Market Outlook
Monday, September 13, 2010

• 2:00 PM… Treasury Budget

Also the following company is reporting its quarterly earnings:-

• K12 Inc. (LRN)

"We've had some really good news out of China for a start," said Mike Lenhoff, chief strategist at Brewin Dolphin in London."It almost looks as if the loss of recovery momentum in China is running its course. That's a very powerful boost to sentiment and the markets are responding."

"I think also what really has helped sentiment has been Basel III and this fairly lengthy phase-in period for the capital requirements which will not burden the banks," Lenhoff said.

Basel III: Meeting in Basel, Switzerland over the weekend, the world's top central bankers passed a historic measure that would force financial institutions to set aside more capital, as a cushion protecting against future meltdowns.

The reforms, known as Basel III, increase the minimum core capital cushion -- the funds banks accumulate by selling stock and retaining profits -- to 4.5% of assets, from the current 2%. In addition, banks will have to set aside another 2.5% for "future periods of stress."

Banks will not be required to meet the minimum core tier one capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets, until 2015. An additional 2.5 percent "capital conservation buffer" will not need to be in place until 2019.

"The message is that authorities have agreed and realised they need to let the banks recover first and start to lend to participate in the recovery," said Guy de Blonay, who co-runs fund manager Jupiter's 1.4 billion pound ($2.2 billion) Financial Opportunities Fund.

"It's no big bang for banks, not with a phase-in arrangement of five years," said Commonwealth Securities analyst Craig James.

August Budget

The Treasury Department is scheduled to release August budget numbers in the afternoon.

Economists expect a deficit of $95 billion in the month, after a shortfall of $103.6 billion in July, according to consensus estimates from Briefing.com

There are a few further points to the mornings trading which need to be considered:-

• The Dow Jones Industrial Average (DJIA) appears poised to challenge round-number resistance in the 10,500 region. Support for the Dow lies near 10,450, with a more stalwart backstop near 10,350.

• The S&P 500 Index (SPX) could be set to make a run at its 200-day moving average in the 1,115 region. The SPX last closed above this trendline on Aug. 10. If it's needed, support for the SPX should materialize near the 1,100 region.

• The U.S. Dollar Index: With traders turning toward riskier investments in the wake of strong Chinese economic data and new regulations for euro zone banks, the U.S. dollar is being pushed to the sidelines. In fact, the U.S. Dollar Index has fallen 0.54% as the greenback's safe-haven appeal evaporates.

• Benchmark crude futures are taking full advantage of the weaker dollar, rallying 76 cents to $77.21 per barrel.

• Gold futures have failed to advance in the wake of the dollar's decline. In London, the lead contract up a mere 20 cents at $1,246.70 an ounce.

• Bonds: The yield on the 10-year Treasury note fell to 2.8% from 2.81% late Friday.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 796,210 call contracts traded on Friday, compared to 568,363 put contracts.

Asian markets closed sharply higher overnight after the Chinese government reported a series of positive economic reports, including a better-than-expected 13.9% rise in August industrial production. China also reported that its inflation rate, which had been abnormally hot for several months, was down to a more manageable 3.5% last month.

European Concerns

European share markets rallied in early trading. The CAC 40 in France rose 1.2%, the DAX in Germany rose 0.9% and Britain's FTSE 100 added 1.1%.

• In Europe, at midday, London +1.1%. Paris +1.1%. Frankfurt +1.0%.

In currencies: The dollar fell against the euro, the British pound and the Japanese yen.

Asian Concerns

Earlier, Asian markets: ended higher. Japan's benchmark Nikkei index rose 0.9%, the Hang Seng in Hong Kong surged 1.9% and the Shanghai Composite ended 0.9% higher.

• In Asia, Japan +0.9% to 9322. Hong Kong +1.9% to 21658. China +0.9% to 2688. India +2.2% to 19208.

Futures Trading

As of 6:25 a.m. in New York, the Dow Jones Industrial Average futures were up 84 points, or 0.8%, to 10477, the S&P 500 index futures climbed 9.8 points to 1114.70 and the Nasdaq 100 futures were up 19.5 points to 1909.25.

• Futures: Dow +0.8%. S&P +0.8%. Nasdaq +0.8%. Crude +1% to $77.24. Gold flat at $1246.80.

The mining sector was the biggest benefactor of the Chinese economic reports, with BHP Billiton (BHP), Alcoa (AA), Rio Tinto (RTP) all up more than 2% in pre-market trading. U.S. Steel (X) was also higher.

The financial sector was also positing solid gains in early trading after international banking regulators met in Basil, Switzerland over the week and agree to new more stringent capital ratios for banks - doubling in some cases - along with consequences for poor risk management.

While the rules were strict, the Basil committee agreed not to implement most of the regulations until as 2019, giving banks plenty of time to adjust. The major U.S. banks such as JPMorgan Chase (JPM), Citigroup (C)and Bank of America (BAC) were all up more than 2%.

• Hertz sweetens Dollar Thrifty offer. Hertz (HTZ) raised its offer for Dollar Thrifty (DTG) by $10.80/share to $50/share, or around $1.56B, to top a rival offer from Avis (CAR). Hertz and Dollar Thrifty amended their merger agreement, first inked in April, to reflect the higher price; the other substantive terms of the merger remain the same. To address potential antitrust concerns, Hertz has already begun to divest its deep-discount Advantage Rent-a-Car brand. A vote on the deal by Dollar Thrifty shareholders has been delayed to Sept. 30 from Sept. 16.

• H-P closes in on ArcSight deal. H-P (HPQ) is said to be close to a deal to acquire security-software maker ArcSight (ARST) for around $1.5B. ArcSight, which closed on Friday at $35.10, was reportedly asking for around $42/share; the price per share that H-P is considering paying couldn't be determined. A deal could be announced as soon as today, and would be H-P's fourth acquisition in the last month as it pushes into higher-margin areas like software, networking, storage and services. Premarket: HPQ +0.2% (7:00 ET).

• Genzyme sells genetics unit. Genzyme (GENZ) agreed to sell its genetics unit to Laboratory Corp. of America (LH) for $925M in cash in order to focus on its core growth areas. Genzyme had put the unit up for sale in May under a plan to increase shareholder value.

• Primus fights back on Nan Shan rejection. Primus Financial, one of the bidders for AIG's (AIG) Taiwan unit, reportedly plans to appeal regulators' decision to block the deal, and would consider bidding again if AIG put the unit back up for sale. Primus, which will only be able to appeal if co-bidder China Strategic agrees to take the same course of action, declined to comment. Similar appeals to Taiwan's regulators in the past have never succeeded.

• Deutsche Bank to raise capital, bid for Postbank. Deutsche Bank (DB) confirmed earlier rumors that it plans to raise at least €9.8B ($12.5B) by selling stock to meet stricter capital requirements (see details below) and to make a bid for Deutsche Postbank (DEUPF.PK). Deutsche Bank, which already holds a 30% stake in Postbank, plans to offer €24-25/share in cash to gain control of the consumer lender and will take a charge of around €2.4B in Q3 to mark down the value of its existing Postbank stake. The purchase will help reduce Deutsche Bank's reliance on investment banking. Premarket: DB +2.9% (7:00 ET).

• Basel III tightens capital requirements. The Basel Committee on Banking Supervision more than doubled the capital requirements for banks, though lenders will have eight years to fully comply with the new standards. Banks will be required to have common equity equal to at least 4.5% of assets, weighted according to risk, and regulators plan to introduce an additional capital buffer of 2.5%. If a bank fails to meet the second buffer, it will be barred from paying dividends, though it won't be forced to raise cash. The required Tier 1 capital ratio will be at least 6%. The new rules could force banks, especially European ones, to raise more funds, but expectations for the tighter Basel III rules have largely been priced in to bank stocks already and the long window for full compliance is boosting shares premarket: C +0.8%, BAC +1.85%, WFC +0.9%, DB +1.9%, UBS +2.1%, RBS +3.15%, ING +2.5%, STD +2.4%, BCS +1.8%, LYG +3.7% (6:00 ET).

• Eurozone nearly doubles GDP forecast. The European Commission nearly doubled its forecast for 2010 eurozone GDP growth, raising its estimate to 1.7% from the 0.9% growth it had forecast in May. The upward revision is mainly because of much stronger growth out of Germany, and is roughly in line with updated ECB projections of 1.4-1.7% eurozone growth this year. The eurozone economy contracted 4.1% in 2009.

• Chinese investors may bid for Prudential. Prudential (PUK) may be the target of a takeover offer by a group of Chinese investors who had backed Pru's failed bid for AIG's (AIG) AIA Group. The investors are also examining other options, including buying a large stake in AIA or taking control of Pru's Asian business. Sources said the deliberations are still in early stages, while Pru said it's aware of the potential interest but hadn't opened talks yet. Premarket: PUK +3.3% (7:00 ET).

• Bailout nation. Harrisburg, Pennsylvania's debt-laden capital, will receive $3.6M in expedited payments from the state and $850K in grants in order to make a $3.29M bond payment due on Wednesday. Governor Ed Rendell said it's not a bailout and will give the city some "necessary breathing space." A default on Wednesday's payment would have created the second-largest general-obligation bond default this year, exacerbating the fears of investors in the $2.8T market that more bad news from debt-strapped cities is probably coming and could weigh on bond prices.

• AOL bets on bigger ads. AOL (AOL) is hoping larger, splashier ads will help turn around its flagging fortunes by pulling in more ad dollars from major brands. The new ads, which sources say AOL plans to unveil later this month at the Advertising Week conference, are four times larger than AOL's usual ads and include room for several special functions such as a photo gallery, videos, coupons, social-media updates, text messaging or maps.

U.S. stocks rallied over the past two weeks pausing only once during that stretch because of worries about European banks.

Otherwise, traders have been encouraged by recent economic reports that have topped modest expectations. Recent data has relieved worries that the economy might slip back into recession, though it still indicates growth will be slow.

The Dow has climbed seven of the past eight days and is up 4.5 percent in September, which is typically one of the weakest months of the year for the market.

Trading volume is expected to pick up this week as traders return from summer vacations and recent holidays.

Stocks ended a lightly traded session modestly higher Friday, as ongoing worries about the economy damped enthusiasm over an increase in wholesale inventories.

The economy will remain a key driver of stocks this week, with reports due on retail sales, initial claims for unemployment benefits, as well as consumer and wholesale inflation.

Investors are also likely to focus on tax policy this week as lawmakers return from recess. Congress is expected to work on possible legislation to extend the Bush tax cuts.