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World markets tumble. Global markets and U.S. futures are heavily in the red this morning, Treasurys are higher, and the dollar is soaring after HSBC's flash PMI fell to a two-month low in September, indicating a broadening slowdown in the Chinese economy, and the Fed's Operation Twist failed to inspire. As of 7:00 AM ET, Japan -2.1%, Hong Kong -4.8%, China -2.8%, London -4.8%, Paris -5%, Frankfurt -4.4%, S&P futures -2.4%, 30-year Treasury +1.18%, euro -1.71% vs. dollar.

FOMC does the twist. As expected, the Fed rolled out Operation Twist yesterday, in which it will swap $400B of Treasurys into longer maturities in a range of 6-30 years, by selling in a range of three years or less, to be completed by the end of June 2012. Operation Twist worked in pushing down long-term yields in the wake of the FOMC announcement, but stocks nosedived and the dollar soared as investors apparently wanted more. Benchmark rates will remain near zero, and the three dissenters this time were Fisher, Kocherlakota and Plosser. The surprise was that the Fed will reinvest principal from agency debt and agency MBS into more agency MBS; investors expected MBS paydowns would go into Treasurys. Growth "remains slow" but business investment is still expanding, and inflation expectations are stable.

United Tech buys Goodrich. United Technologies (UTX) agreed to buy Goodrich (GR) in an all-cash deal worth $16.4B, or $127.50/share, marking a 16% premium to yesterday's close and 47% higher than last week when the deal started to leak. It's UTX's biggest deal in a decade and a heavy move into commercial aviation, and comes as peers like Tyco (TYC) are splitting their businesses and slimming down.

Recession fears grip Europe. Eurozone PMI slid to 49.2 from 50.7 in August, the first dip below the contraction watermark of 50 since July 2009, stoking fears of recession. Weak forward-looking indicators raised the risk of further contraction in coming months.

HP's Apotheker may face the axe. Shares of Hewlett-Packard (HPQ) jumped 6.7% yesterday on chatter the board is considering ousting CEO Leo Apotheker, who has been on the job only since November 2010. A source says board member and former eBay chief Meg Whitman could be the replacement, and that the board is reconsidering a plan to spin off the company's PC business.

More IMF warnings. The IMF said yesterday that the global financial system faces more challenges now than at any point since the financial crisis began, and warned that Europe's debt crisis is spreading to its banks, which face €300B ($409B) in potential losses. To help defuse the situation, European banks should shore up their finances by raising more capital and the U.S. should help homeowners cut their mortgage debt.

Moody's downgrades bank giants. Moody's downgraded Bank of America (BAC) to Baa1 from A2. The move comes from a decrease in the probability the government would support the bank, if necessary, but "do(es) not reflect a weakening of the intrinsic credit quality of BofA." Moody's cut Wells Fargo (WFC) to A2 from A1 for the same reason. With Citigroup (C), Moody's confirmed the company's long-term rating, saying the bank's stand-alone credit profile has improved, but downgraded the holding company's short-term rating to Prime-2 from Prime-1.

Accounting impasse could rile U.S. megabanks. The International Accounting Standards Board (IASB) and its U.S. counterpart, the Financial Accounting Standards Board (FASB) seem unlikely to converge their approaches to offsetting financial assets and liabilities - which could result in bloated balance sheets at U.S. banks compared to global counterparts, while simultaneously limiting their ability to offset liabilities. "Simply put, it would gross up U.S. balance sheets," an S&P report says, and this at a time U.S. regulators are trying to address the issue of too-big-to-fail.

In China, lending moves off-bank. Deposits at China's Big Four banks have dropped by 420B yuan ($66B) since the end of Aug. as customers move money into private-lending markets, where they enjoy rates up to 10x the benchmark. China's tighter lending policies are forcing smaller businesses to borrow on secondary markets.

Google's Hill grilling. Google (GOOG) Executive Chairman Eric Schmidt testified in Congress yesterday, sparring with senators who contended the company is a growth-hungry monopolist that thwarts rivals. The biggest concern is that Google manipulates its search results to promote its own services, a claim which Schmidt denied.

More budget wrangling. Congress is gearing up for another bout of brinksmanship over the budget, after the continuing resolution for an extension went down in flames yesterday in a 230-195 vote. Democrats appear to be upset with the lack of disaster funding, while conservative Republicans want more cuts. The leadership had hoped to enact the stop-gap measure by Friday to avoid any threat of a shutdown after Sept. 30, when funding for government operations expires - again.

S&P changes. Mosaic (MOS) will replace National Semiconductor (NSM) in the S&P 500 Index at the end of trading on Friday. The acquisition of National Semi by Texas Instruments (TXN) is expected to close by that date. In AH trading, MOS +2.8%.

Today's Markets
Asia: Japan -2.1%. Hong Kong -4.8%. China -2.8%. India -4.1%.
Europe at midday: London -4%. Paris -4%. Frankfurt -3.5%.
Futures at 7:00: S&P -2.32%. 10-yr +0.47%. Euro -1.05% vs. dollar. Crude -4.46% to $82.09. Gold -3.05% to $1750.65.

Thursday's Economic Calendar
8:30 Initial Jobless Claims
10:00 Mass Layoffs
10:00 FHFA Housing Price Index
10:00 Leading Indicators
10:30 EIA Natural Gas Inventory
1:00 PM Results of $11B, 10-year TIPS auction
4:30 PM Money Supply
4:30 PM Fed Balance Sheet

Notable earnings before Thursday's open: DFS, FDX, KMX

Notable earnings after Thursday's close: CTAS, NKE, TIBX

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Source: Wall Street Breakfast: Must-Know News