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Moody's downgrades Japan. Moody's has cut Japan's credit rating to Aa3 from Aa2, citing "large budget deficits and the build-up in Japanese government debt since the 2009 global recession." Moody's also blamed political instability, which will see the ruling party soon choose the country's sixth prime minister in five years. However, the EU's debt crisis is unlikely to spread to Japan, Moody's said, and the nation's outlook is now stable as the government is able to obtain "the lowest nominal rates globally."

German business confidence, eurozone factory orders fall. German business confidence in August posted its biggest fall since late 2008, with the Ifo index tumbling more than expected to 108.7 from 112.9 in July. The slowdown in the U.S. and debt problems on both sides of the Atlantic were the main reasons for the worsening outlook. As if to underscore the despondency of German companies, data showed that eurozone industrial orders dropped 0.7% in June after rising 3.7% in May, the sharpest fall in almost a year.

Merkel opposes collateral for bailouts. Angela Merkel has rejected demands that Greece provide collateral for its bailout amid requests from several countries for a Finnish-type deal in which Greece puts ups hundreds of millions of euros in cash as a guarantee. The fissure could expose the eurozone to new dangers, as Finland has threatened to drop out of the bailout if its collateral demands aren't met. In response, Greek two-year bond yields rose two full points to 42%, their highest levels since the launch of the euro.

Fitch: Global CDS liquidity hits fresh record. Worries over government deficits have pushed global CDS liquidity to the highest level on record, Fitch said. Developed-market sovereigns - not emerging markets - have led the surge, indicating renewed "uncertainty on the potential for eurozone contagion" and a global slowdown.

Gaddafi stays defiant. Speaking from a secret location and remaining as defiant as ever despite the fall of his compound yesterday, Muammar Gaddafi has called on Libyans to "cleanse Tripoli of rats" in a message broadcast by the Al-Ouraba local TV station. While pro-Gaddafi loyalists continue to fight on the outskirts of the capital, the rebel council plans to move to Tripoli as early as tomorrow. Brent crude futures are -0.3% at $108.98 and WTI is -0.25% at $85.23.

FDIC must face $10B lawsuit over WaMu. A federal judge has turned down the FDIC's attempt to dismiss a $10B lawsuit filed by a unit of Deutsche Bank (NYSE:DB) over bad mortgages that were securitized by Washington Mutual before it was seized by regulators and sold to JPMorgan (NYSE:JPM). The unit argues that loans that WaMu pooled into mortgage bonds did not meet the underwriting standards that had been promised, causing investors to lose billions of dollars. The FDIC had argued Deutsche Bank should sue JPMorgan and not the agency.

ComScore sued for software installations. Two Internet users are suing comScore (NASDAQ:SCOR) for secretly installing illegal data-mining software on their computers. The litigants say the program collects user names and passwords, credit card numbers, and prices paid for goods. This is in addition to the company's regular practice of logging the sites consumers visit and the ads they click on. If it succeeds, the lawsuit could undermine confidence in comScore, which sells data from about 2M people across 170 countries to financial analysts, advertising agencies and other businesses.

NY AG dropped from foreclosure panel. New York AG Eric Schneiderman has been removed from a committee of state AGs negotiating a deal with major banks over inappropriate foreclosure practices. Schneiderman, who was accused of undermining the work of the panel, opposes any agreement that releases banks from other litigation, including over the securitization of mortgages. Given the importance of New York, a nationwide deal it doesn't agree to could still leave uncertainty about the banks' liabilities. The institutions involved are Bank of America (NYSE:BAC), JPMorgan (JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and Ally Financial.

BofA turmoil continues. Fears about legal liabilities and writeoffs again played havoc with Bank of America (BAC) yesterday as five-year CDS spreads hit levels higher than during the peak of the financial crisis. Shares also tumbled as much as 6.4% before a broad market rally helped BofA recover to close at -1.9%. The bank had to defend itself from a blog post by former securities analyst Henry Blodget, who said it faced $100B-$200B of writeoffs and troubled assets. BofA called Blodget's claims "exaggerated and unwarranted."

BHP net profit soars 62%. BHP Billiton's (NYSE:BHP) FH2 net profit excluding items jumped 62% to a record $10.98B, boosted mostly by soaring prices for iron ore. However, the figure missed forecasts, and the world's largest miner warned about higher expenses and was cautious about commodity prices in the short term due to expected weak growth in Europe and the U.S. BHP raised its dividend by 22% but won't buy back shares, as speculated, because its $12.1B acquisition of Petrohawk Energy (NYSE:HK) will absorb any extra cash. Shares -1.2% premarket.

Insurers on edge as Hurricane Irene heads for east coast. Insurers and reinsurers are preparing for major losses as Hurricane Irene, now at Category 2, heads towards the east coast of the U.S. after hitting the Caribbean. Macquarie's Amit Kumar thinks any losses north of $20B would "mark the tipping point" for the property catastrophe reinsurance market, producing a major overhaul of how the industry operates. Irene could arrive in the U.S. at the weekend, not long after yesterday's 5.9 earthquake in Virginia that caused a nuclear plant to shut down.

HP sues AU Optronics. AU Optronics (NYSE:AUO) is being sued by HP (NYSE:HPQ), one of its largest clients, for allegedly conspiring to fix the prices of thin-film transistor LCD panels. HP is relating its complaint to a pending group case against LCD makers on behalf of the buyers of the screens used in PCs, TVs and mobile devices. HP's lawsuit follows the Justice Department indicting AUO for price fixing last year.

Today's Markets:
In Asia, Japan -1.1% to 8640. Hong Kong -2.1% to 19467. Shanghai -0.5% to 2541. India -1.3% to 16285.
In Europe, at midday, London -0.1%. Paris +0.3%. Frankfurt +0.7%.
Futures at 7:00: Dow -0.9%. S&P -0.9%. Nasdaq -0.9%. Crude -0.25% to $85.23. Gold -0.7% to $1848.20.

Wednesday's economic calendar:
7:00 MBA Mortgage Applications
8:30 Durable Goods
10:00 FHFA Housing Price Index
10:30 EIA Petroleum Inventories
1:00 PM Results of $35B, 5-Year Bond Auction

Earnings Results: Companies that beat EPS or net profit expectations last night and today include Dycom (DY +9.9%), Pacific Sunwear (PSUN +10.7%), Avago (AVGO +8.2%), China Unicom (CHU), Toll Brothers (TOL). Those that missed forecasts include BHP Billiton (BHP -1.4%). Full real-time earnings coverage here.

Notable earnings before Wednesday's open: AEO, TOL

Notable earnings after Wednesday's close: AMAT, EXPR, GES, TIVO

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Source: Wall Street Breakfast: Must-Know News