

Fitch warns Japan about its sovereign credit rating

An exceedingly unkind commnetator might feel that Japan is looking more and more like a banana republic run by crackpots these days. Such an assessment of the mental health of Japanese politicians may not be shared by many, but Fitch, at least, concurs that the political squabbles, lack of decisiveness, and direction, and horrible public relations practices may at one point hurt the nation's credibility so much that the sovereign rating of the country may have to be lowered. They are probably inspired by Mr. Ozawa's charge into the spotlight to make this latest warning, but whatever it is, the outlook for Japan is certainly bleak.

We conclude by noting the comments of ECB board members Jean Claude Juncker, and Yves Mersch, that the widening productivity gaps in the Eurozone are threatening the stability of the currency. This comment is unusual coming from the usually ebullient ECB Governing Council, and must be seen as a nod to the market's concerns about widening growth gaps between the periphery and the core of the Eurozone. In any case, the weakness in technology and education, in nations like Italy, or Spain (not to mention countries like Greece), vs. The economies of the north is nothing new, and the fact that the ECB is suddenly drawn to ponder about them with such a severe attitude is probably a sign that even they, behind the rhetoric, are worried about the credibility of the Euro as a currency if no steps are taken to repair the status quo.