Trade the News Market Internals Update at 12:00ET

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Dow -362 S&P -34.5 NASDAQ -35

***Economic Data***

– (CZ) Czech Central Bank leaves the Repo Rate unchanged at 0.75%, as expected
– (BR) Brazil Aug Unemployment Rate: 6.0% v 6.1%e
– (CA) Canada July Retail Sales M/M: -0.6% v -0.3%e; Retail Sales Less Autos M/M: 0.0% v 0.2%e
– (US) Initial Jobless Claims: 423K v 420Ke; Continuing Claims: 3.727M v 3.722Me
– (SA) South Africa Central Bank (SARB) leaves interest rates unchanged at 5.50%, as expected
– (MX) Mexico Q2 Aggregate Supply & Demand: 4.2% v 4.9%e
– (EU) Euro Zone Sept Advanced Consumer Confidence: -18.9 v -18.0e
– (US) Aug Leading Indicators: 0.3% v 0.1%e
– (US) July House Price Index M/M: 0.8% v 0.1%e
– (US) Weekly EIA Natural Gas Inventories: +89 bcf v +90 bcf to +95 bcf expected range

– Global markets have gone into liquidation mode this morning in the wake of the launch of the Fed’s Operation Twist aided by the renewed pessimism about the economic outlook. Equities, precious metals including gold, energy and selected currencies are facing steep losses, with the leading European indices down nearly 5% each and the DJIA retesting the August lows. Gold is down 4%, silver is down 8% and copper is at its lows for the year falling below $3.50. Banks are taking it on the chin as investors guess the Fed’s attempt to flatten the yield curve will hamper profits. The VIX is poised to go above 40 for the first time since August. In Europe, there seems to be a growing consensus among EU officials that Greece will default while remaining inside the euro zone. Press reports suggest that intense talks are taking place in Berlin, Paris, Frankfurt and Brussels about how to manage a Greek default in the short to medium term. Various well-known names have been weighing in with pessimistic comments this morning. Morgan Stanley Strategist Steven Roach predicted that the Fed’s Operation Twist would probably fail and Greece would probably default on its debt. Investor George Soros said Greece would pass whatever law demanded by EU officials to get their hands on the next aid tranche and said the US is already in recession. The US yield curve continues to flatten dramatically as the Fed is seeing the desired effect of its decision to tweak the composition of its balance sheet. The long bond is up another 3 points today narrowing the 2-30 year spread below 270 basis point compared to 305 prior to the Fed announcement. The 10-30-year spread has slipped below 110 basis points while the benchmark 10-year yield hovers around 1.75%.

– FedEx only just topped expectations in its Q1 report and trimmed its FY12 outlook slightly. FedEx’s CEO said that recession is not part of the forecast at the moment, although he does expect sluggish growth. Note that the firm’s Q2 guidance was soft, although it also said it was increasing rates by around 3.9%. Quarterly losses at struggling pharmacy name Rite Aid were a bit better than expected and the firm slightly improved its full-year outlook. Discover Financial Services reported higher quarterly profit, topping estimates, on increased credit card spending and lower costs for bad loans. The company reduced its reserve for credit losses by an impressive $359M in the latest quarter. On the guidance front, PC peripherals maker Logitech cut its FY12 outlook slightly. Honeywell reaffirmed its FY11 guidance. And just after Alpha’s FY11 coal shipment guidance cut, competitor Consol Energy said coal exports would grow more than expected for the year thanks to sustained demand and lower inventories.

– US banks are tanking this morning in the wake of the Moody’s downgrades of Bank of America, Citigroup and Wells Fargo yesterday afternoon plus the impact of Operation Twist. Moody’s said that it downgraded the three banks due to the decreased probability that the US government would support the banks in a crisis and that the government is more likely to let a large bank fail than it was in the heart of the crisis. One analyst warned that another downgrade of BoA would make counterparties think twice about cutting business with the bank. Operation Twist is pressuring the shares of insurance names, with Aetna down 2%, Prudential down 3% and MetLife down 4% as analysts note the firms’ diminished profit generating ability as the yield curve flattens out.

– Last night United Technologies said it would acquire Goodrich for $18.4B in cash, at $127.50/shr. The deal helps UTX gain heft in new aircraft technology and plane services. The company will issue about $4.6B in new shares to fund the deal and cut its spending on share buybacks as it digests its biggest acquisition in a decade. Shares of UTX are down more than 6% this morning.

– The FX price action was a bit choppy as rumors circulated that the Fed might reduce the interest rates charged on its FX swap lines by 100 bps. The yen continued to maintain a firm tone ahead of its fiscal half-year end. USD/JPY continued to linger about 25 pips from fresh all-time lows. JPY continued to hit fresh 10-year highs against the Euro and life-time highs against the GBP. EUR/USD briefly tested below the 1.34 level but managed to probe back toward 1.3470 ahead of the European equity close.

***Looking Ahead***

– BRICs to discuss euro zone aid
– 12:00 (CO) Colombia Q2 GDP Y/Y: 5.2%e v 5.1% prior
– 13:00 (US) Treasury to sell $11.0B in 10-Year TIPS Reopening
– 15:00 (AR) Argentina Aug Trade Balance: $777Me v $672M prior

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