Wednesday Watch

Evening Headlines 
Bloomberg: 

• Wenzhou Shadow Banking Unscathed by China Crunch as Rates Steady. China’s efforts to rein in shadow banking, which contributed to the nation’s worst credit crunch in at least a decade, haven’t driven up costs for borrowers in at least one place: Wenzhou. On June 20, as the nation’s banks demanded a record 30 percent to lend to each other for one day, small businesses in the export hub paid 23.42 percent for one-month loans from pawn shops, small lending companies and individuals, according to data from a local government-backed agency. That’s almost unchanged from this month’s average of 23.17 percent. 

• Taiwan’s Prodigal Companies Return as China Costs Rise: Economy.

• Yuan Declines for Fifth Day on Concern Over China’s Growth. China’s yuan declined for a fifth day on concerns the worst cash crunch in a decade will worsen a slowing economy.

• Asian Stocks Rise as Gold Slumps With Metals; Won Gains. Asian stocks rose, lifting the regional benchmark index from the lowest in almost seven months, after housing data bolstered the U.S. economic outlook and China’s cash crunch eased. Gold slid, while the won gained. The MSCI Asia Pacific Index climbed 0.3 percent at 11:39 a.m. in Tokyo, after closing at the lowest level since Dec. 4 yesterday. Japan’s Topix Index (TPX) slid 0.9 percent.

• Portugal Throws Open Europe’s Them-And-Us Divide Over Austerity. When it comes to sharing the burden of austerity, some Portuguese feel more equal than others. Half way through his four-year term, Prime Minister Pedro Passos Coelho is trying to curb popular resentment over what opponents say is a widening gulf between private employees and about 600,000 public workers who have mostly stayed immune to mass job cuts. Portugal’s two biggest unions scheduled a general strike for tomorrow, the second since the country asked for international aid in April 2011, to protect benefits, including a 35-hour working week and early retirement. 

• Australia Cuts Commodity Export Earnings Outlook as Prices Drop. Australia, the largest iron ore shipper, lowered its forecast for earnings from the export of minerals and energy resources after prices tumbled. The value of exports may total A$197 billion ($182 billion) in the year starting July 1, the Bureau of Resources and Energy Economics said in a report today. That compares with A$205 billion forecast in March. Earnings are set to total A$177 billion in the year ending June 30, less than the A$186 billion previously estimated, and the first decline since 2009-2010, the Canberra-based bureau said. Iron ore has tumbled 21 percent this year and slipped into a bear market last month amid concerns slowing economic growth in China, the world’s biggest metals consumer, will reduce demand. 

• Gold Drops to Cheapest Since September 2010 as Silver Tumbles. Gold fell to the lowest level since September 2010 as U.S. economic data beat estimates, backing the case for reduced stimulus from the Federal Reserve as the dollar strengthened. Silver sank to the cheapest since August 2010. Cash bullion dropped as much as 2.6 percent to $1,244 an ounce, the cheapest since Sept. 13, 2010, and was at $1,249.25 at 11:57 a.m. in Singapore. It’s lost 22 percent since the start of April, heading for its worst quarterly performance since 1920, according to data compiled by Bloomberg. Silver retreated as much as 4.5 percent to $18.7630 an ounce.

• Steelmaking Coal Slides to Four-Year Low After Billiton Deal. A key contract that determines prices of coal used in the $1.3 trillion market for steel slid to a four-year low amid a global supply glut. The coking-coal benchmark contract for the third quarter was settled at $145 a metric ton in quarterly negotiations between BHP Billiton Ltd., the world's biggest coking coal exporter, and Nippon Steel & Sumitomo Metal Corp., Doyle Trading Consultants LLC said today in a report. That compares with $172 in the second quarter. 

• Rebar Falls as Iron Ore Declines, Liquidity Uncertainty Persists. Steel reinforcement-bar futures in Shanghai fell as iron ore declined for the third day and as uncertainty persisted over liquidity in the Chinese economy. Rebar for delivery in October on the Shanghai Futures Exchange declined as much as 0.9 percent to 3,426 yuan ($557) a metric ton before trading at 3,433 at 10:40 a.m. local time.

• Brazil Further Dismantles Capital Controls as Real Weakens. Brazil dismantled capital controls for the third time this month in a bid to temper the biggest decline among major currencies. The central bank starting July 1 will eliminate reserve requirements on short dollar positions held by local banks. The new rule comes after the government earlier this month removed taxes on currency derivatives and foreign purchases of bonds.

• Fed’s Fisher Urges Bank Breakup Amid Too-Big-to-Fail ‘Injustice’. Federal Reserve Bank of Dallas President Richard Fisher said an implicit government guarantee for the biggest U.S. banks is an “injustice” that prompts them to take excessive risks and that they should be allowed to fail. The largest financial firms should be restructured so each of their units “is subject to a speedy bankruptcy process,” and creditors should be notified their investments won’t be guaranteed by the government, Fisher said in testimony prepared for a House Financial Services Committee hearing in Washington tomorrow on the risk of taxpayer-funded bailouts for banks.

• Banks Could Face U.S. Home-Equity ‘Payment Shock,’ Moody’s Says. Home-equity lenders could see delinquencies rise in the next two years as borrowers face a “payment shock,” Moody’s Investors Service said. The majority of home-equity loans were issued during the housing bubble before the 2008 financial crisis when underwriting standards were “dismal,” Moody’s said today in a report. Those loans will reach the 10-year mark between 2015 and 2017, when borrowers who are paying only interest must start repaying principal, and some won’t be able to keep up, Moody’s said. Home-equity loans were among the largest sources of bad debt in the Federal Reserve’s stress tests of U.S. banks conducted earlier this year, with $37.2 billion of projected losses on junior-lien and home-equity loans.

• Munis Extend Worst Losses Since 2008 as Illinois Sets Sale. The U.S. municipal market is poised for its worst monthly loss since 2008, leading investors to offer a record amount of tax-exempt debt as yields surged to 26-month highs. The selloff is the backdrop for a $1.3 billion general-obligation sale tomorrow by Illinois, the lowest-rated U.S. state. Local-government debt has lost 5.1 percent this month, matching the drop in September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy, Bank of America Merrill Lynch data show.

Wall Street Journal:   

• President Details Sweeping Climate Policies. A far-reaching plan to fight climate change detailed by President Barack Obama on Tuesday would profoundly reshape the way the U.S. produces and consumes electricity, though the resistance it is sure to encounter promises to sow uncertainty for an industry already buffeted by shifting rules and economics. As part of a much-anticipated speech at Georgetown University, in which the president laid out the first-ever federal effort to rein in greenhouse-gas emissions from the power sector, Mr. Obama also said he would approve the controversial Keystone XL pipeline later this year if it didn't "significantly" increase net greenhouse-gas emissions. Mr. Obama's conditional remark was meant, in part, to blunt criticism that approving an oil pipeline would be at odds with his climate policy. 

• Weak Links Mar Investing in China. Stocks Trail the Rest of the Economy as State-Owned Companies Get Preferential Treatment for IPOs. The selloff in China's stock market abated on Tuesday, but a key issue for investors remains: The country's financial system puts state-owned companies ahead of private businesses.

• Bottom Is Falling Out of Copper Prices. Copper's world is coming apart. The price has fallen 16% so far this year and is 34% below February 2011's all-time closing high. This isn't just a case of slowing economic growth. The global forces propelling the metal's stunning rise over the past decade are shifting. Copper's supercycle is entering its downhill run.

• The Carbonated President. Obama unveils a war on fossil fuels he never disclosed as a candidate. President Obama's climate speech on Tuesday was grandiose even for him, but its surreal nature was its particular hallmark. Some 12 million Americans still can't find work, real wages have fallen for five years, three-fourths of Americans now live paycheck to check, and the economy continues to plod along four years into a quasi-recovery. But there was the President in tony Georgetown, threatening more energy taxes and mandates that will ensure fewer jobs, still lower incomes and slower growth.

• Ruchir Sharma: How Emerging Markets Lost Their Mojo. Investors have once again come to see state companies as slow-witted giants, prone to overinvest and overbuild.

Fox News:

• IRS credit cards used for wine, pornography, IG report says. The report from the Treasury Inspector General for Tax Administration found that between fiscal 2010 and 2011, the more than 5,000 IRS card accounts racked up $103 million in purchases.

MarketWatch.com:

• Las Vegas Sands(LVS) CFO Kay to step down.

• Shanghai falls again.

• How China officials’ obsession drives fudging. The falsification of statistics is not surprising news in China. In the most recent case of number fudging, statistics officials in Henglan County, Guangdong Province, vastly overstated local gross industrial output to an extent that was unusual even in a country where economic data is routinely massaged.

CNBC: 

• Financial Stress Index Hits Scary Level. (graph) The St. Louis Fed's Financial Stress Index has shot upward in the past few months.

• Junk Bonds Suddenly Don't Look So Good Anymore. June has been a brutal month for bonds but particularly in the high-yield space, where issuance has cooled after a record run. Junk bond volume has slowed to $7.1 billion this month, the slowest pace since December 2011 and about one-fifth the average monthly total previously in 2013, according to Dealogic.

Zero Hedge:   

• What Happened The Last 2 Times Mortgage Rates Spiked Like This? (graph)

• For Bonds, It's A Lehman Repeat. (graph)

• Asian Deja Vu: Gold And Japanese Stocks Plunge Again. (graph)

Business Insider: 

• GLENN GREENWALD: Snowden Has Stashed Secret NSA Files With People All Over The World.

• My Brother Is Being Held Hostage At The Factory He Founded In China.

Reuters:

• Markit presses on with IPO, interviews banks -sources. Financial information services company Markit Group is moving ahead with an initial public offering and has hired Goldman Sachs (GS.N) as the lead coordinator of the deal, four people familiar with the process said on Tuesday. 

• More big-name hedge funds nurse wounds from bond sell-off. One of last year's top-performing hedge fund managers, Deepak Narula, is suffering a reversal of fortune as the mortgage bonds that steered him to the top of the industry in 2012 are now delivering losses. His Metacapital Management's roughly $1.5 billion flagship fund was down 5.66 percent for the year through June 14, according to an investor with knowledge of the numbers. The loss is particularly notable given the fund's 41 percent gain last year. Narula's fund is just one of many credit-oriented hedge funds that have seen gains posted earlier this year turn into losses in the wake of a ferocious sell-off in bonds sparked by fears the Federal Reserve could pull back from its easy money policies later this year. Other large hedge funds with significant credit exposure that are posting negative numbers since Fed Chairman Ben Bernanke signaled a potential end to the monthly purchases of $85 billion in Treasuries and mortgage securities include Brevan Howard, Bridgewater Associates and BlueCrest Capital Management.

• Europe seeks to shield taxpayers from bank collapses. The European Union will make a fresh attempt on Wednesday to share out the costs of future bank failures, starting a regime to spare taxpayers further bailouts and maintain momentum to integrate the bloc's crisis response. 

• Smith & Wesson(SWHC) forecasts first-quarter results above estimates.

Financial Times:

• Italy faces restructured derivatives hit. Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn.

China Securities Journal:

• China Central Bank May Seek to Improve Debt Ratio. China's central bank may intend to improve the nation's debt ratio, Zhang Monan, a researcher at the State Information Center, wrote. Macro policies aimed at lowering borrowing costs can't relay on interest rates or reserve requirement ratio cuts  alone, Zhang wrote. The debt ratio should be prevented from rising too quickly and financial risks limited, he said.

Evening Recommendations 
Janney Montgomery:

• Rated (GOOG) Buy, target $1,050.00.

Night Trading

• Asian equity indices are -.50% to +1.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 159.50 -8.0 basis points.

• Asia Pacific Sovereign CDS Index 130.5 -10.25 basis points.

• FTSE-100 futures +.33%.

• S&P 500 futures -.24%.

• NASDAQ 100 futures -.14%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (GIS)/.54

• (MON)/1.59

• (PAYX)/.38

• (BBBY)/.93

• (PRGS)/.22

• (MLHR)/.36

• (FUL)/.70

• (TECD)/1.03 

Economic Releases
8:30 am EST

• 1Q GDP is estimated to rise +2.4% versus a prior estimate of a +2.4% gain.

• 1Q Personal Consumption is estimated to rise +3.4% versus a prior estimate of a +3.4% gain.

• 1Q GDP Price Index is estimated to rise +1.1% versus a prior estimate of a +1.1% gain.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,750,000 barrels versus a +313,000 barrel gain the prior week. Gasoline inventories are estimated to rise by +875,000 barrels versus a +183,000 barrel gain the prior week. Distillate supplies are estimated to rise by +650,000 barrels versus a -489,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.25% versus a +1.8% gain the prior week.

Upcoming Splits

• (SIX) 2-for-1

• (CRVL) 2-for-1

Other Potential Market Movers

• The Fed's Kocherlakota speaking, Fed's Fisher speaking, 5Y T-Note auction, BOE Financial Stability report, GfK German Consumer Climate Index, weekly MBA mortgage applications report, CSFB Basic Materials Conference, (HRL) investor day and the (PRXL) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by financial and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the day.