Stocks Rising into Final Hour on Central Bank Hopes, Oil/Euro Strength, Short-Covering, Commodity/Tech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 13.0 -4.90%

• Euro/Yen Carry Return Index 132.66 -.16%

• Emerging Markets Currency Volatility(VXY) 9.77 +1.56%

• S&P 500 Implied Correlation 67.17 +2.61%

• ISE Sentiment Index 90.0 -11.76%

• Total Put/Call .78 -28.44%

• NYSE Arms .90 +8.76% 

Credit Investor Angst:

• North American Investment Grade CDS Index 60.44 -2.21%

• America Energy Sector High-Yield CDS Index 1,131.0 +2.14%

• European Financial Sector CDS Index 65.35 unch.

• Western Europe Sovereign Debt CDS Index 23.03 +.59%

• Asia Pacific Sovereign Debt CDS Index 59.58 +.97%

• Emerging Market CDS Index 297.24 +.03%
  

• iBoxx Offshore RMB China Corporates High Yield Index 116.16 +.06%

• 2-Year Swap Spread 26.5 -.25 basis point

• TED Spread 26.0 +.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -23.25 -.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .01% unch.

• Yield Curve 139.0 unch.

• China Import Iron Ore Spot $50.33/Metric Tonne -.89%

• Citi US Economic Surprise Index -49.0 -1.0 point

• Citi Eurozone Economic Surprise Index 55.30 -.4 point

• Citi Emerging Markets Economic Surprise Index -13.2 -6.6 points

• 10-Year TIPS Spread 1.83 +2.0 basis points

Overseas Futures:

• Nikkei Futures: Indicating +11 open in Japan

• DAX Futures: Indicating +13 open in Germany

Portfolio: 

• Higher: On gains in my biotech/tech/retail sector longs

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:    

• The Major Paradox at the Heart of the Chinese Economy. “China’s economy is in a very critical period of restructuring,” said Zhang Bin, a senior fellow at the Chinese Academy of Social Sciences in Beijing. And there will be economic pain as the government pushes through overdue structural reforms. “Even if GDP growth is lower, it isn’t a bad thing. We have talked about it for many years without progress, but now it is really making progress.”
• The Latest Numbers From China Show the Government Is Facing a Huge Challenge. (graph) China’s GDP growth came in on target in the first quarter. Slumping output in March, a slide into deflation and an expanding credit bubble underline the magnitude of the challenge the economy continues to face. We believe the weeks ahead will see the government intensifying efforts to support growth. Alternative measures of growth painted a gloomier picture. Bloomberg’s monthly GDP tracker came in at 6.5 percent year on year in the first quarter. An index composed of electricity, rail freight and bank loans — measures reportedly favored by Li — suggested growth is in the mid-single digits. 
• China Steel Output Slides to Worst First Quarter in 20 Years. China’s crude steel output fell in the first three months of the year, the first decline over that period in 20 years, as the country grew at the slowest pace since the global recession. Crude steel production from January to March slid 1.7 percent from a year earlier to 200.1 million metric tons, according to National Bureau of Statistics data released Wednesday in Beijing. First quarter output hasn’t contracted since 1995. Falling production in the world’s largest steelmaker reflects the country’s slowing pace of construction and sliding exports. Output is poised to fall further as the government tries to trim overcapacity and cut pollution in its drive to shift the world’s second-biggest economy toward consumption and services.
• ECB Keeps Rates on Hold as Investors Await Draghi Assurance on QE Path. The European Central Bank kept interest rates unchanged at record lows as it focuses on a bond-buying program to bolster the improving euro-area economy. The 25-member Governing Council left the main refinancing rate at 0.05 percent at its meeting in Frankfurt on Wednesday, as predicted by all 51 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate stayed at minus 0.2 percent and 0.3 percent, respectively.
• Strong Dollar’s Economic Ax to Fall on Small U.S. Exporters. The big hit from the strong dollar is going to fall on small U.S. exporters. While large U.S. multinational corporations have kicked up a storm of complaints about the currency’s advance, their broader customer and production bases make them more nimble and able to cope. For the smaller counterparts with fewer products to offer and most factories in the U.S., it’s becoming more difficult to remain competitive.  
• Europe Stocks Extend Record as Draghi Says QE Will Stay Course. European stocks rose with commodity shares after Mario Draghi said quantitative easing will continue until there’s sustained improvement in inflation. The Stoxx Europe 600 Index added 0.6 percent to 414.06 at the close of trading, with gauges of miners and energy shares posting the biggest gains.
• Saudi Arabia Leads OPEC Oil Boom as U.S. Shale Growth Slows. Saudi Arabia pumped close to a record amount of crude oil last month, leading the biggest surge in OPEC output in almost four years just as the U.S. shale boom shows signs of slowing, the International Energy Agency said. The Organization of Petroleum Exporting Countries may extend its biggest output gain since June 2011 into next month as recovery in Libya and Iraq adds to the Saudi increase, the IEA said. Average U.S. oil production of 12.6 million barrels a day in the first six months of 2015 will slide to 12.5 million by the fourth quarter as companies curb drilling, the agency said.
• Oil Production Jumps in March Even as U.S. Drilling Collapses. The U.S. keeps pumping oil at a near-record pace, in spite of the collapse in prices over the past year and cutbacks in drilling. Crude production rose 1.3 percent in March to the highest level since 1973, a Federal Reserve index showed Wednesday. Output was up 13.7 percent from a year ago, according to the central bank's report on industrial production. For all of 2014, the gauge of oil extraction climbed 15.4 percent.

Fox News:

• Fierce clashes in Iraq as ISIS takes control of villages near Ramadi. The Islamic State group launched an offensive in Iraq's western Anbar province on Wednesday, capturing three villages near the provincial capital of Ramadi and forcing villagers to flee from their homes as fierce clashes were underway between the extremists and government troops, residents said. The militants' push comes after the Islamic State was dealt a major blow earlier this month, when Iraqi troops routed the group from Tikrit, Saddam Hussein's hometown. Wednesday's fighting could also further threaten Ramadi, 70 miles west of Baghdad. The city is mostly held by government forces but militants control some parts of it, mainly on the outskirts.

ZeroHedge:

• The Madness Of Negative Bond Yields. (graph)
• Bullard Hints The Fed May Hike Rates Only To Cut Them Right After.
• WTI Spikes Above $55 After Crude Inventories Rise At Slowest Pace In 14 Weeks. (graph)
• Homebuilder Confidence In April Jumps Most Since July. (graph)
• US Industrial Production Plunges By Most Since Aug 2012, Utility Output Drops Most In 9 Years. (graph)
• German FinMin Schaeuble Sees "No Contagion" From Grexit, Don't Show Him This Chart. (graph)
• April Empire Fed Manufacturing Plunges, New Orders Crash To Jan 2013 Lows. (graph)
• Bank of America(BAC) Revenue Drops, Misses Due To Declining Trading Revenues, Loan Creation And Net Interest Margin.

Business Insider:

• Apple(AAPL) just dropped a big clue about a major new product coming in June.
• STAN DRUCKENMILLER: I just know this is going to end badly; I can feel it in my bones.
• The Fed says employers are offering more money and they're still struggling to find skilled workers. The Fed sees the economy expanding at a modest pace. 
• Health care costs continue to only go up. (graph)
• HARD LANDING? All of the charts scream 2009 for China all over again. (graph)
• Here's the case for how Marco Rubio could defeat Hillary Clinton.
• Nike(NKE) just got a great sign it will dominate in the future.
• Smith & Wesson(SWHC) said Americans are buying more guns, and now its stock is going wild.

NY Times:

• Schaeuble Says ECB Monetary Policy 'Can Only Buy Time'. Euro area budgets "need to prepare for an eventual normalization of monetary policy and capital markets," German Finance Minister Wolfgang Schaeuble said Wendesday in NYT op-ed. Debate over "tapering" in the US "shows how difficult it is to withdraw a stimulus once governments and markets get used to it," he sad. ECB policy "cannot substitute for fiscal and structural reforms in member countries." Debt problems can't be solved by heaping on new debt, Schaeuble said.

Reuters: 

• Exclusive: Six percent of U.S. adults plan to buy Apple Watch - Reuters/Ipsos poll. If calculated based on 2014 U.S. Census projections, and excluding younger teens, this could mean potential sales of about 15 million watches, if those who said they intended to buy follow through with an actual purchase.

Telegraph:

• IMF tells regulators to brace for global 'liquidity shock'. Financial engineering that preceded the last two financial crises is back, International Monetary Fund warns.
• Greece downgraded further into 'junk' as black hole in public finances widens. Standard & Poor's slashes sovereign bonds as Athens' budget surplus shrinks by more than two-thirds.

Unian:

• Ukraine Says Russia Sent Grad Systems, Tanks to Rebels. 25 tanks, 5 Grad systems were sent Wednesday to territories controlled by militants in self-proclaimed Donetsk and Luhansk republics, citing Col. Valentyn Fedichev, Ukrainian government deputy commander in Donetsk and Luhansk regions.

Bear Radar

Style Underperformer:

• Large-Cap Growth +.23%

Sector Underperformers:

• 1) HMOs -2.26% 2) Networking -1.22% 3) REITs -.52%

Stocks Falling on Unusual Volume:

• NSAM, WUBA, STWD, LPLA, PCP, ASML, ADXS, WSO, LFC, GLOB, BFR, EDN, PNC, GWPH, CI, NFLX, CCU, HNP, NUVA, FMI, NEWM, PFNX, DECK, NGVC and GGAL

Stocks With Unusual Put Option Activity:

• 1) UNH 2) AVP 3) MRO 4) USB 5) DDD
  

Stocks With Most Negative News Mentions:

• 1) NUVA 2) BAC 3) BA 4) CSX 5) PCP
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value +.47%

Sector Outperformers:

• 1) Oil Service +2.65% 2) Gold & Silver +1.76% 3) Gaming +1.74%
  

Stocks Rising on Unusual Volume:

• FOMX, SAGE, SWHC, MBLY, JMEI, CMGE, DK, YNDX, INTC, RGR, EVEP, LINE, DYN, FLR, CJES and OZRK

Stocks With Unusual Call Option Activity:

• 1) NSAM 2) EMN 3) TWX 4) RRC 5) THC
  

Stocks With Most Positive News Mentions:

• 1) HCA 2) INTC 3) DOW 4) MBLY 5) NKE
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume 10.0% Above 100-day average

• 10 Sectors Rising, 0 Sectors Declining

• 70.4% of Issues Advancing, 26.2% Declining

• 86 New 52-Week Highs, 6 New Lows

• 57.2% of Issues Above 200-day Moving Average (yesterday's close)

• Average 14-Day RSI 46.5 (yesterday's close)

• TRIN/Arms 1.06

Wednesday Watch

Evening Headlines 
Bloomberg: 

• China Stock Frenzy Gets Even More Manic With First Leveraged ETF. Want to double down on China’s world-beating stock rally? Now there’s an exchange-traded fund for that. Direxion Investments is starting the first ETF that seeks to provide twice the daily return of mainland Chinese stocks using leverage, according to Andy O’Rourke, chief marketing officer for the New York-based fund provider. 
• China Liquor Giant Moutai Reveals Record Deliveries Without Cash. China President Xi Jinping’s crackdown on corruption and extravagance has cut into demand for luxury goods throughout the economy. Now, the campaign is bruising the balance sheets of some of China’s biggest companies. In the latest example, Kweichow Moutai Co., the $37.9 billion maker of a fiery liquor long used at political celebrations, has seen a spike in unpaid bills as distributors delay paying bills. Prices for Moutai have tumbled, cutting distributor profits and forcing them to buy on credit. Payments due to the company, what accountants call receivables, almost quadrupled at the end of September, the most recent quarter available. As Kweichow Moutai prepares to report earnings next week, the results will illustrate the corporate fallout of Xi’s crackdown. 
• China Stock Jump Blows Up Bond Yields in Threat to PBOC. China’s world-beating stock surge is sucking money away from bonds and thwarting central bank efforts to cut borrowing costs to support the economy. Yields on five-year yuan corporate notes with top ratings have jumped 30 basis points in the past month to 4.74 percent, near the highest since December. 
• Islamic State Recruits Teen Soldiers With Cars, Cash and Guns. They look like regular Islamic State militants in khaki fatigues and black bandanas, exercising and practicing combat routines. Yet their size and lack of trademark black beards betray them as children. The group, also known as ISIS or Da’esh, is already turning to the next generation to ensure its legacy of extremism and brutal violence endures as a U.S.-led offensive chips away at areas it controls in Iraq and Syria. Using recruitment offices in Syria called “Cubs of the Caliphate,” the al-Qaeda breakaway group is incorporating young Muslims into its ranks, sending some into battle or having them shoot hostages.  
• Draghi Seen Dispelling QE Duration Doubts as ECB Jolts Economy. No sooner has he started than Mario Draghi is facing questions on how he plans to finish  Six weeks into a 1.1 trillion-euro ($1.2 trillion) asset-buying plan to propel euro-area inflation out of the doldrums, the European Central Bank president is set to be asked at his regular press conference what happens if he succeeds before the provisional end-date of September 2016. His challenge is to show that policy makers are determined to cut off extraordinary support only when they’re sure the economy can stand on its own.  
• Five Questions for Mario Draghi.
• Asian Stocks Drop With Aussie as Data Shows Weaker China Growth. Asian stocks fell from an almost seven-year high and the Australian dollar slid against most peers as data showed China’s economy slowed to the weakest pace of expansion since 2009 last quarter. Crude oil rose for a fifth day. The MSCI Asia Pacific Index dropped 0.3 percent by 11:10 a.m. in Tokyo, as the Hang Seng Index fluctuated after a 1.6 percent slide Tuesday.
• U.S. Seen Becoming Net Energy Exporter on Shale Output. The U.S. government said for the first time that the nation will become a net energy exporter within 15 years as the shale boom bolsters crude oil production. U.S. energy exports will exceed imports from 2029 through 2032, and from 2037 through 2040, the Energy Information Administration said Tuesday in its Annual Energy Outlook. The agency raised its oil output forecasts for 2025 and 2040, while cutting total energy demand estimates for the same years. The forecast doesn’t anticipate any change in U.S. law that bans most exports of crude.
• Iron Ore Cut by JPMorgan on Supplies as Hockey Plans China Talks. A worsening mismatch between global iron ore supply and demand prompted JPMorgan Chase & Co. to reduce price forecasts through 2018, with the world’s biggest mining companies seen sticking with expansion plan. The raw material will average $51 a metric ton this year, 20 percent less than previously forecast, the bank said in an e-mailed report on Wednesday. The 2016 outlook was cut 22 percent to $50 a ton, while predictions for 2017 and 2018 were reduced by 18 percent and 8 percent, respectively, it said.

Wall Street Journal: 

• Florida Doctor Linked to Sen. Robert Menendez Indicted for Health-Care Fraud. Salomon E. Melgen received $105 million over six years from Medicare, indictment alleges. A Florida doctor whose practice twice was raided by federal authorities received $105 million over six years from Medicare, an indictment alleges, highlighting vulnerabilities in the federal program for the elderly and disabled. A federal grand jury indicted Salomon E. Melgen, a North Palm Beach ophthalmologist, on 46 counts of health care fraud, alleging among other things that he filed false Medicare...
• Oil Layoffs Hit 100,000 and Counting. Roughnecks feel brunt of cuts as tumble in price of crude ripples through energy industry.
• U.S. Warns Iran to Halt Unilateral Military Moves in Iraq. Move is part of a broader U.S. effort to weaken Tehran’s growing sway in the fight against Islamist extremists in the Middle East.
• Obama’s One-Man Nuclear Deal. Congress will get a vote but the President still has a free hand. President Obama says he wants Congress to play a role in approving a nuclear deal with Iran, but his every action suggests the opposite. After months of resistance, the White House said Tuesday the President would finally sign a bill requiring a Senate vote on any deal—and why not since it still gives him nearly a free hand.

Fox News:

• Senate panel passes Iran bill giving Congress a say on nuclear deal. The Senate Foreign Relations Committee on Tuesday unanimously approved legislation that would allow Congress to have a say on a possible U.S. nuclear negotiation with Iran. The legislation next will go to the full Senate for a vote. There was a strong bi-partisan effort for an increased congressional role as the June 30 deadline approaches for international negotiators to turn the framework of a nuclear deal into the real thing.

MarketWatch.com:

• Intel’s(INTC) cap spending cuts may fuel concerns. Intel Corp.’s lackluster first quarter results were on target with its previously reduced guidance, as the chip giant was hit by sluggish demand for PCs, but a bigger surprise was a far larger-than-expected cut in its capital spending forecast.

CNBC: 

• Wary of natural disaster, NY Fed bulks up in Chicago: Report. The New York branch of the U.S. Federal Reserve, wary that a natural disaster or other eventuality could shut down its market operations as it approaches an interest rate hike, has added staff and bulked up its satellite office in Chicago. Some market technicians have transferred from New York and others were hired at the office housed in the Chicago Fed, according to several people familiar with the build-out that began about two years ago, after Hurricane Sandy struck Manhattan.

Zero Hedge:

• 330 Million Citizens & Only One Democrat Interested In Being President.
• "We're Living In A Gambling Society" BlackRock's Larry Fink Urges CEOs To Stop "Short-Termist" Thinking.
• How Intel's EPS Rose And Beat Expectations Despite Flat Revenue And Net Income. (graph)
• Crude Pops After Smaller-Than-Expected API Inventory Build, Cushing Capacity Concerns Remain. (graph)
• Dollar Dumped, Oil Pumped As Another Retail Sales Miss Sends Stocks Surging. (graph)
• Q1 GDP Expectations Are Crashing. (graph)
• China GDP Tumbles To Lowest In 6 Years Amid Quadruple Whammy Of Dismal Data. (graph)
• Russian-Iranian Cooperation In The Creation Of New Regional Security Systems.
• Central Banks Made The Whole World “Buy Time”... There Are Signs We’re Beginning To Sell It.
• China Stock Rally To Continue Unless Economic Recovery Gets In The Way, Deutsche Bank Says. (graph)

Business Insider:

• A former top adviser destroyed Obama's Iraq policy in one sentence.
• China's wealthy are fleeing the country like crazy.

NY Times: 

• Hillary Clinton Was Asked About Email 2 Years Ago. Hillary Rodham Clinton was directly asked by congressional investigators in a December 2012 letter whether she had used a private email account while serving as secretary of state, according to letters obtained by The New York Times. But Mrs. Clinton did not reply to the letter. And when the State Department answered in March 2013, nearly two months after she left office, it ignored the question and provided no response for it.

Reuters:

• No swift recovery seen for copper market amid surplus, weak demand. The copper market will not get any respite from weak prices and excess supplies any time soon, even after recent hefty cost cutting and project delays have removed more than a million tonnes of new capacity, top executives said on Tuesday. Speaking at the CRU Copper conference, the executives painted one of the bleakest outlooks in years at the CRU Copper conference. While prices have recovered to around $6,000 per tonne from January when the market crashed below $5,500 for the first time since 2009, the market was languishing in a surplus of some 160,000 tonne at the end of the first quarter, according to estimates. Demand from China, the world's top consumer, grew at a meager 0.7 percent over that period as credit tightened and buying of refrigerators and air conditioners waned. While cuts in production and delays to projects have removed eight projects equating to 1.5 million tonnes that were due to come onstream by 2019, it will take years before the global market feels any supply pinch and prices recover.

Financial Times:

• Global trade faces poor growth, says WTO. Global trade is poised for at least two more years of disappointing growth, according to a new forecast that will add what some see as increasing evidence that globalisation is stalling.

Evening Recommendations 
Piper Jaffray:

• Raised (GPRO) to Overweight, target $55. 
• Raised (ULTA) to Overweight, target $170.

Night Trading

• Asian equity indices are -.75% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 106.0 +1.0 basis point.

• Asia Pacific Sovereign CDS Index 59.0 +.75 basis point.

• S&P 500 futures -.02%.

• NASDAQ 100 futures -.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ASML)/.92
• (BAC)/.29
• (SCHW)/.24
• (DAL)/.44
• (PNC)/1.71
• (PGR)/.43
• (USB)/.76
• (KMI)/.23
• (NFLX)/.64
• (SNDK)/.70 

Economic Releases
8:30 am EST

• Empire Manufacturing for April is estimated to rise to 7.17 versus 6.90 in March.
  

9:15 am EST

• Industrial Production for March is estimated to fall -.3% versus a +.1% gain in February.
• Capacity Utilization for March is estimated to fall to 78.6% versus 78.9% in February.
• Manufacturing Production for March is estimated to rise +.1% versus a -.2% decline in February.
  

10:00 am EST

• The NAHB Housing Market Index for April is estimated to rise to 55.0 versus 53.0 in March.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +3,540,000 barrels versus a +10,949,000 barrel gain the prior week. Gasoline Supplies are estimated to fall by -660,000 barrels versus a +817,000 barrel gain the prior week. Distillate inventories are estimated to rise by +255,000 versus a -250,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise +.64% versus a +.7% gain the prior week.

2:00 pm EST

• US Fed Beige Book Release.

4:00 pm EST

• Net Long-Term TIC Flows.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Lacker speaking, Fed's Bullard speaking, ECB rate decision, Eurozone CPI report, Australia Unemployment report, Bank of Canada rate decision, weekly MBA mortgage applications report, BofA Merrill Oil/Gas Conference, Needham Health Care Conference, (WBA) analyst day and the (WDAY) analyst day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity 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 day.