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Thursday Look Ahead: Mark-to-Market, G20 and the ECB

The fate of an important accounting rule will have a big impact on markets Thursday and beyond.

It's not just any accounting rule. It's the highly controversial mark-to-market rule, criticized for the massive write downs in the banking industry but praised for bringing transparency to the industry's assets. Its critics say the current rule relies too heavily on last sale pricing, and the modification could give institutions more latitude.

For the past two days, financial stocks, and the broader market, have gotten a lift from the expectation that the Financial Accounting Standards Board will modify the mark-to-market rule to give banks more flexibility in how they price their assets. FASB begins meeting at 8 a.m. Thursday. Financial stocks rose 2.6 percent, on top of a a more than 7 percent move higher Tuesday

"You've had (Rep. Barney) Frank and (FDIC chairwoman Sheila) Bair both out talking about it in a rational fashion using cash flow valuations," said Peter McCorry who trades bank stocks at Keefe Bruyette.

He said the expectations for change have clearly been floated by Washington. "I would hope that people are all anticipating a similar event, and if it doesn't go that way, it'll be a surprise, and the surprise is on the downside," he said.

Some traders say a change to the rule could make the outlook for banks even more uncertain. But it would cover first-quarter earnings and that could help the industry's performance by preventing some write downs.

Traders say the market may have already moved on the anticipated news, but they see a sell off if FASB does not change the rule.

McCorry said the buying Wednesday did not show a great deal of conviction because the volume was not heavy. "People are kind of trading with one foot out the door," he said. "...But I think there's a hope that the earnings aren't as bad as people think."

Other good news for the banking sector came Wednesday with word that several smaller institutions have been paying back the government's Troubled Asset Relief Program. Iberiabank and Signature Bank are among those already giving the money back.

Look Ahead

Markets are also watching the G20 summit, underway in London Thursday. President Obama holds a news conference at 12:45 p.m. New York time.

The European Central Bank meets as well, and it may steal some attention from G20 when it cuts rates and holds its presser in Brussels, ahead of the Wall Street open.

U.S. weekly jobless claims data is also reported at 8:30 a.m.; factory orders are at 10 a.m., and there a few important earnings, including Monsanto and Research in Motion.

Wednesday's surprisingly poor ADP jobs report initially impacted stocks, but better-than-expected ISM manufacturing data and pending home sales helped push stocks higher.

From 'Fast Money':

ADP reported a loss of 742,000 jobs in March. Diane Swonk, chief economists at Mesirow Financial, said it will be another "bloody Friday" when the government jobs report is released this week.

"We lost 23,500 jobs a day in February. If ADP data is close to correct, it is about the same rate. (It) could easily approach 8.9 percent on unemployment in March," Swonk said in a note.

Investors will also be watching the ECB rate moves. Marc Chandler, chief currency strategist at Brown Brothers Harriman, said he expects the ECB to cut its refi rate by 50 bps and its deposit rate by 25 bps.

In fact, Chandler said the ECB is likely to be more important to the currency market than the G20 meeting. "If the ECB does something more than cutting rates ... and they do something of unconventional means, like extending unlimited access to liquidity ... some people expect them to announce they will buy corporate bonds. If they do these steps, that'll help the dollar rally," he said.

Chandler said the G20 meeting is acrimonious but there's an effort being made for everyone to agree. In the past, there have been leaks of a communique at gatherings of this type. "This time, we're being told there are several draft versions circulating," he said. Chandler expects the group to agree to give the IMF more funding and make a commitment against protectionism, despite reports that 17 of the 20 countries have adopted protectionist measures since the financial crisis began.

From 'Mad Money':

Reuters reported late Wednesday that the latest draft communiqe says world leaders would establish a new oversight board to monitor the global financial system and refrain from competitive currency devaluations. They also are expected to vow to regulate hedge funds.

The dollar Wednesday rose 0.4 percent against the euro and fell 0.29 percent against the yen. The 10-year Treasury gained, lowering its yield to 2.658 percent.

Muni Watch

In the municipal bond market, traders have been watching the continuing saga of Jefferson County, Alabama sewer bonds.

"We're waiting on what could potentially be the largest bankruptcy in muni history ... They're supposed to have something out tomorrow," said Peter Delahunt, senior vice president and national sales manager at Raymond James. Delahunt said the county has failed to make counter party payments for some time now and it's possible the deadline could again be postponed. "The insurance companies that are on the hook are pushing for foreclosure so they could take over the sewer system and raise rates, and that may not be politically palatable," he said.

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"It definitely will give a black eye to the county. They are on their own a weak credit," he said. Jefferson is the the home of Birmingham, Alabama's biggest city.

Delahunt said the deal flow in the municipal market is much improved from where it was at the end of 2008. At this time last year, though, bond issuance was at a record. "It ran at about just under $8 billion a week. I'd say January and February we're running more like $4 billion a week, and now we're just entering $6 billion ... In November and December, there was barely any issuance," he said. "People were just throwing munis out the window and overboard ... it was an incredible buying opportunity."

Delahunt said more than half the market for new issuance is now from the retail market, as many of the traditional institutional buyers are still on the sidelines. "Most of the activity is taking place in the primary market because the primary market is getting priced at a discount to what might be considered the prevailing market prices," he said.

Delahunt said though there are plenty of deals that are not getting put on the calendar. Some are quietly coming to market. "It's the shadow market that looks large, and no one ever talks about it. It's deals -- (rated) single A, or triple B plus, that don't' come to market ..They'd rather test them quietly rather than publicly," he said.

Earnings Central

Carmax , Monsanto and Rite Aid report earnings Thursday morning. Micron Tech and Research in Motion report after the bell.

Questions? Comments? marketinsider@cnbc.com

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