Morning Market Update

China Loosens Peg, Providing Power to the Bulls’ Legs

The global equity markets are nicely higher in the first trading day of the week, as China’s announcement that it will allow more flexibility in the exchange rate of the Chinese yuan, loosening a two-year peg against the US dollar, is boosting optimism about the health of the Chinese economy and the global recovery. Treasuries are lower as stocks are moving higher on the news, and there are no major US economic reports due out today, but housing and the Federal Reserve will be in focus for the remainder of the week. US equity news is relatively light, with M&A dominating the headlines, as Corn Products International Inc announced that it has reached an agreement to acquire a starch unit from AkzoNobel for $1.3 billion, while Ralcorp Holdings Inc reported that it will acquire American Italian Pasta Co for $1.2 billion. Overseas, markets are solidly higher.

As of 8:48 a.m. ET, the September S&P 500 Index Globex future is 10 points above fair value, the Nasdaq 100 Index is 18 points above fair value, and the DJIA is 88 points above fair value. Crude oil is up $1.15 at $78.33 per barrel, and the Bloomberg gold spot price is down $1.30 at $1,255.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 85.68.

In M&A news, Corn Products International Inc. (CPO $35) announced that it has reached an agreement to acquire National Starch, a specialty starch maker, from AkzoNobel (AKZOY $56) for about $1.3 billion in cash. AKZOY said it will use the proceeds for both acquisitions and organic growth.

In other M&A news, private label and branded food products firm Ralcorp Holdings Inc. (RAH $62) announced that it will acquire American Italian Pasta Co. (AIPC $42) for $53.00 per share in cash, for a total purchase price of approximately $1.2 billion. Separately, RAH issued 3Q EPS guidance that missed the Street’s profit forecasts. RAH is down solidly, while AIPC is up sharply.

No US reports today, but tomorrow begins the economic fray

Treasuries are lower amid the advance in the equity markets on the favorable reaction to the currency news out of China, and as there are no major reports scheduled for today’s economic calendar.

However, the rest of the week will provide a plethora of economic data to digest, beginning with tomorrow’s release of existing home sales, forecasted to increase 6.5% month-over-month (m/m) in May to an annual rate of 6.15 million units. Sales of existing homes reflect closings from contracts entered one to two months earlier, and therefore include a full benefit from the tax credit rush. However, new home sales are expected to show an 18.7% slump in May to an annual rate of 410,000 units when released on Wednesday, after jumping 14.8% in April, as they are accounted for at the time of contract signing.

However, the highlight of the week will be the two-day Federal Open Market Committee (FOMC) meeting that concludes with the release of the statement mid-day Wednesday. While no interest rate changes are expected, the status of the extra measures the Fed has taken to address liquidity and the cost of capital will continue to be monitored. Minutes from the April meeting showed that there was debate about the pace and timing of asset sales on the Fed’s balance sheet, while the crisis in Europe prompted the Fed on May 10th to re-open its currency swap lines to central banks to ensure financial institutions had access to dollars in conjunction with the larger European rescue package that was unveiled that day. The Fed’s balance sheet expanded very modestly after the action, but has since leveled off, remaining fairly flat over the past two months. Since the last meeting, economic growth forecasts globally have been revised lower due to the European crisis and the likelihood of a slowdown in China, and traders have pushed out the timing of the first US rate hike from December 2010 to March of 2011.

Other reports on this week’s US economic calendar include, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, durable goods orders, weekly initial jobless claims, the final University of Michigan Consumer Sentiment Index for June, and the final reading on 1Q gross domestic product (GDP).

China’s currency move helps give Europe a boost

Stocks in Europe are nicely higher in afternoon action, amid the backdrop of global economic recovery optimism in the wake of China’s announcement over the weekend to allow the yuan to appreciate, ending a two-year peg against the US dollar. Basic materials and industrials are leading the way on optimism about the health of the Chinese economy and the outlook for demand for resources amid an appreciation of the Chinese yuan. Euro-area economic news is relatively light, with a gauge of UK home prices rising 0.3% month-over-month (m/m) in June and a narrowing of the Italian current account deficit, being the lone major reports on today’s docket. Meanwhile, BP Plc (BP $32) remains in the news and continues to decline after the company said late Friday that Anadarko Petroleum Corp. (APC $43)—a partner of BP’s in regard to the leaking oil well in the Gulf of Mexico—plans to refuse to pay its share of the clean-up costs. According to the Dow Jones Newswires, APC’s CEO said, “BP’s behavior and actions likely represent gross negligence or willful misconduct.” BP said it strongly disagrees with APC’s claims and expects its partners to pay their full share. Moreover, BP said the costs for the spill had reached $2 billion.

The UK FTSE 100 Index is 0.8% higher, France’s CAC-40 Index is up 1.3%, Germany’s DAX Index is advancing 1.1%, Italy’s FTSE MIB Index is gaining 0.8%, and Spain’s IBEX 35 Index is 1.6% in the green.

Asia rallies as China signals flexibility in yuan

Stocks in Asia were broadly higher, led by Chinese markets, with the Hong Kong Hang Seng Index jumping 3.1% and the Shanghai Composite Index rising 2.9% after the Chinese government said over the weekend that it will allow more flexibility in the exchange rate of the Chinese yuan. China’s currency has been pegged against the US dollar since 2008 and the move is being met with optimism regarding the Chinese economy and the outlook for the continued global economic recovery. The yuan hit the highest level since July 2005 compared to the dollar but the Chinese government said there is no basis for a large-scale appreciation, per the Associated Press. Moreover, the move is expected to aid in controlling inflation and help domestic demand, with Bloomberg reporting that the Chinese government said an appreciation of the yuan will benefit exporters and Chinese employment more than it hurts and a more flexible currency would also help curb consumer-price gains, asset bubbles and dependence on exports for growth. The move helped boost Asian markets across the board, with Japan’s Nikkei 225 Index advancing 2.4%, South Korea’s Kospi Index increasing 1.6% Taiwan’s Taiex Index gaining 1.9%, and India’s BSE Sensex 30 Index rising 1.7%.

Economic news in the region was relatively light, with the lone major release being Japanese department sales, which fell 2.1% year-over-year (y/y) in May. In equity news, shares of Telstra Corp. (TLSYY $14)—Australia’s largest phone company, per Bloomberg—moved solidly higher after the company reached a A$11 billion ($9.7 billion) deal to allow the Australian government to use its fixed line business as part of a planned national broadband network. The Australian S&P/ASX 200 Index rose 1.3%, aided by the agreement and the aforementioned optimism out of China.