Tuesday Watch

Today's Headlines 

Bloomberg: 

• Greece Returns to Talks With Varoufakis Blaming Creditors. Greek officials will use Tuesday to revive their bid to access financial aid with their finance minister, Yanis Varoufakis, blaming creditors’ insistence on more austerity for the impasse. While Greek Prime Minister Alexis Tsipras’s spokesman Gabriel Sakellaridis said Monday that a deal can be reached by the end of May, he admitted that disagreements remain in areas such as budget targets, sales-tax rates, pension and labor market rules.

• ECB Slows Bond Purchases After Indicating Pace Would Accelerate. The European Central Bank slowed purchases of public-sector bonds, even after saying it would accelerate buying before liquidity dries up during Europe’s summer vacation period. Holdings of government and agency debt under its quantitative-easing program climbed by 11.8 billion euros ($13 billion) to 134.2 billion euros in the week ended May 22, data on the ECB website showed on Monday. That’s the smallest increase in three weeks.  

• BOJ Debt Purchases Can’t Offset Tumbling Demand at Bond Auctions. Even as the Bank of Japan buys record amounts of debt, investor demand at government auctions is tumbling and bondholders have lost 0.8 percent this year. At the last 10-year sale, investors bid for 2.24 times the amount of debt available, the least since 2009. An index tracking auction demand for maturities ranging from two to 40-years fell to the lowest level since 2007, according to Barclays Plc. Japan is scheduled to sell 20-year bonds Tuesday.

• Another Chinese Company Says It Will Miss Full Bond Payment. A bottle maker in China said it won’t be able to fully repay a bond due May 28 as a slowdown in the world’s second-biggest economy persists. Zhuhai Zhongfu Enterprise Co. can only repay 148 million yuan ($23.9 million) of the 590 million yuan principal, according to a company statement to the Shenzhen Stock Exchange Monday. It plans to pay all the 31.152 million yuan of interest. The manufacturer, which isn’t state-owned and supplies bottles for Coca-Cola Co. and PepsiCo Inc. in China, sold the 5.28 percent securities in 2012.

• Euro Weakens on Greece as Emerging Stocks, Spanish Bonds Decline. The euro weakened after Greece told creditors to lower demands that are holding up bailout funds. Emerging-market stocks fell as speculation grew the U.S. was moving closer to raising interest rates, while Polish equities slid the most in four months and Spanish markets dropped. Europe’s currency slid 0.4 percent to $1.0974 at 12:46 p.m. in New York. The MSCI Emerging Markets Index of stocks fell 0.6 percent.

• Spanish Shares Fall After Vote as Greek Stocks Drop Second Day. Equity markets in Spain and Greece fell, dragging European stocks lower as holidays across the region curbed trading volume. The IBEX 35 Index dropped 2.1 percent after local Spanish elections showed support for parties seeking to overturn the political establishment. The FTSE MIB Index of Italy, where anti-austerity sentiment is also on the rise, slid 1.7 percent. Greece’s ASE Index lost 3.1 percent as the government is priming investors for another cliffhanger on June 5. The broad Stoxx Europe 600 Index slipped 0.3 percent to 406.53 at 4:32 p.m. in London, with the volume of shares changing hands 80 percent lower than the 30-day average. Equity markets in the U.K., Germany and Switzerland are among those closed for a holiday.  

• Asian Stock Gauge Heads for First Drop in Four Days; Kospi Slips. Asia’s regional benchmark stock gauge headed for the first decline in four days, with South Korean shares slipping as the market reopened from a holiday. Healthcare and consumer companies led declines. The MSCI Asia Pacific Index retreated 0.1 percent to 153.73 as of 9:06 a.m. in Tokyo.

• Chinese Hedge Funds Bearish on Copper Ring Alarm Bells for Bulls. Nobody may be more bearish on China copper than Chinese hedge funds. That should be a warning to investors who’ve ridden the metal’s rebound from a five-year low into a bull market. Gains of as much as 20 percent since late January haven’t convinced the money managers that demand is improving in the world’s biggest copper-consuming country, where the economy is growing at the slowest pace in a generation.

• Goldman(GS) Sticks to Commodity Bear Call as Copper Vulnerable. Commodities will reverse a rally that started in March as a stronger U.S. dollar, cheaper oil and cooling China again pressure raw materials, especially copper, according to Goldman Sachs Group Inc. Copper will lose at least 16 percent over the coming 12 months on China’s weakening demand growth and slowdown in construction completions, analysts including Jeffrey Currie said in a report e-mailed Monday. Oil in New York will fall to $45 a barrel by October while the dollar continues its rise, pushing commodities prices lower as production costs slide. “We see downside pressures on commodity prices re-emerging,” the analysts wrote in the report dated May 22. “The recent rise in commodity prices is clearly at odds with our lower-for-longer bearish view across the complex.”

• Fed’s Fischer Says Rate Hike Debate Driven by Data, Not Date. Federal Reserve Vice Chairman Stanley Fischer said central bankers are weighing the risk of raising interest rates prematurely against the danger of having to play catch-up if they wait too long. “Which is better, early and gradual or late and steep? If we raise the rate from zero it will be harder to go back to zero if there is a problem,” Fischer said Monday in a speech at IDC Herzliya in Herzliya, Israel.

• Fed’s Mester Says ‘Time Is Near’ for U.S. Interest-Rate Increase. Accelerating inflation and strong employment growth are pushing the U.S. economy close to the point where it can support higher interest rates, Federal Reserve Bank of Cleveland President Loretta Mester said. “If the data comes in according to my forecasts then the time is near where we’re going to be wanting to raise rates,” Mester said Monday in an interview in Reykjavik, Iceland. The Fed’s rate-setting committee will go into its June meeting with an “open mind” about whether to raise the central bank’s benchmark rate, Mester said after delivering a speech at a conference on the financial system.

• Charter(CHTR) Near Deal for Time Warner Cable(TWC) at $195 a Share.

Wall Street Journal:

• Islamic State’s Gains Reveal New Prowess on Battlefield. Examination of Ramadi’s downfall reflects complex plans and new weapons. In late April, a commander for Islamic State said his forces were ready to launch an offensive to take Ramadi, and the group called for fighters to redeploy to Iraq from Syria. Three weeks later, the jihadist group seized the capital of Anbar province after relentless waves of suicide bombings. U.S. defense chief Ash Carter has blamed Ramadi’s fall mainly on Iraqi forces’ lack of will to fight. But Islamic State’s battlefield...

• The Rational Ayatollah Hypothesis. If President Obama can forgive us our trespasses, he can forgive the Ayatollah Khamenei’s, too.

CNBC:

• Europe, Canada, Australia face rising terror threat: Report.

Zero Hedge:

• Hanergy Contagion Sparks Chinese Investor Rotation From Shenzhen "Ponzi" To Shanghai "Safety".

• "It's A Coup D'Etat," David Stockman Warns "Central Banks Are Out Of Control".

• Bernanke Says "No Large Mispricings In US Securities"; These 5 Charts Say Otherwise. (graph)

• The Best-Selling 'Monetary-Policy' Books Are All Anti-Fed.

• ISIS Planning US Nuclear Attack In Next 12 Months: Report.

• China Stocks Surge, Europe/US Purge, & Portuguese Bonds Are Crashing. (graph)

• Mario Draghi's Slippery Downward Slope.

• Greek "Anti-Austerity" Wave Spreads In Dramatic Loss For Spanish Status Quo.

• Oil Futures Prices Divorced From Physical Markets For Now. (graph)

• ECB's Bizarro QE Taper May Add To Summer Bond Market Volatility, Citi Says. (graph)

• Chinese IPO 826 Times Oversubscribed. (graph)

• Chinese State Paper Warns "War Will Be Inevitable" Unless U.S. Stops Meddling In Territorial Dispute.

• There Is No Longer A Market: Citigroup Confirms What Zero Hedge Has Said Since 2009. (graph)

• Greece Was 20 Votes Away From Defaulting This Weekend.

Business Insider:

• Spain's ruling party just had its worst election in 20 years.

• The new Greek government's honeymoon is over — and default is just round the corner.

• It’s time to worry about China. On any list of calamities threatening the world economy, a China crash ranks at or near the top. Just what would constitute a "crash" is murky.

• The Obama administration's anti-ISIS strategy is not in good shape.

• Japan just joined the US and Australia in an 'unprecedented' collaboration amid China tensions.

Financial Times:

• Brazil economy to contract nearly one-quarter this year in dollar terms. Brazil’s economy is expected to contract by nearly one-quarter this year in dollar terms due to a depreciating currency and a deepening recession, according to government figures.

Weekend Recommendations

• None of note

Night Trading

• Asian indices are unch. to +1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 106.0 +1.75 basis points.

• Asia Pacific Sovereign CDS Index 58.5 +.25 basis point.

• S&P 500 futures -.22%.

• NASDAQ 100 futures -.20%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (AZO)/9.51

• (TDW)/.55

• (TIVO)/.07

• (WDAY)/-.08

Economic Releases

8:30 am EST

• Durable Goods Orders for April are estimated to fall -.5% versus a +4.0% gain in March.

• Durables Ex Transports for April are estimated to rise +.3% versus a -.2% decline in March.

• Cap Goods Orders Non-Defense Ex Air for April are estimated to rise +.3% versus a -.4% decline in March. 

9:00 am EST

• FHFA House Price Index for March is estimated to rise +.7% versus a +.7% gain in February.

• The S&P/CS 20 City MoM SA for March is estimated to rise +.9% versus a +.93% gain in February.

9:45 am EST

• Preliminary Markit US Services PMI for May is estimated to fall to 56.5 versus 57.4 in April.
  

10:00 am EST

• New Home Sales for April are estimated to rise to 505K versus 481K in March.

• Consumer Confidence for May is estimated to fall to 95.0 versus 95.2 in April.

• Richmond Fed Manufacturing Index for May is estimated at 0.0 versus -3.0 in April.
  

10:30 am EST

• Dallas Fed Manufacturing Activity for May is estimated to rise to -11.5 versus -16.0 in April.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Lacker speaking, China Industrial Profits report, 2Y T-Note auction and the KeyBanc Industrial/Automotive/Transport conference could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the week.