Wednesday Watch

Evening Headlines 

Bloomberg:

• Contagion Is Back as Greece Risks Trump QE on Europe’s Periphery. Europe’s peripheral nations are facing the highest borrowing costs in at least six months as investors shun the issuers that may be most at risk if Greece defaults. Even with the European Central Bank rolling out 1.1 trillion euros ($1.2 trillion) of government-bond purchases, Spain’s 10-year yields touched 2.54 percent on Tuesday, the highest since August. Italy’s were the highest since October while Ireland and Portugal are also seeing the steepest borrowing costs this year. Investors are cutting their exposure to peripheral debt as Greece and its creditors square off over the terms of another aid payment. As that dispute fuels concern that Greece could default on the International Monetary Fund as early as this month, the fallout is reviving memories of the budget angst and financial turmoil that threatened to tear the euro apart three years ago. “We are seeing contagion from Greece for the first time since 2012,” said Mauricio Vargas, a Frankfurt-based economist at Union Investment, which manages more than 200 billion euros of assets, including bonds from Spain and Italy. “That’s a matter of big concern to me because it’s a sign of systemic risk that markets have been ignoring.” 

• Warped Rates Fuel Demand for Safeguards in Europe’s Loan Markets. Negative interest rates have so warped Europe’s structured credit markets that top-ranking creditors are demanding safeguards to protect their income. 

• Europe Stock Strategists 100% Bullish in Face of Greece Impasse. Greece isn’t budging, and neither are Europe’s stock strategists.

• China Stocks Slump for Third Day on Concern Valuations Excessive. China’s stocks headed for their biggest three-day loss in a month on concern a world-beating rally has gone too far, too fast. The Shanghai Composite Index slumped 2.3 percent to 4,777.28 at 10:46 a.m. local time, extending a two-day, 5.4 percent decline. Consumer, industrial and technology companies led losses Wednesday. Shanghai Electric Group Co. tumbled 7.5 percent, the biggest contributor to declines and paring its gain this year to 132 percent. “Shares have risen to pretty expensive levels and some investors are choosing to sell,” said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset Management Co. “The speed of new share sales is fast and accelerating now. The market needs a correction at this level.” A growing number of analysts are predicting the stock market is a bubble that will burst as valuations reached levels that by some measures exceed the peak of China’s last equity mania in 2007. Equities also declined on concern investors were pulling funds to partake in new share sales. Guotai Junan Securities Co. plans to raise as much as $4.85 billion this week in the mainland’s biggest initial share sale since 2010. The CSI 300 Index declined 2.2 percent. 

• Asian Stocks Rise First Time in Three Days Before Fed Decision. Asian stocks rose for the first time in three days, following U.S. shares higher, as investors awaited a Federal Reserve decision on U.S. monetary policy. The MSCI Asia Pacific Index gained 0.2 percent to 146.63 as of 9:02 a.m. in Tokyo.

• Banks Balk at China Commodities Deals. Once bitten, twice shy. Banks are wary of commodities deals in China a year after officials started investigating alleged fraud that led to a $193 million writedown for Standard Chartered Plc and $147 million at Standard Bank Group Ltd. Traders in the world’s biggest consumer of metals are finding it harder to get credit from lenders after the probe at the eastern ports of Qingdao and Penglai, according to Guotai & Junan Futures Co. and Everbright Futures Co., Chinese commodity brokers whose clients include trading companies and financial institutions.

Wall Street Journal:

• Fitbit IPO Is Tracking a $3.7 Billion Valuation. Excitement about the wearable fitness-tracking company’s success is driving strong demand for the shares.

• Hedge-Fund Bet Hits Pensions. Firms moved portfolios away from stock market to reduce risk, but missed out on rally.

• Hulu Steps Up Its Fight Against Netflix(NFLX). Much smaller Web-video service secures shows with marketing promises as well as money.

• Obama Wants to Pick the Clintons’ Neighbors. The administration is forcing low-income housing into wealthy enclaves, whether or not anyone wants it.

CNBC: 

• Experts: What to expect from the Fed meeting.

Zero Hedge: 

• JPM's Walk Through What Greek Capital Controls Would Look Like.

• Chinese Corporations Become Stock Speculators, Joining Housewives, Banana Vendors. (graph)

• We Might As Well Face It – America Is Addicted To Debt.

• What Happened The Last Time The Fed's Balance Sheet Hit 25% Of GDP. (graph)

• "Horrified" Syriza Hardliners Back "Immediate" Greek Bank Nationalization, Euro Exit. (graph)

• Chinese Iron Ore, Steel Prices Collapse Despite Government Stimulus. (graph)

• The Warren Buffett Economy, Part 5: Why Its Days Are Numbered.

• China Completes Island Construction, Will Now Build Military Facilities.

• Well That Was Not Supposed To Happen.

• The Audacity Of Hope Meets The Veracity Of Data. (graph)

• Forget The 3:30pm Ramp, Stock Gains Are All About The Night Shift. (graph)

• Stocks Up, Bonds Up, VIX Up, Dollar Up, & Oil Up; Time's Up, Fed's Up. (graph)

Business Insider:

• Japanese trade data just missed big. Exports grew by 2.4% from a year earlier, below April’s 8.0% increase and forecasts for growth of 3.0%. Exports to the US grew by 7.4%, down on 21.4% seen in April, while those to China increased by 1.1% from 2.4% rate reported previously. On the other side of the ledger imports slid by 8.7%, far below April’s 4.2% contraction and expectations for a decline of 7.5%.

• The stage is set for a 'full blown' currency war in Asia.

• Obama is getting dangerously close to lame duck status.

• It's not just the oil bust that's crushing Canadian manufacturing.

• Hot shot startup investor Bill Gurley just wrote a cryptic tweet about the looming tech bubble — once you understand it, you'll be a little freaked out. (graph)

• China's stock market bubble is destined to pop.

Telegraph:

• Are overvalued stock markets heading for another crash? The possibility of Greece defaulting and a rebound in the price of oil are putting pressure on global markets.

Valor: 

• Brazil Govt Sees Downgrade From Moody's Inevitable. Economic team sees downgrade as its base scenario and now working to avoid rating being kept on negative outlook after that, citing a govt official. Slow economic growth and doubts that the fiscal target will be met make it hard to avoid a negative outlook following a downgrade.

Liquidity crunch a catalyst for big China slowdown – analysts The mini liquidity crunch is the early warning sign of a substantial economic correction long overdue, amid rising leverage and a broken growth model, say bearish analysts.


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Sydney Morning Herald:

• Irrational exuberance in Australian household debt: PIMCO. Australians are being "irrationally exuberant" and borrowing too much to invest in housing, exposing the economy to financial shocks, global bond fund giant PIMCO says. In a detailed statistical study that compares Australian borrowers to those in other countries, PIMCO researchers found that Australians' decision to borrow is driven by falling interest rates and rising house prices – not economic fundamentals that reflect the health of the economy like employment.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.5% to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 112.0 unch.

• Asia Pacific Sovereign CDS Index 63.25 -.25 basis point.

• S&P 500 futures +.03%.

• NASDAQ 100 futures -.03%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (ATU)/.52

• (FDX)2.70

• (DRC)/.12

• (HGR)/.45

• (JBL)/.49

• (ORCL)/.87

• (PIR)/.08

Economic Releases

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,500,000 barrels versus a -6,812,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -790,000 barrels versus a -2,939,000 barrel decline the prior week. Distillate inventories are estimated to rise by +810,000 barrels versus a +865,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.31% versus a +1.4% gain prior.

2:00 pm EST

• The FOMC is expected to leave the benchmark Fed Funds rate at .25%.
  

Upcoming Splits

• (CF) 5-for-1

Other Potential Market Movers

• The Fed's Yellen speaking, Eurozone CPI report, weekly MBA mortgage applications report and the (PRU) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity and consumer 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 day.