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Markets Deal with 3 Issues at Once

Markets are dealing with three big issues at once: the European debt mess, extending the debt ceiling in the U.S., and earnings.

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Put simple: there is a blend of a weakening growth picture combined with a continued flare up of the main problem: excessive global debt levels and how do to deal with them.

European markets are weak, not on facts, but on speculation and confusion: EU officials have called an emergency meeting to discuss Italy and Spain, but it's not clear what the agenda is, or what policy options are being discussed. There is the usual chatter about buying up Greek debt and finding some way to lower interest rates for new debt, but there's also speculation that some kind of default of Greek debt is being considered, or to expand the bailout facility to include Italy.

On the horizon are the publishing of stress tests of 91 European banks on Friday....expect more capital raising.

Trench warfare on debt ceiling negotiations: like a WWI bunker battle. The $4 trillion, 10-year, swing-for-the-fences effort to reduce the U.S. debt level by addressing the tax code and trying to scale back defense and Medicare is apparently out the window. Now what? Some smaller package, but it's not clear if it will be a $2 trillion or $1 trillion deal. One thing's clear: either deal deal will mean another fight over the debt ceiling will come up 2012, so this is another kick-the-can story.

The debate lines are simple enough: the Democrats want new tax revenues and are reluctant to budge on Medicare, the Republicans say no on higher taxes and want entitlements on the table. Most seem to agree that some deal needs to be hammered out by July 22nd to ensure Congress has enough time to act.

Where will this deal come down? The Democrats will probably support an extension of the payroll tax cut (and other tax breaks) in exchange for some tax increase on the wealthy (letting Bush-era tax cuts expire for households that make, say, over $150,000). Everyone declares victory and goes home for the summer.

The president has scheduled a news conference at 11am ET to discuss progress (or lack thereof) on the debt deal.

Elsewhere:

1) My mailbox was full of commentary on why stocks held up so well on Friday, but the two main threads were that 1) jobs are a lagging indicators and job growth pick up in July, and 2) there is more stimulus coming.

2) China inflation accelerated to a 3-year high in June — their Consumer Price Index (CPI) was up 6.4 percent, above expectations, but the Shanghai stock market was one of the few global markets on the upside prior to our open.

3) the CME is launching a yuan futures contract in August — more signs of increased interest in investment products denominated in Chinese currency. Last Wednesday, Caterpillar sold $355 million in yuan-denominated bonds...it was the biggest deal by a multinational company using renimbi. Global companies — and now exchanges — are gaining confidence in China's currency

4) Dunkin Brands estimates IPO terms at 22.3M shares, $16-$18 each. The company was taken private in 2005 for $2.4 billion in cash by Bain Capital, Carlyle, and Thomas Lee. Will trade on the Nasdaq.

5) Coal producer Peabody Energy and steelmaker ArcelorMittal launched a joint bid for Australia's Macarthur Coal. The $5 billion bid comes at a 40 percent premium and would give Macarthur Coal shareholders AUD 15.50 in cash. However, there is still no word on whether Macarthur will accept or reject the bid.

6) Alcoakicks off earnings after the bell.

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Good news: alumina and aluminum prices are up from the first quarter (but decreasing as the quarter ended), and inventories fell. Shipments of flat-rolled products (cars, cans) also increased.

Estimate is for $0.34 on $6.3 billion in revenue, 22 percent revenue growth (!), EPS growth of nearly 160 percent ($0.13 last year).

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