Morning Market Update

China Data and Capital Rules Agreement Boost Sentiment

The global equity markets are nicely higher on the heels of global economic recovery optimism in the wake of a plethora of favorable Chinese economic reports, depicting the health of the economy that has led the recovery remains prosperous. Also, clarity and relief from the weekend’s Basel Committee agreement on global capital requirements are helping support sentiment and the global advance in the equity markets. Treasuries are lower amid the upbeat mood to begin the week as there are no major US economic reports scheduled for release today, but the rest of the week’s economic docket is full. In other equity news, the M&A theme continues to ramp up with Dow member Hewlett-Packard announcing that it has reached an agreement to acquire security and compliance firm ArcSight for about $1.5 billion, and Hertz Global Holdings Inc. and Dollar Thrifty Automotive Group Inc. agreeing to an increased merger offer for about $1.56 billion. Overseas, the Chinese reports and banking enthusiasm lifted Asian stocks and is boosting equity markets in Europe.

As of 8:53 a.m. ET, the December S&P 500 Index Globex future is 9 points above fair value, the Nasdaq 100 Index is 12 points above fair value, while the DJIA is 76 points above fair value. Crude oil is up $0.50 at $76.95 per barrel, and the Bloomberg gold spot price is down $3.40 at $1,242.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.9% at 82.16.

The global financial sector is being supported 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. Banks will have a period of eight years to comply with the new capital rules, which is helping boost optimism in the sector’s ability to succeed in strengthening the global financial system.

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 $35) for $43.50 per share or about $1.5 billion. Also, Hertz Global Holdings Inc. (HTZ $10) and Dollar Thrifty Automotive Group Inc. (DTG $48) agreed to an increased takeover offer of $50.00 per share for HTZ to acquire DTG for about $1.56 billion.

Treasuries lose ground on China data and banking sector capital rules clarity

Treasuries are under pressure amid the optimism following some upbeat economic data in China over the weekend and as the banking sector is reacting favorably to the new capital requirements agreed upon by global regulators. Today’s US economic calendar is 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.

The economic calendar starts with tomorrow’s release of advance retail sales, 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. The retail sales report includes spending at supermarkets and gas stations.

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.

Thursday brings the Producer Price Index (PPI), expected to show prices at the wholesale level advanced by 0.3% m/m in August, on the heels of a 0.2% increase in July, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.3% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a continued deceleration, to 3.0% in August versus 4.2% the prior month on a headline basis, and a 1.3% increase at the core level, down from a 1.5% increase in July. The release precedes Friday’s report on the Consumer Price Index (CPI), forecasted to show a 0.3% m/m increase, after increasing by the same rate in July, while ex-food and energy, it is expected to post another rise of 0.1% m/m. On a y/y basis, the CPI is expected to increase 1.1% at the headline level and 1.0% y/y at the core level.

Other releases on the US economic calendar include the NFIB Small Business Optimism survey, business inventories, the import price index, the Empire Manufacturing Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the University of Michigan Consumer Sentiment Index.

Europe higher as banks and global recovery optimism pace the advance

Stocks in Europe are nicely higher in afternoon trading, led by gains in financials as the global banking sector received some clarity on the new Basel III capital requirements facing the group as global regulators agreed to strengthening of existing capital requirements. Also, basic materials are helping lead the advance across the pond amid improved optimism regarding the global economic recovery following the weekend’s release of a plethora of better-than-forecasted Chinese economic data.

Some M&A activity in the financial sector is also helping the cause in European equities as Banco Santander (STD $13) agreed to pay 2.9 billion euros ($3.7 billion) to acquire Allied Irish Banks’ (AIB $2) 70% stake in Poland’s Bank Zachodni WBK (BKZHF $48). STD would accumulate a near 30% stake in the Polish lender upon completion of the offer. Moreover, Deutsche Bank confirmed media reports last week that it plans to raise at least 9.8 billion euros ($12.5 billion) to bolster its capital position to meet the aforementioned capital requirements and acquire Deutsche Postbank (DEUPF $33), by offering between 24-25 euros per share.

In other 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.

The UK FTSE 100 Index and France’s CAC-40 Index are up 1.1%, Germany’s DAX Index is advancing 0.9%, Spain’s IBEX 35 Index is gaining 0.7%, and Switzerland’s Swiss Market Index is rising 0.2%.

Asia advances on strength in financials and Chinese data

Stocks in Asia were broadly higher led by strength in financials on optimism regarding the health of the banking sector in the region following the capital requirement agreement among global leaders in Basel Switzerland. Japan’s Nikkei 225 Index and South Korea’s Kospi Index both gained 0.9%, while Australia’s S&P/ASX 200 Index rose 1.2% and Taiwan’s Taiex Index advanced 2.6% to help lead the way as stocks closely tied to the Chinese economy received a boost from some favorable economic reports out of China. Chinese industrial production rose 13.9% y/y in August, after posting a 13.4% increase in July, and compared to the 13.0% growth that economists had expected. Also, China’s retail sales, fixed asset urban investment, and new yuan loans for August all exceeded forecasts to promote some optimism about the health of the economy that has been a leader of the global recovery. The Hong Kong Hang Seng Index gained 1.9% and the Shanghai Composite Index rose 0.9%. Chinese inflation was also in focus and smaller-than-anticipated growth in producer prices as well as an inline report on consumer prices helped support the optimistic backdrop as the report did not stoke fears about an overheating of the economy and the potential for continued government intervention to try to cool down the economy. The upbeat Chinese data boosted global recovery optimism and supported today’s broad-based advances.

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