Evening Market Update

Banking Rules, Chinese Economic Data Catalyze Markets

Investors cheered the Basel Committee’s clarity on new banking capital requirements and a number of better-than-expected economic reports out of China by sending stocks into positive territory to start the trading week. However, despite the rise in equities, and with today’s economic calendar void of any scheduled releases, Treasuries moved higher ahead of tomorrow’s retail sales report. Equity news was dominated by M&A activity, with Dow member Hewlett-Packard saying that it has agreed to acquire security and compliance firm ArcSight for about $1.5 billion, Hertz Global Holdings Inc. and Dollar Thrifty Automotive Group Inc. agreed to an increased merger offer for about $1.56 billion, and Genzyme Corp announced a deal to sell its genetic testing unit to Laboratory Corp of America Holdings for $925 million.

The Dow Jones Industrial Average moved 81 points (0.8%) higher to 10,544, the S&P 500 Index gained 12 points (1.1%) to 1,122, while the Nasdaq Composite advanced 43 points (1.9%) to 2,286. In moderately light volume, 934 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil rose $0.74 to $77.19 per barrel, wholesale gasoline increased $0.01 to $1.98 per gallon, and the Bloomberg gold spot price lost $1.40 to $1,244.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 1.2% at 81.87.

The global financial sector was aided by the announcement from the weekend agreement from the Group of Governors and Heads of Supervision—the oversight body of the Basel Committee on Banking Supervision—to enforce “substantial strengthening of existing capital requirements.” The Committee’s agreement will increase the minimum common equity requirement from 2% to 4.5%, and banks will be required to hold a “capital conservation buffer” of 2.5% to withstand future periods of stress, bringing the total common equity requirements to 7%.

European Central Bank President Jean-Claude Trichet said in the press release following the announcement that, “the agreements reached today are a fundamental strengthening of global capital standards.” Meanwhile, the Board of Governors of the US Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement saying they “actively supported” the agreement. The positive reaction to the agreement comes with relief that the capital requirements are less stringent that some had feared and as banks will have a period of eight years to comply with the new capital rules, helping boost optimism in the sector’s ability to succeed in strengthening the global financial system.

The optimism on the clarity of the Basel III capital requirement agreement, which had been a formidable source of market-unfriendly uncertainty, teamed up with a slew of favorable reports out of China to propel the global equity markets higher.

In M&A news, Dow member Hewlett-Packard (HPQ $38) announced that it has reached an agreement to acquire security and compliance firm ArcSight (ARST $44) for $43.50 per share or about $1.5 billion. HPQ said that the combination of the two entities will improve security, reduce risk and facilitate compliance at a lower cost for customers. HPQ was lower, while shares of ARST finished over 25% higher.

Also, Hertz Global Holdings Inc. (HTZ $10) and Dollar Thrifty Automotive Group Inc. (DTG $50) agreed to an increased takeover offer of $50.00 per share for HTZ to acquire DTG for about $1.56 billion. The deal is above the near $1.4 billion offer to acquire DTG by Avis Budget Group Inc. (CAR $11) earlier this month, and CNBC’s David Faber reported that CAR is unlikely to counter HTZ’s offer, according to people close to the matter. CAR has not commented on the matter. Shares of all three firms were solidly higher.

Elsewhere, following its pledge in May to divest non-core operations, Genzyme Corp. (GENZ $70) announced that it has reached an agreement to sell its genetic testing unit to Laboratory Corporation of America Holdings (LH $74) in an all-cash transaction valued at $925 million. The move LH Chairman and CEO David King said that the acquisition would help the company greatly expand its reproductive, genetic, and hematology-oncology testing capabilities. Shares of both firms were lower.

Treasuries higher after erasing losses

Treasuries finished higher, despite the strength in the equity markets, as the yield on the two-year note lost 4 bps to 0.53%, the yield on the 10-year note declined 6 bps to 2.74%, and the 30-year bond yield fell 3 bps to 3.84%. Today’s US economic calendar was void of any major releases, but for the rest of the week there will be a plethora of data points for the markets to consider, beginning with tomorrow’s advance retail report forecasted to rise 0.3% month-over-month (m/m) in August, after increasing 0.4% in July, while sales ex-autos are also estimated to grow 0.3% in August, after advancing by 0.2% in July. Same-store sales results —sales at stores open at least a year—reported by retailers were generally better-than-expected in August and some retailers, such as Target Corp. (TGT $53), J.C. Penney Co. Inc. (JCP $22), and Macy’s Inc. (M $21) noted that the important back-to-school shopping season was strong. The retail sales report includes spending at supermarkets and gas stations. The figure that may garner the most attention is the ex-autos and gas reading, as this is a clearer read on the consumers’ appetite for spending, which is a huge part of the economy. Excluding autos and gas, sales are projected to increase by 0.4% during August, after posting a disappointing 0.1% decline in July.

Moreover, Wednesday brings the August reading on industrial production, expected to rise 0.2% in August after advancing by 1.0% in July, and capacity utilization, forecasted to rise to 75.0% from 74.8% in July. Industrial production has been a source of strength thus far this year. Also, some regional manufacturing reports are due out this week, with Wednesday’s release of the Empire Manufacturing Index, expected to improve from 7.10 in August to 8.00 in September, and Thursday’s Philadelphia Fed Business Activity Index, forecasted to increase from -7.7 in August to 0.0 in September. Both the August readings disappointed economists, with the Philly Fed reading posting the first monthly contraction since July 2009 after unexpectedly falling below the zero mark, which is the separation point between expansion and contraction. However, despite the lackluster regional reports, the ISM Manufacturing Index posted an unexpected improvement for August, and recorded the thirteenth-consecutive month of expansion in the manufacturing sector.

Other releases on the US economic calendar include the NFIB Small Business Optimism survey, business inventories, the import price index, MBA Mortgage Applications, the Producer and Consumer Price Indexes, initial jobless claims, and the University of Michigan Consumer Sentiment Index.

Chinese economic data helps boosts optimism

The weekend’s release of a plethora of better-than-expected Chinese economic data helped to bolster global equity markets. Industrial production in the Asian nation rose 13.9% year-over-year (y/y) in August, more than the 13.0% economists had expected, while 18.4% y/y growth in August retail sales, a 24.8% y/y rise in August fixed asset urban investment, and new yuan loans rising to 545.2 billion yuan for August all exceeded forecasts as well, prompting optimism about the health of the economy that has been a leader of the global recovery. As well, China’s Consumer Price Index rose 3.5% y/y in August, inline with expectations, and the country’s Producer Price Index gained 4.3%, slightly lower than forecasts, helping to soothe fears about an overheating of the economy and the potential for continued government intervention to try to cool down the rate of growth. Chinese Premier Wen Jiabao said that the nation’s economy was in “good shape” with “fast growth, gradual structural improvement, rising employment and basic price stability,” however he added that the country will continue its measures to limit property speculation and preserve stable housing prices.

In other economic news in Asia/Pacific, separate reports in Hong Kong showed growth in 2Q industrial production and producer prices both accelerated versus the previous period, while export prices in South Korea fell, and increases in the nation’s import prices decelerated in August.

In economic news in Europe, the European Commission boosted its economic growth forecast for the euro-area this year, France’s current account deficit narrowed, the pace of growth in Spain’s housing transactions increased, while Switzerland’s producer and import prices unexpectedly increased.

Tomorrow, economic reports set for release internationally will include two measures of housing prices and CPI in the UK, French CPI, the German ZEW Economic Sentiment survey, and euro-zone industrial production. Further east, Japan will provide revised industrial production and the Ministry of Finance’s business outlook survey, and New Zealand will report retail trade. In North America, Canada will report industrial production and capacity utilization, as well as motor vehicle sales.