Wednesday Watch

Evening Headlines 
Bloomberg: 

• Australia Economy Grows Less Than Forecast in First Quarter. Australia’s economy expanded less than economists forecast last quarter as machinery and equipment investment declined, sending the currency lower as traders increased bets on further interest rate cuts. First-quarter gross domestic product advanced 0.6 percent from the previous three months, when it expanded at the same pace, a Bureau of Statistics report released in Sydney today showed. The result compared with the median of 25 estimates in a Bloomberg News survey for a 0.7 percent gain.

• Cash Outflows Turn World’s Best Stocks to Worst: Southeast Asia. Stock markets in Indonesia, the Philippines and Thailand have gone from being the world’s best to among the worst as the threat of reduced bond purchases by the U.S. Federal Reserve sends foreign investors to the exit. Equity indexes in the three markets have declined more than 3.5 percent since May 22, when Fed Chairman Ben S. Bernanke said policy makers could consider reducing stimulus if the U.S. labor market improves. International money managers pulled a combined $1.6 billion from the Southeast Asian countries in that period, the most since August 2011, data compiled by Bloomberg show.

• Asian Stocks Fall, Led by Banks, on U.S. Stimulus Concern. Asian stocks fell, led by financial shares, on prospects the Federal Reserve will scale back stimulus efforts as the U.S. economy improves. Japanese shares swung between gains and losses before Prime Minister Shinzo Abe gives a speech on his economic-growth strategy. Westpac Banking Corp. (WBC), Australia’s No. 2 lender by market value, fell 1.9 percent, pacing declines among financial shares after the nation’s economy grew less than expected. Mitsui Fudosan Co. (8801), Japan’s largest property company by sales, added 0.6 percent after the Nikkei newspaper reported Abe will promote high-rise condominium developments in the growth plan. Hokkaido Electric Power Co. and Shikoku Electric Power Co. both dropped at least 3.9 percent to lead losses among Japanese utilities. The MSCI Asia Pacific Index slid 0.5 percent to 133.98 as of 11:25 a.m. in Tokyo. About two stocks dropped for each that rose as seven of the 10 industry groups on the gauge fell. 

• HSBC Sued by New York Over Alleged Foreclosure Violations. HSBC Holdings Plc (HSBA), Europe’s largest bank, was accused by New York Attorney General Eric Schneiderman of violating the state’s foreclosure law and putting homeowners at increased risk of losing their property. 

• Rubber Futures Fall in Tokyo on Concern Supply May Increase. Rubber futures declined in Tokyo trading on expectations that supply will increase from Thailand, the world’s largest exporter. The contract for delivery in November fell 0.4 percent to 260.3 yen ($2,600 a metric ton) on the Tokyo Commodity Exchange at 11:33 a.m. after moving between 258.5 yen and 262.3 yen. Futures have lost 14 percent this year.

• Subprime Interrupted as Fed Concern Tapers Gain: Credit Markets. US mortgage bonds that returned as much as 59% over 18 months while recovering from the credit crisis they ignited are producing losses as speculation grows the Federal Reserve will cut unprecedented stimulus. Subprime-mortgage securities issued before the property bubble burst in 2007 lost .33% in May, the first decline since October 2011, Barclays Plc index data show. Prices on a Markit Group Ltd. index linked to commercial-mortgage bonds that have largely been cut to junk after being given top ratings during the boom have slumped to 71.7 cents on the dollar from 78.6 on May 8,  after soaring from as low as 54 a year ago.

• Obama Failed to Tell Truth About IRS in Poll With 47% Skeptical. Almost half of Americans say President Barack Obama isn’t telling the truth when he says he didn’t know the Internal Revenue Service was giving extra scrutiny to the applications of small government groups seeking tax-exempt status. Forty-seven percent of Americans say they don’t believe Obama compared with 40 percent who say he is being truthful, according to a Bloomberg National Poll of 1,002 adults conducted May 31 through June 3. More than half of political independents -- 53 percent -- say Obama’s explanation that he learned it from media reports is untrue, while 34 percent say they believe him. “How could he not know?” said poll respondent June Wilshusen, 50, of Yuma, Colorado, a political independent and a stay-at-home wife married to a machinist. “I think any president has to know what’s going on with our government. I think they’re very aware of the IRS.”

• Turkey’s Urban Protesters Blame Erdogan for Narrowing Freedoms. Asked why they’re joining the crowds that have gathered in Istanbul and Ankara every day since May 31, many cite what they say is a threat to their freedoms from an Islamist-rooted government increasingly unwilling to countenance dissent. Erdogan, who has blamed “extremists” for the spread of protests, has introduced curbs on alcohol, objected to popular television programs and said he hopes to preside over a “pious generation” of young people. 

• France Says ‘No Doubt’ Syrian Regime Used Chemical Arms. French Foreign Minister Laurent Fabius said there is no question that Syrian President Bashar al-Assad’s forces used sarin gas against rebels in an escalating civil war that’s entered its third year. French tests detected the nerve agent in samples sent from Syria, and France is “certain that sarin gas has been used in Syria on several occasions and in a localized manner,” Fabius said yesterday in an e-mailed statement.

Wall Street Journal: 

• One of Wall Street’s Riskiest Bets Returns. In a sign of how hard Wall Street is trying to satisfy investor demand for higher returns, J.P. Morgan Chase and Morgan Stanley bankers are moving to assemble synthetic collateralized debt obligations, or CDOs. Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO. In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase & Co. and Morgan Stanley bankers in London are moving to assemble so-called synthetic collateralized debt obligations. CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds. Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice. While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments. During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world. Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.

• The Wonk With the Ear of Chinese President Xi Jinping. Even in China, few people would recognize Wang Huning, head of the Communist Party's secretive Central Policy Research Office. And small wonder: The former university professor almost never talks in public, barely speaks to old acquaintances and makes a point of not associating with foreigners. Yet party insiders and experts on Chinese politics consider him one of the most influential figures in China today, a key architect of its domestic and foreign policy over the past decade, and now of Mr. Xi's signature "China Dream" campaign that evokes a militarily and economically strong nation reclaiming its place of prominence in the world.

• Tech Firms Back Obama Patent Move. Administration Targets Companies That Amass Portfolios So That They Can Pocket Licensing Fees.

• SAC Flap Is Liable to Hit Wall Street. The fate of SAC Capital Advisors LP is a $1 billion question on Wall Street. That figure is an estimate of how much the hedge-fund giant generates annually in trading commissions, financing fees and an array of other payouts to banks and other financial firms, according to more than a dozen representatives of Wall Street banks, brokerage firms and others that do business with SAC or are familiar with details of its operations. The firm is by far the biggest hedge-fund customer on Wall Street, said people at multiple firms.

• Joseph Schmitz: Obama's Inspector General Negligence. The president was on notice at least by 2010 that the State Department was impaired by a lack of IG independence.

Fox News:

• EPA accused of singling out conservative groups, amid IRS scandal. It's not just the IRS. A second federal agency is facing a probe and accusations of political bias over its alleged targeting of conservative groups. The allegations concern the Environmental Protection Agency, which is being accused of trying to charge conservative groups fees while largely exempting liberal groups. The fees applied to Freedom of Information Act requests -- allegedly, the EPA waived them for liberal groups far more often than it did for conservative ones. The allegations are under investigation by the House Energy and Commerce Committee and the House Oversight and Government Reform Committee, which is also holding hearings on the Internal Revenue Service targeting of conservative groups. 

• Conservative group claims it has proof IRS leaked donor list.

CNBC: 

• Amazon(AMZN) Plans Major Move Into Grocery Business. Amazon.com is planning a major roll-out of an online grocery business that it has been developing for years, targeting one of the largest retail sectors yet to be upended by e-commerce, according to two people familiar with the situation.

• Consumers Still to Buy Into Abe's Economic Experiment. Skepticism is setting in among consumers in the world's third largest economy over Abe's radical policies and whether he will be able to successfully deliver on his promise to end two decades of economic stagnation and ignite inflation.

• The Aussie Dollar Just Can’t Catch a Break. Just as the Australian dollar attempted to make a concerted rebound against the U.S. dollar this week, the prospect of further monetary easing in Australia has provided traders with another reason to dump the currency.

Zero Hedge: 

• Meanwhile, In Investment Grade Bond Land...(graph)

• Special Repo And Visualizing The Fed's All-Too-Visible Hand. (video)

• Jeff Gundlach: "What In The World Is Going On". (presentation)

• Taxpayers Could Face (Previously Undisclosed) $115 Billion Losses From FHA.

• The Debt Of Nations. (graphs)

• The Hindenburg Cluster: 2nd Omen In 3 Days. (graph)

• How Big Institutional Money Distorts Housing Prices.

Business Insider: 

• 23 Iconic Pictures Of Global Unrest From The Last Three Years.

• US Marine And His Family Kidnapped In Mexico.

• Samsung Wins Import Ban On Some Older Models Of iPhones And iPads.

Washington Post:

• Watchdog says GSA officials improperly intervened on top tech contracts. Senior officials from the General Services Administration pressured subordinates to accept federal technology contracts with higher-than-necessary prices and unfavorable terms, according to a watchdog report released Tuesday.

New York Times:

• Trade Nominee Holds $500,000 in Cayman Islands. Michael Froman, a longtime White House economic aide nominated to be President Obama’s trade representative, holds close to $500,000 in the Cayman Islands and received millions of dollars to divest himself from Wall Street accounts that rely on a tax loophole the administration has sought to close. 

• In China, an Empire Built by Aping Apple(AAPL). China is notorious for its knockoffs. But now comes a knockoff of one of the gods of American ingenuity: Steven P. Jobs.

Reuters: 

• Fed poised to evaluate bond buys, 'fine tune' tactics -Fisher. The U.S. Federal Reserve is poised to evaluate and potentially make changes to its massive monetary stimulus, a top Fed official who is critical of the Fed's bond-buying program said on Tuesday. Financial markets have been increasingly on edge on expectations that the Fed is ready to start scrolling back on its stimulus. "The plot now thickens," Richard Fisher, president of the Dallas Federal Reserve Bank, said. He likened developments in the Fed's monetary policy to a Shakespearean play starring a "daring captain," Fed Chairman Ben Bernanke, steering the ship of the U.S. economy. "Act IV, just beginning, will involve the drama of introspection, with the FOMC evaluating the utility of its navigational tactics, and, perhaps, fine-tuning them, if not altering the course," Fisher said, referring to the Fed's policy-setting Federal Open Market Committee, in remarks prepared for delivery to the C.D. Howe Institute Directors' Dinner in Toronto. Fisher is not a voting member of the committee this year. "Only time will reveal the efficacy of current policy and whether the risks that I and more experienced observers like Paul Volcker fret over are as substantial as we surmise, or whether we have made much ado about nothing," he added. He told the Toronto audience there was a "practical limit" to the size of the Fed's balance sheet and investors should not expect "QE infinity." He later told journalists he had advocated for the Fed to begin slowing the rate of purchases of mortgage-backed securities, but not stop them. Asked if he was concerned about the impact of rising bond yields on the economy, he said it should be monitored but that policymakers could not let markets dictate policy. "We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine," he said. While chances are "extremely low" that monetary policies will help push inflation above the Fed's 2 percent target this year, the bond-buying program is, "at best, pushing on a string and, at worst, building up kindling for speculation and, eventually, a massive shipboard fire of inflation," he said. 

• Brazil reduces foreign capital controls as currency tanks. Brazil will scrap a tax on foreign investments in local debt, a surprise move that could help stop a sharp depreciation of the country's currency that threatens to stoke already high inflation in Latin America's largest economy.

• U.S House Republicans pursue plans to cut 2014 spending. Republicans in the House of Representatives pressed ahead on Tuesday with efforts to extend deep "sequester" spending cuts into next year, despite a veto threat from President Barack Obama.

• Japan's Abe to target income gains in growth strategy. Prime Minister Shinzo Abe will pledge to boost incomes by 3 percent annually and allow tax cuts and reduce red tape in special economic zones when he unveils the government's latest polices aimed at revitalizing the world's third-biggest economy, Japanese media said. 

Telegraph: 

• There’s a worse crisis on the way unless we get serious about tackling debt. For all of the talk of austerity, Britain is still drowning in debt, private as well as public.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.0% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 121.0 +1.0 basis point.

• Asia Pacific Sovereign CDS Index 99.50 -4.5 basis points.

• FTSE-100 futures -.31%.

• S&P 500 futures -.07%.

• NASDAQ 100 futures -.04%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (HOV)/-.05

• (JOSB)/.34

• (BF/B)/.46

• (PAY)/.47

• (RUE)/.47

• (CWTR)/-.77

• (TECD)/1.06

Economic Releases
8:15 am EST

• The ADP Employment Change for May is estimated to rise to 165K versus 119K in April.

8:30 am EST

• Final 1Q Non-farm Productivity is estimated to rise +.6% versus a prior estimate of a +.7% gain.

• Final 1Q Unit Labor Costs are estimated to rise +.5% versus a prior estimate of a +.5% gain.

10:00 am EST

• Factory Orders for April are estimated to rise +1.5% versus a -4.0% decline in March. 

• ISM Non-Manufacturing for May is estimated to rise to 53.5 versus 53.1 in April.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -800,000 barrels versus a +3,000,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +1,000,000 barrels versus a -1,514,000 barrel decline the prior week. Distillate supplies are estimated to rise by +1,400,000 barrels versus a +1,851,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.6% versus a -.9% decline the prior week.

2:00 pm EST

• The Fed's Beige Book

Upcoming Splits

• None of note

Other Potential Market Movers

• The Japan 30Y bond auction, Eurozone Services PMI, weekly MBA mortgage applications report, (UA) investor day, (SWK) investor day and the (STZ) investor meeting could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open mixed and weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.