Wednesday Watch

Evening Headlines 

Bloomberg:  

• Merkel Says New Talks Must Wait After Greece Blows Off IMF Payment. German Chancellor Angela Merkel ruled out an immediate return to debt talks as Greece became the first advanced economy to miss payment to the International Monetary Fund and its European bailout also expired. While Merkel rejected talks before a July 5 referendum called by Greek Premier Alexis Tsipras on further budget cuts, euro-area finance ministers signaled the deadlock may be thawing. As capital controls ration bank withdrawals and pensions, Greek society is feeling the pain.

• Is the Contagion From a 'Grexit' Being Underestimated? (video)

• Tsipras Under Pressure to Cede After Greece Misses IMF Payment. European leaders are waiting for signs that Greek Prime Minister Alexis Tsipras is ready to compromise as his country buckles under capital controls and fails to make its International Monetary Fund payment. With Greek society feeling the pain of rationed bank withdrawals and pensions, the government is looking for a way out of economic ruin after a bailout expired and the country joined delinquent Sudan and Zimbabwe in being in arrears to the global lender of last resort. An 11th-hour request for a new two-year rescue package to tide over a ravaged economy was sternly dismissed by German Chancellor Angela Merkel. With Greece’s stay in the euro club at stake, finance ministers in the 19-nation bloc are scrambling for a solution to pull Greece away from the precipice after morethan five years of crisis fighting and two bailouts.

• Greece Crisis Ripples Across European Companies as Markets Swing. Greece’s financial turmoil rippled across corporate Europe as a market rout sabotaged planned bond sales and stock offerings and threw companies into crisis-response mode to deal with unsettled customers. German real-estate investor ADO Properties shelved its planned initial public offering, citing volatile markets, while Adler Real Estate halted plans to sell a convertible bond to shareholders. Travel companies TUI AG and Thomas Cook Plc fielded calls from travelers about access to cash after Greece introduced capital controls to prevent bank collapses.

• Hidden China Stock Debt Revealed in Online Loans at 22% Interest. Zhang Minmin is one of tens of thousands playing in one of the riskier corners of China’s stock market, borrowing money at high interest rates through unregulated online lenders to amplify his bets on potential equity gains. “Sometimes when the market is good, I would make profits enough to buy an Audi in just a week or two. However, when the market is down, it’s also possible to lose half an Audi very quickly,” said Zhang, a 32-year-old who works in the financial industry in Hangzhou, a city near Shanghai. As more Chinese jumped into the market in the hope of instant wealth, peer-to-peer websites offering loans for stock investing have mushroomed. They are among a multitude of sources of leverage outside of traditional margin financing that threaten to complicate any efforts to prevent an unruly reversal of China’s stock market boom, which is already faltering. Chinese brokers have extended 2.1 trillion yuan ($339 billion) of margin finance to investors, double the amount at the start of the year. But this often-cited figure is only part of the mountain of debt taken out to finance share purchases. Another 1.7 trillion yuan may have flowed into stock market investment from wealth management products, online lending sites and other sources, according to a Bloomberg survey of analysts.   

• There Are Now More Stock Traders in China Than Communist Party Members. More than 90 million Chinese now trade stocks, according to China Securities Depository and Clearing Co. That compares with 87.8 million Communist Party members at the end of last year, the state-run Xinhua News Agency reported June 29, two days before the 94th anniversary of the party’s founding. “As more people get burned, the government feels more pressure,” said Ronald Wan, chief executive officer of Partners Capital International in Hong Kong. “A disorderly decline will affect stability in the Chinese economy.” “The authorities are always sensitive to moves in the market because they fear a systemic collapse,” said Anthony Neoh, a visiting professor at the National University of Singapore and a member of the Chinese securities regulator’s international advisory body. “There’s nothing wrong with greater stock market investment and there’s nothing wrong with diversification from simply savings,” Howie, a former managing director at CLSA Asia-Pacific Markets, said in a phone interview from Singapore. “But the difficulty in China is that none of what’s been happening in the past few months can be called investment. It’s all speculation.” 

• Billionaire-Backed Hedge Fund to Short India Stocks After Rally. Infina Finance Ltd., a Mumbai-based $190 million hedge fund, has turned the most bearish in a year on India’s stock market and will short if it rallies further. “Right now we have the lowest net longs than we had in the last 12 months,” Venkat Subramanian, Infina chief executive officer, said in an interview. “If the market goes up any further, I would become net short.” The long-short equity fund, which counts billionaire Uday Kotak and Kotak Mahindra Bank Ltd. among investors, is expecting a correction as foreigners allocate money to other regions and stock valuations become expensive.

• Singapore Home Prices Post Longest Losing Streak Since 2002. Singapore’s home prices dropped for a seventh consecutive quarter, the longest losing streak in 13 years, as tighter mortgage curbs cooled demand in Asia’s second-most expensive housing market. An index tracking private residential prices fell 0.9 percent in the three months ended June 30, the longest stretch of declines since June 2002, according to preliminary data from the Urban Redevelopment Authority on Wednesday. The last time prices fell for this long was eight consecutive quarters from September 2000, the data showed.

• Asian Stocks Advance After Steepest Monthly Drop Since September. Asian stocks rose, after the regional benchmark gauge posted its biggest monthly drop since September, as energy and materials shares led gains. The MSCI Asia Pacific Index climbed 0.1 percent to 146.38 as of 9:01 a.m. in Tokyo. The measure slid 3.4 percent in June, leaving it little changed for the quarter, as Chinese equities in Hong Kong slumped. The city’s stock market is closed Wednesday for a holiday.

• Bullard Sees U.S. Sheltered From Greek Crisis, September in Play. A September interest rate rise is still “very much in play,” according to Federal Reserve of St. Louis President James Bullard, who said the U.S. will gain from any investor flight to safety from the Greek debt crisis that drives down U.S. bond yields. “I would say the flight to safety is a bullish factor for the U.S. Increased global uncertainty might be a bearish factor,” Bullard told reporters after delivering a speech in St. Louis on Tuesday. “They roughly offset so it would not change the timing of any rate hike. I would say September is very much still in play.”

• Options Limited for U.S. as Crises Mount in Greece, Puerto Rico. The Obama administration, which has spent years trying to erect barriers against financial crises, faces fresh turmoil in Greece and Puerto Rico with few politically feasible tools and an even smaller appetite to intervene. The combination explains why the administration is signaling that not all emergencies warrant bailouts, at least not by the U.S. government. With unrelated crises on two continents, its response boils down to this: Greece is an issue for Europe to resolve, and a long-term fix for Puerto Rico requires help from Congress.

Wall Street Journal: 

• For Greeks, Referendum Poses Murky Choice Between Pain, Pride. Bailout question polarizes voters along ideological, economic lines. Chara Marantidou stood in the rain Tuesday with thousands of Greeks who support bowing to creditors’ demands, but she was feeling the uncertainty that is dogging many in this haggard country whether they agreed with her or not. “I feel like I need to choose between two doors, but no one’s really told me what lies behind each,” said the 40-year-old freelance designer and mother of two. The debate over a single question,...

• The Greek Crisis Is About More Than Money. Greece was critical to the Cold War policy of Soviet containment. It is no less so in the age of Putin.

MarketWatch.com:

• China’s central bank reveals its weak hand. China’s domestic stock markets may have bounced back Tuesday, but the damage from the panic despite interest-rate and reserve-ratio cuts at the weekend will take longer to heal. The big problem is that the People’s Bank of China explicitly targeted the plunging stock market, and yet the Shanghai Composite kept falling, revealing that the PBOC was not in control. Even after Tuesday afternoon’s sharp rebound, the index is still flirting with bear territory, taken as a 20% drop from the recent high.

CNBC:

• Market pros eye next potential debt crisis. (video)

• Julian Robertson: Euro could easily go below parity. (video)

Zero Hedge: 

• Greece Becomes First Developed Country To Default To The IMF.

• For Greeks The Nightmare Is Just Beginning: Here Come The Depositor Haircuts.

• Goldman(GS) Just Crushed The "Strong Fundamentals" Lie; Cuts EPS, GDP, Revenue And Profit Forecasts. (graph)

• Chinese QE Calls Officially Begin: Bond Swap "Sucks Liquidity", "Contributes To Stock Slump", Broker Claims.

• A 14 Year Old Explains Why Socialism Fails.

• "Off The Grid" Indicators Suggest US Economy Not Ready For 'Liftoff'. (graph)

• Crude Slips On Surprise API Inventory Build. (graph)

• Fed Examines Wealth Redistribution Program; Decides It's Not Worth It.

• Who Could Have Seen This Coming? (graph)

• China's "E*trade Babies" Wiped Out In Market Crash.

• Stocks Turmoil To End Q2 With Worst Run Since Lehman. (graph)

Business Insider:

• Here's how much Jeb Bush pays in taxes.

• There is a new 'ghost town' in China.

• There is something that is a bigger drag on US stocks than Greece or China.

• Nike(NKE) cofounder and chairman Phil Knight is stepping down.

• Here's what's really happening to your skin when you get a tattoo.

• A Russian military base has been spotted in eastern Ukraine.

• The current nuclear deal will leave Iran with 5,000 centrifuges.

• FISA court rules the NSA can continue its mass collection of phone metadata.

• Chinese manufacturing PMI misses expectations in June.

• There are more marijuana shops in Oregon than Starbucks and McDonald's.

• Russia is reviewing the 'legality' of Baltic states' independence.

USA Today:

• Girl Scouts reject $100K after donor won't let it go to transgender girls.

Reuters:

• Xiaomi takes first big step outside Asia with Brazil smartphone. Chinese smartphone maker Xiaomi has started making devices in Brazil for sale locally, promising to dramatically undercut rivals on price in the first big step beyond Asia for the world's most valuable technology start-up.

Telegraph: 

• Echoes of Greece in Britain's growing reliance on debt-fuelled growth. Greece's predicament was caused by the madness of the euro, which pumped up the economy with debt only to crush it down again. Worryingly, Britain's recovery is based largely on rising levels of debt, too.  

• Greece crisis: Greece defaults on the IMF as government submits audacious new two-year bail-out plan. Athens applies to European rescue fund for €29bn loan package in return for debt relief as midnight deadline passes.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are +.25% to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 113.0 -2.0 basis points.

• Asia Pacific Sovereign CDS Index 59.75 -1.25 basis points.

• S&P 500 futures +.33%.

• NASDAQ 100 futures +.31%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (AYI)/1.35

• (AZZ)/.70

• (STZ)/1.24

• (GIS)/.71

• (GBX)/1.63

• (MKC)/.68

• (PAYX)/.44

• (PRGS)/.32

Economic Releases

7:30 am EST

• Challenger Job Cuts for June.
  

8:15 am EST

• The ADP Employment Change for June is estimated to rise to 218K versus 201K in May.

9:45 am EST

• The Final Markit US Manufacturing PMI for June is estimated at 53.4 versus 53.4 in May.
  

10:00 am EST

• Construction Spending for May is estimated to rise +.4% versus a +2.2% gain in April.

• ISM Manufacturing for June is estimated to rise to 53.2 versus 52.8 in May.

• ISM Prices Paid for June is estimated to rise to 51.0 versus 49.5 in May.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,781,820 barrels versus a -4,934,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +213,640 barrels versus a +680,000 barrel gain the prior week. Distillate supplies are estimated to rise by +1,304,550 barrels versus a 1,837,000 barrel gain prior. Finally, Refinery Utilization is estimated to rise by +.22% versus a +.9% gain the prior week.

Afternoon:

• Total Vehicle Sales for June are estimated to fall to 17.2M versus 17.71M in May.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Eurogroup Meeting on Greece, Eurozone PMI, Australia Trade report, weekly MBA Mortgage Applications report, (F) June Sales call, (PBR) general meeting, (KRFT) special meeting and the (SNX) analyst day could also impact trading today.

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