Stocks Falling into Final Hour on Rate Worries, Rising Eurozone Debt Angst, Increasing Mideast Unrest, Biotech/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 11.50 +11.43%

• Euro/Yen Carry Return Index 144.67 -.15%

• Emerging Markets Currency Volatility(VXY) 5.90 +.86%

• S&P 500 Implied Correlation 48.49 +5.71%

• ISE Sentiment Index 113.0 unch.

• Total Put/Call 1.01 unch.

• NYSE Arms 1.27 +126.65% 

Credit Investor Angst:

• North American Investment Grade CDS Index 56.17 +1.81%

• European Financial Sector CDS Index 62.44 +3.49%

• Western Europe Sovereign Debt CDS Index 31.79 +2.28%
• Asia Pacific Sovereign Debt CDS Index 70.24 -.40%

• Emerging Market CDS Index 233.05 +.08%

• China Blended Corporate Spread Index 300.46 n/a
• 2-Year Swap Spread 14.75 +1.25 basis points

• TED Spread 22.5 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -11.25 unch.

Economic Gauges:

• 3-Month T-Bill Yield .01% unch.

• Yield Curve 210.0 -5.0 basis points

• China Import Iron Ore Spot $95.90/Metric Tonne -.62%

• Citi US Economic Surprise Index -11.20 -1.8 points

• Citi Emerging Markets Economic Surprise Index -7.60 +1.2 points

• 10-Year TIPS Spread 2.25 -1.0 basis point

Overseas Futures:

• Nikkei Futures: Indicating -44 open in Japan

• DAX Futures: Indicating +5 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech/tech/medical sector longs

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, took some profits in my biotech sector longs

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg: 

• Ukraine Moves to Destroy Rebel Bases in East, Ruling Out Cease-Fire. Ukraine’s government accused pro-Russian rebels of destroying bridges, as it expressed its determination to wipe out insurgent bases and ruled out a unilateral cease-fire in the battle-torn east. “Government troops are blocking roads to Donetsk and Luhansk to prevent rebels’ reinforcement and weapons delivery,” a Defense Ministry spokesman, Andriy Lysenko, told reporters in Kiev today. “Rebels are putting mines on infrastructure, such as bridges.”

• Carney’s Hawkish Turn Seen Setting Fashion for Yellen. The question investors are now asking is whether Federal Reserve Chair Janet Yellen will take the same journey. The debate burns brighter after U.S. unemployment fell to its lowest in more than five years. Goldman Sachs Group Inc. now sees a Fed increase in the third quarter of next year, rather than the first three months of 2016. 

• China Local Funding Unit Got Funds Illegally, Beijing News Says. Jiamusi New Era Infrastructure Construction Investment Group Co., a local government financing vehicle in northeastern China, used fabricated documents to illegally obtain funds, Beijing News reported on July 4. The LGFV, based in the city of Jiamusi near the Russian border in Heilongjiang province, used fabricated urban planning documents to boost the area of land for which it owns the usage rights, Beijing News reported, citing Song Xueying, former head of the city’s Department of Land and Resources. The financing unit used the land as collateral to sell bonds, according to the report.

• German Industrial Output Falls in Sign of Slower Growth. German industrial output dropped for a third month in May amid signs Europe’s largest economy is taking a breather. Production, adjusted for seasonal swings, fell 1.8 percent from April, when it declined a revised 0.3 percent, the Economy Ministry in Berlin said today. Economists forecast output to remain unchanged, according to the median of 35 estimates in a Bloomberg News survey. Production rose 1.3 percent in May from the previous year when adjusted for working days. 

• European Banks Seen Facing $50 Billion More in Legal Expenses. Europe’s banks face a further $50 billion of legal costs as they catch up with their U.S. counterparts, according to analysts at Morgan Stanley. European firms, which have set aside or paid out more than $80 billion since 2009, face about $130 billion of litigation and settlement costs in total, analysts led by Huw van Steenis wrote in a note to clients today. U.S. firms, which have so far made provisions for or paid out $125 billion, may have only to set aside a further $25 billion, the analysts said.

• Europe Stocks Drop After Biggest Weekly Rally Since March. European stocks fell the most in almost two weeks as investors assessed equity valuations following the biggest rally since March. Sky Deutschland AG and Deutsche Boerse AG slipped at least 2.5 percent each after brokerages downgraded the shares. TeliaSonera AB and Tele2 AB advanced after the Swedish company agreed to buy Tele2’s Norwegian business. PostNL NV (PNL) rallied the most in more than two years after boosting its profit forecast. The Stoxx Europe 600 Index dropped 0.9 percent to 344.8 at the close of trading in London, with all 19 industry groups retreating.

• Copper Drops as Stockpiles Increase, Rally Seen Excessive. Copper futures for delivery in September dropped 0.6 percent to settle at $3.261 a pound at 1:11 p.m. on the Comex in New York, where floor trading was closed on July 4 for the Independence Day holiday.

• Travelers to U.S. Asked to Turn On Mobile Devices as Security Beefed Up. U.S.-bound travelers from some overseas airports are being asked to turn on mobile phones and other devices under enhanced security measures from the Transportation Security Administration. Electronic devices that don’t power up won’t be permitted onboard the aircraft and the passenger may be subject to further screening, the TSA said yesterday in a statement.

Wall Street Journal:

• Ukraine Forces Working to Block Donetsk, Official Says. Interior Ministry Adviser Says Armed Rebel Fighters Unable to Leave City.

CNBC:

• Why this bullish pro sees big market drop soon. (video)

• The BIG threat to Obamacare (that you've never heard of). (video) If you wake up tomorrow and hear a top U.S. court has issued a ruling that could end up effectively destroying much of Obamacare, don't say we didn't warn you.

ZeroHedge: 

• Why An End To Dark Pools Would Be A Clear Nightmare For The Fed. (graph)

• What's Lurking Beneath The Glossy Veneer Of The Jobs Report? (graph)

• Consumer Spending Slides In All Important June, Gallup Finds. (graph)

• More Powderkegs: Israel Prepares For Gaza Escalation, Boosts Troops On Gaza Border.

• Russia Rushes To Seal Ukraine-Bypassing Gas Pipeline: Lavrov Pays Bulgaria A Visit.

• "This Could Be The Last Straw" 90% Of China Loan Guarantors Bankrupt.

• Japan Sounds Emergency Warning As "Once In Decades" Supertyphoon Neoguri Approaches.

• ISIS' Latest And Most Ambitious Plan Yet: Invade Spain.

Business Insider:

• China's Shadow Banking System Could Bring Down The World's Hottest Property Markets.

• The 17 Most Exciting New Tech Products That Will Launch Before The End Of The Year.

• Everyone Is Passing Around This Chart Showing How Much The Great Investors Have Beat The Market.

Chicago Tribune:

• Fourth of July weekend toll: 82 shot, 14 of them fatally, in Chicago. For 10 minutes, it seemed like the shooting was everywhere in the South Chicago neighborhood. It started when someone shot and wounded a couple, then two people fired at the shooter, then there was a chase and shots exchanged and a man sitting on a porch was hit. Responding officers kept cutting each other off on their radios as they reported other gunfire in the area late Sunday night and early Monday morning. Then the heavy equipment rolled in: A helicopter and SUVs packed with lockers of rifles. SWAT teams in green coveralls patrolled the streets with uniformed officers.

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.75%

Sector Underperformers:

• 1) Coal -2.44% 2) Biotech -2.22% 3) Social Medica -2.20%

Stocks Falling on Unusual Volume:

• CBSO, MEAS, GTAT, USLV, NEWS, TU, VJET, NSTG, EUFN, LGND, GLOG, COV, FNHC, ENTA, TTPH, TDW, KS, FPRX, SRPT, GALT, ACRX, RCI, CRH, BECN, LGIH and UIHC

Stocks With Unusual Put Option Activity:

• 1) EWJ 2) M 3) MBI 4) HES 5) XME
  

Stocks With Most Negative News Mentions:

• 1) GTAT 2) NFLX 3) TSLA 4) XONE 5) UAL
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.61%

Sector Outperformers:

• 1) Utilities +.27% 2) REITs +.03% 3) Ag -.15%
  

Stocks Rising on Unusual Volume:

• BDSI, KNDI, BBRY, INVN, CRUS and UTEK

Stocks With Unusual Call Option Activity:

• 1) ACI 2) KLAC 3) AFSI 4) VRS 5) INVN

Stocks With Most Positive News Mentions:

• 1) F 2) AMAT 3) KING 4) BBRY 5) BDSI
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Monday Watch

Weekend Headlines 
Bloomberg:

• Ukraine Chases Rebels From Strongholds as Showdown Looms. Ukraine’s army turned the tide against pro-Russian insurgents with its biggest victories of a three-month campaign, sending the rebels fleeing to the eastern strongholds where they have vowed to make a stand. After recapturing Slovyansk and Kramatorsk, government forces secured control of the Donetsk region towns of Artemivsk and Druzhkivka, military officials told President Petro Poroshenko yesterday. The insurgents are bolstering defenses in Donetsk in preparation for an onslaught, Denis Pushilin, leader of the self-declared Donetsk People’s Republic, said on Twitter. “There are a lot of tests ahead,” Poroshenko said. The government plans a “complete blockade” of Donetsk and the region’s other main city, Luhansk, that will force rebels to lay down arms, Inter TV cited Mikhailo Koval, deputy head of the National Defense and Security Council, as saying. 

• Saudis Alert to Enemies on Both Sides of Iraq Schism. Saudi Arabia is a target for both sides in Iraq’s deepening conflict, one reason it has ramped up security levels to confront a threat that’s more immediate than the Arab Spring revolts three years ago. The world’s biggest oil exporter convened its national security council for a rare meeting under King Abdullah, and has bolstered defenses at the border with Iraq, where militants last month seized several cities and declared an Islamic state. The king vowed to protect the nation’s “resources and territory and prevent any act of terror.”

• Teenagers Under Siege as Murders Haunt West Bank. Almost every weekend, Dvir thumbs rides through the hills of the West Bank to the Jewish settlement where his family lives. The murder of a neighbor on a similar journey home won’t change the 16-year-old’s routine. “The terrorists want to scare us, they want us to leave this place, but this is how we live,” said Dvir, a crocheted skullcap pinned to his close-cropped hair as he mourned Gilad Shaar, who grew up next door in the settlement of Talmon. “Our response is to be together now and help one another, and to believe even more in our mission to live here.”

• Emerging-Markets Hedging Costs Jump as End of QE Looms: Options. China's weakening growth prospects and the imminent end of Federal Reserve stimulus are spurring traders to scoop up protection on emerging-market stocks. The cost of bearish options on the iShares MSCI Emerging Markets ETF rose to the highest level in more han a year relative to bullish wagers last week, Bloomberg data show. Options pricing in a 5% decline in the emerging-markets ETF on June 23 cost 4.6 points more than wagers betting on a 5% increase, according to three-month implied-volatility data compiled by Bloomberg.

• China’s New Economy Stocks Selling Off With the Old. After surging at least 20 percent for the biggest gains in China’s stock market last year, gauges of technology, health-care and consumer shares have all lost more than 6 percent. The companies, tied to what analysts have dubbed China’s “new economy,” are now falling in tandem with “old economy” stocks in state sectors such as commodities and finance that fueled growth in the last decade. All 10 industries in the CSI 300 Index sank in the first half, the broadest losses in four years.

• Lagarde Signals Cut in Global Growth Forecast as Investment Lags. International Monetary Fund Managing Director Christine Lagarde signaled a cut in the institution’s global growth forecasts as investment remains weak. “The global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment” spending remains lackluster, Lagarde told the Cercle des Economistes conference in Aix-en-Provence, France.

• ECB’s Noyer Warns Euro Area Against Giving Up on Deficit Cutting. European Central Bank Governing Council member Christian Noyer warned euro-area governments against giving up on deficit reduction or looking to use a debt build-up to bolster growth. “No country today has sufficient credibility to put in place a strategy” of financing public infrastructure with a major debt increase, Noyer said today at the Cercle des Economistes conference in Aix-en-Provence, France. “Decades of of deficits have created profound skepticism. The current balance is fragile and any significant deviation from the current budget trajectory would probably be paid for, in a volatile environment, with higher borrowing costs.”

• German Manufacturing Orders Decline on Geopolitical Risks. German factory orders (GRIORTMM) fell more than economists expected in May as geopolitical risks weighed on confidence in the strength of Europe’s largest economy. Orders, adjusted for seasonal swings and inflation, fell 1.7 percent from April, when they rose a revised 3.4 percent, the Economy Ministry in Berlin said today. Economists forecast a decline of 1.1 percent, according to the median of 30 estimates in a Bloomberg News survey. 

• Bond Anxiety Grows in $1.6 Trillion Repo Market as Failures Soar. In the relative calm that is the market for U.S. Treasuries, a sense of unease over a vital cog in the financial system’s plumbing is beginning to rise. The Federal Reserve’s bond purchases combined with demand from banks to meet tightened regulatory requirements is making it harder for traders to easily borrow and lend certain desired securities in the $1.6 trillion-a-day market for repurchase agreements. That’s causing such trades to go uncompleted at some of the highest rates since the financial crisis. 

• Dollar Gains as Treasuries Slide on Rates Speculation. The dollar strengthened against major peers and Treasuries fell amid speculation a stronger U.S. labor market means the Federal Reserve may raise rates sooner than anticipated. Asia’s benchmark equity gauge traded near a six-year high and oil fell with gold. 

• Goldman Sachs(GS) Brings Forward Rate Forecast as Treasuries Fall. Goldman Sachs Group Inc. brought forward its forecast for the Federal Reserve to raise interest rates after U.S. employers added more jobs than forecast, sending Treasuries lower for a fourth day. The Fed will increase its benchmark in the third quarter of 2015, rather than the first three months of 2016, Goldman Sachs Chief Economist Jan Hatzius wrote in a report yesterday. The investment bank joins companies including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in moving up its Fed estimates.

• Plunging Unemployment Bolsters Case for Earlier Fed Rate Rise. A plunge in U.S. unemployment to the lowest level in more than five years bolsters the case for Federal Reserve officials to raise the main interest rate earlier than they forecast just three weeks ago.

 Wall Street Journal:

• Pro-Russia Rebels Prepare Last Stand in East Ukraine. Separatist Leaders Say Evacuation From Slovyansk Was Strategic. Ukraine neared a final showdown with pro-Russia rebels on Sunday, after Kiev forced insurgents to retreat to the last major city they control and Moscow showed no signs of intervening to help them. On Sunday, Ukraine said it plans to lay siege to Donetsk, a regional capital of one million residents that is the political and economic center of eastern Ukraine, and pursue rebels who fled there from Slovyansk, which had been the base of rebel military resistance in the region until government forces recaptured it over the weekend. Rebel forces, meanwhile, also appeared to be readying themselves for a fight for Donetsk, the proclaimed capital of their breakaway republic.

• Insurgents in Iraq Seizing Advanced Weaponry. Arms Turning Up in Battles and Military-Style Parades in Iraq and Syria.

• Political Battle Over Export Bank Heats Up. New House Leadership, Conservative Groups Seek to Shut It Down. Lawmakers at a recent House hearing on the future of the Export-Import Bank were given an extra piece of reading material: a personalized index card laying out exactly which companies in their districts benefit from the financing agency and how many people they employ.

MarketWatch.com:

• ECB: We're aware of asset bubble risk. European Central Bank executive board member Benoit Coeure says the bank's current monetary policy of interest rates close to zero for a long period increases the risk of asset price bubbles. Mr. Coeure said the International Bank of Settlements is right to point at the risk that cheap money may generate exuberant rises in some asset prices in the euro zone posing a systemic crisis risk when eventually bursting.

Fox News:

• US increases security at foreign airports, focus on cellphone, other electronic devices. Passengers taking international flights into the United States now must have their cell phones and other electronic devices pass additional inspection before boarding planes, as part of the Transportation Security Administration’s most recent strategy to protect against the threat of a new type of terror attack.

CNBC:

• U.S. moves toward opening skies for commercial drones. The U.S. air safety regulator is drafting rules to permit small drones to be used for commercial purposes, a step toward allowing remote-control planes and helicopters to be deployed for everything from TV news coverage to monitoring crops.

• France hits out at dollar dominance in international transactions. France's political and business establishment has hit out against the hegemony of the dollar in international transactions after US authorities fined BNP Paribas $9 billion for helping countries avoid sanctions.

Zero Hedge:

• These Are The "Worst Possible States To Live In" As Ranked By Their Residents.

• Yellen Is Flat-Out Wrong: Financial Bubbles Are Caused By The Fed, Not The Market.

• McClellan Sounds "Alarm" Over Stock Market Drawdowns. (graph)

• Charting The Death Of The Saver. (graph)

• Pro-Russian Rebels Flee Slavyansk After "Massive Shelling", Demand Putin's Help To Avoid "Genocide".

• For All The Bond Bears Banking On Inflation. (graph)

• Taliban Sets 400 'NATO-Supplying' Oil Tankers Ablaze In Afghanistan.

• Productivity Can Return If The Central Banks Would Give It A Chance.

• ISIS Head Makes First Video Appearance.

• Congressional Panel Accused Of Leaking Insider Information, Refuses To Comply With Probe.

• "Making Investment Decisions Based On Fundamentals Is No Longer A Viable Philosophy".

• Excluding Oil, The US Trade Deficit Has Never Been Worse. (graph)

• 5 Things To Ponder: Under The Surface. (graph)

• Costs? US Sales To Russia Hit Record High After Sanctions. (graph)

• What Your "Startlingly Intimate, Voyeristic" NSA File Looks Like.

• "There Is No Honest Pricing Left" - The Epochal Error Of Modern Central Banking.

• Why Obamacare Is Pushing Up Health Insurance Premiums.

• Foodflation - Since QE3, Breakfast Is Up Over 24%.

• Current 'Wealth' Is Transitory: "The Risks Of Failing To Act Should Not Be Underestimated".

• What Next For Ukraine - Ethnic Cleansing?

• Nothing's Cheap Anymore. (graph)

• European Banks Are In Trouble. (graph)

Business Insider:

• Here's Another Obvious Sign Of Inflation Coming...

• Two Visions Of China's Future Are Colliding On Hong Kong's Streets.

• Ukraine Scored A Huge Symbolic Victory By Retaking A Russian-Backed Rebel Stronghold.

• ISIS Issues Passports Warning It Will 'Deploy Armies' If The Holder Is Harmed [Report].

• The Illusion Of Central Bank Control Is In Full Force.

• China Is Failing To Woo Western Investors.

• Russia Has Effectively Invaded Eastern Ukraine — The Question Is How The West Will Respond.

• The Failures Of The Arab Spring Were A Long Time In The Making.

• Israel Sends Their Biggest Message To Hamas In Years.

Wall Street All-Stars:

• Indicator Update: Time for a mid-course correction?

Reuters:

• Dubai's finances stronger but still vulnerable, IMF says. Dubai's ability to finance its debts has improved because of stronger economic growth and more conservative spending, but the emirate would still be vulnerable in a major dowturn of the global economy, the International Monetary Fund said.

Financial Times: 

• US warns China over tech trade deal. European Central Bank executive board member Benoit Coeure says the bank's current monetary policy of interest rates close to zero for a long period increases the risk of asset price bubbles. Mr. Coeure said the International Bank of Settlements is right to point at the risk that cheap money may generate exuberant rises in some asset prices in the euro zone posing a systemic crisis risk when eventually bursting.

Telegraph:

• The Obama years: 'The trailers were great, the movie was horrible'.

FAS:

• Lautenschlaeger Sees Non Need for ECB to Buy Govt Bonds. Sabine Lautenschlaeger "doesn't see government bond-buying on the horizon, ECB Executive Board member says in interview.

Xinhua:

• Xia Bin Says China's Property Market Downturn 'Certain'.  Long-term downturn in China's property market is "certain," Xia Bin, a former adviser to the People's Bank of China and a researcher with the Development Research Center of the State Council, says today at a forum in Tianjin. It's important to prevent outbreak of systemic risks following decline in property prices, Xia is cited as saying.

Night Trading

• Asian indices are -.25% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 99.0 -2.25 basis points.

• Asia Pacific Sovereign CDS Index 70.5 -1.0 basis point.

• FTSE-100 futures -.04%.

• S&P 500 futures -.10%.

• NASDAQ 100 futures -.08%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note

Economic Releases

• None of note

Upcoming Splits

• (ALK) 2-for-1

Other Potential Market Movers

• The Japan Trade Balance, German Industrial Production report, (AMAT) analyst briefing and SEMICON West could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by real estate and technology 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.

Weekly Outlook

Week Ahead by Bloomberg. 
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week modestly lower on rising Mideast turmoil/Ukraine-Russia tensions, technical selling, profit-taking, emerging markets debt angst and yen strength. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 50% net long heading into the week.