Evening Market Update

Report of Chinese Aid for Italy Rescues Stocks

In what has become an all-too-familiar theme, US equities again fell victim to the festering European debt crisis, however a late-day surge helped stocks to recover and finish in positive territory after the Financial Times reported that Italy was in talks with China regarding the purchase of large amounts of Italian debt. M&A news and corporate reorganization dominated the equity front, with Broadcom announcing that it has reached a deal to acquire NetLogic Microsystems for about $3.7 billion, Global Industries Ltd saying that it will be acquired by France’s Technip for about $1.1 billion, while McGraw-Hill Companies said that its Board of Directors has approved a plan to split into two separate public companies, and Dow member Bank of America will shed 30,000 jobs. Treasuries reversed course and finished lower and gold lost ground, while crude oil prices moved higher and the US dollar eked out a small gain.

The Dow Jones Industrial Average rose 69 points (0.6%) to 11,061, the S&P 500 Index gained 8 points (.07%) to 1,162, and the Nasdaq Composite added 27 points (1.1%) to 2,495. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose by $0.95 to $88.19 per barrel, wholesale gasoline lost $0.03 to $2.74 per gallon, and the Bloomberg gold spot price fell $39.01 to $1,859.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 77.29.

Semiconductor firm Broadcom Corp. (BRCM $33) announced that it has reached an agreement to acquire NetLogic Microsystems Inc. (NETL $48) for $50.00 per share or about $3.7 billion, net of cash assumed. BRCM said the acquisition meaningfully extends its infrastructure portfolio and it expects the deal to be accretive to adjusted EPS by about $0.10 in 2012. BRCM was lower, while NETL was up over 50%.

In other M&A news, Global Industries Ltd. (GLBL $8) announced that it has entered a definitive merger agreement to be acquired by France’s Technip (TKPPY $22) for $8.00 per share in cash or about $1.1 billion, including debt. GLBL was over 50% higher on the news.

Elsewhere on the corporate finance front, McGraw-Hill Companies (MHP $39) announced that its Board of Directors has approved its plan to split into two separate public companies: McGraw-Hill Markets, primarily focused on capital and commodities markets, and McGraw-Hill Education, focused on education services and digital learning. Shares were nicely higher.

Meanwhile, Dow member Bank of America Corp. (BAC $7) said it will reduce its workforce by 30,000, or by roughly 10%, over the next few years as part of CEO Brian Moynihan’s plan to boost profits and cut nearly $5 billion in annual costs by the end of 2013. The announcement comes after last week’s management shake-up that saw the departure of President of Global Wealth and Investment Management Sallie Krawcheck, as well as President of Global Consumer and Small Business Banking Joe Price. Shares of BAC were lower.

Treasuries reverse course while US data was light

Treasuries moved lower following the Financial Times report and as there were no major US economic reports released today. The yield on the 2-year note was up 4 bps to 0.24%, the yield on the 10-year note was 3 bps higher at 1.96%, and the 30-year bond rate was flat at 3.25%.

The US economic calendar will be more active later in the week, beginning with Wednesday’s advance retail sales, forecasted to rise 0.2% month-over-month (m/m) in August, after gaining 0.5% in July, while sales ex-autos are expected to increase 0.2% and sales ex-autos and gas are estimated to grow 0.3%. Meanwhile, inflation readings will be monitored due to the impact on spending and corporate profits, starting with Wednesday’s Producer Price Index (PPI), expected to show prices at the wholesale level fell 0.1% m/m in August after gaining 0.2% in July, while the core rate, which excludes food and energy, is anticipated to slow to a 0.2% rate. The release precedes Thursday’s Consumer Price Index (CPI) report, forecasted to show a 0.2% m/m increase after rising 0.5% in July, while ex-food and energy it is expected to remain at a 0.2% rate. Thursday also brings the industrial production report, expected to increase 0.1% m/m in August after gaining a surprising 0.9% in July, while capacity utilization is forecasted to remain at 77.5%.

Releases on tomorrow’s docket will include the Import Price Index, forecasted to show a 0.8% decline m/m during August following a 0.3% gain the month prior, as well as the NFIB Small Business Optimism Index.

Greek default uncertainty continues to rail Europe; China to aid Italy?

Concerns about a potential default of Greece continued to hamper sentiment across the pond, along with waning confidence that eurozone policymakers have a handle on containing the sovereign debt contagion in the region. Greek Prime Minister Papandreou said over the weekend that the nation will meet its austerity targets in order to qualify for the next installment of aid from the euro-area bailout package, after announcing a new property tax measure to help it meet its goals. Meanwhile, reports that Greece could run out of cash within weeks if it does not get its next infusion in eurozone financial aid exacerbated sentiment. Meanwhile, worries over French banks’ exposure to the troubled nation’s debt added to the uneasiness and raised concerns of whether it could result in credit rating downgrades for the group. Moreover, the UK’s Independent Commission of Banking recommended measures to insulate retail banking business in the sector from investment banking operations.

After European markets closed, the Financial Times reported that Italy is courting China to buy a “significant” amount of Italian bonds and investments in strategic companies, citing unidentified Italian officials. The newspaper went on to say that officials from both countries met in Beijing two weeks ago and additional negotiations are to take place soon, citing the same unnamed officials. Neither country has confirmed the report.

Further east, sentiment in the Asia/Pacific region was skittish as a result of the eurozone debt crisis, as well as a report that showed that India’s industrial production rose 3.3% year-over-year in July, well below the 8.8% increase seen in June and the 6.2% gain that economists had forecasted, marking the slowest pace of growth in industrial production for the nation in almost two years.

Tomorrow, the international economic calendar will remain light, with CPI figures coming from France, Spain, Sweden, and the UK, while the UK will also release its retail price index and trade balance. Elsewhere, Australia will report consumer confidence and Brazil will offer retail sales data.