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.


While we want you to share, we ask you use the functions on-site rather than copy/paste. See T's & C's for details. http://www.euromoney.com/Article/3222433/Liquidity-crunch-a-catalyst-for-big-China-slowdownanalysts.html?copyrightInfo=true

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.

Stocks Rising into Final Hour on Lower Long-Term Rates, Central Bank Hopes, Oil Bounce, Food/HMO Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Most Sectors Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 15.02 -2.40%

• Euro/Yen Carry Return Index 144.78 -.42%

• Emerging Markets Currency Volatility(VXY) 9.35 -1.27%

• S&P 500 Implied Correlation 61.86 -.74%

• ISE Sentiment Index 79.0 +1.28%

• Total Put/Call .73 -17.98%

• NYSE Arms .92 -48.17% 

Credit Investor Angst:

• North American Investment Grade CDS Index 69.08 -.45%

• America Energy Sector High-Yield CDS Index 1,643.0 +1.21%

• European Financial Sector CDS Index 86.10 +2.92%

• Western Europe Sovereign Debt CDS Index 28.68 +2.50%

• Asia Pacific Sovereign Debt CDS Index 64.14 +.93%

• Emerging Market CDS Index 320.99 +.02%
  

• iBoxx Offshore RMB China Corporates High Yield Index 120.43 +.01%

• 2-Year Swap Spread 26.0 -1.0 basis point

• TED Spread 28.0 +.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -19.25 +.5 basis point

Economic Gauges:

• 3-Month T-Bill Yield .00% unch.

• Yield Curve 163.0 -3.0 basis points

• China Import Iron Ore Spot $62.91/Metric Tonne -2.09%

• Citi US Economic Surprise Index -32.90 -2.5 points

• Citi Eurozone Economic Surprise Index -.6 -3.9 points

• Citi Emerging Markets Economic Surprise Index -17.80 -1.5 points

• 10-Year TIPS Spread 1.91 +4.0 basis points

Overseas Futures:

• Nikkei 225 Futures: Indicating +42 open in Japan 
• China A50 Futures: Indicating -251 open in China

• DAX Futures: Indicating +17 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:      

• Tsipras Brands IMF Criminal as Merkel Focuses on Greek Solution. Prime Minister Alexis Tsipras hurled criticism at Greece’s creditors, accusing the International Monetary Fund of “criminal” responsibility for his country’s predicament. Addressing lawmakers in Athens on Tuesday, Tsipras gave no sign of backing down in the standoff over Greece’s bailout. Instead, he blasted the IMF’s adherence to austerity and accused the European Central Bank of using tactics that were akin to “financial asphyxiation.” “The situation in which we find ourselves today is that IMF positions prevail when it comes to the strictness of austerity measures asked, while at the same time EU positions prevail when it comes to the denial for any discussion about Greek debt sustainability,” Tsipras, 40, said.
• Euro Risk Signals Flash Red for a Third Day as Greek Talks Stall. Indicators of risk surged for a third day across the euro zone as a Greek standoff with its creditors continued. The Markit iTraxx Crossover index of credit-default swaps on high-yield companies climbed as much as 18 basis points, the biggest daily gain since April, and was up 12 basis points to 335 basis points at 12:35 p.m. in London. An index linked to the subordinated debt of financial companies rose to 176 basis points, the highest in almost eight months.
• French Bonds Infected as Greek Crisis Swells Euro-Region Spreads. Europe’s bond selloff is spreading to markets traditionally viewed as safer, with only Germany remaining unscathed by Greece’s impasse with creditors. The extra yield, or spread, that investors get for holding French or Belgian 10-year bonds rather than benchmark German debt surged above 50 basis points for the first time this year. Even bonds of the Netherlands and Finland, which have top AAA grades from at least two of the three major ratings companies, are suffering as the fallout from the Greek debacle spreads beyond the euro-zone periphery. “The semi-core is selling off,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “On the other hand, the gains the bunds have made have also been rather disappointing. With the Greek story you could have expected the bund to make more ground.” The 10-year yield spread between French and German debt widened three basis points, or 0.03 percentage point, to 48 basis points as of 10:38 a.m. in London. It climbed as high as 54, the most since March 2014, up from 33 as recently as June 11.
• Spanish 10-Year Bond Yield Rises Above 2.5% Amid Greece Impasse. Spanish government bonds dropped, pushing the 10-year yield above 2.5 percent for the first time since August, as Greece signaled it won’t make further concessions this week to unlock the bailout funds needed to avoid default. Irish and Portuguese bonds also declined as concern over the turmoil in Greece increased investor perceptions of risk in other peripheral euro-area nations. Greece has no plans to present new proposals at a meeting of European finance ministers in Luxembourg on June 18, Finance Minister Yanis Varoufakis told Bild newspaper. German 10-year bunds rose for a fourth day, boosted by demand for the assets as a haven.
• I Knew Italy's Economy Was Bad, but the Truth May Be Even Grimmer. (graph)
• German Investor Confidence Drops as Greece Clouds Outlook. German investor confidence fell for a third month as the risk of a Greek debt default stoked uncertainty in Europe’s largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, slid to 31.5 in June from 41.9 in May. That’s the lowest level since November. Economists had forecast a decline to 37.3, according to the median of 36 estimates in a Bloomberg survey.
• China Bubble Debate Turns to When, Not If, Stocks Will Tumble. It’s no longer a question of whether China’s stock-market rally is a bubble, but when the bubble will burst. That’s the refrain from a growing number of analysts as valuations climb to levels that by some measures already exceed the peak of China’s last equity mania in 2007. A market crash may come within six months, Bocom International Holdings Co. said Tuesday, citing an analysis of global bubbles over 800 years that shows the speed of gains in China mirroring past market peaks. Macquarie Investment Management, whose Asian stock fund is outperforming 97 percent of peers in 2015, has already eliminated exposure to mainland shares after turning bearish for the first time in seven years. The government may engineer a correction if valuations rise much further, according to CLSA Ltd. “We are probably going to be in a very volatile trading period before a crash eventually happens,” Hao Hong, the chief China strategist at Bocom International in Hong Kong, said in an interview with Bloomberg Television. “It is plain that China is in a bubble.”
• Real Cost of Chinese Stocks Dwarfs 2007 Bubble. Chinese stocks are getting a lot more expensive than the benchmark Shanghai Composite Index suggests. Using the most-watched mainland equity gauge as a guide, an investor might conclude that valuations are pricey, though still within reason: the index trades near a five-year high of 19 times estimated earnings -- well below the level of 36 reached during the 2007 bubble -- and in the same ballpark as the Standard & Poor’s 500 Index’s multiple of 17. The problem with the Shanghai Composite is that 94 percent of Chinese stocks trade at higher valuations than the index, a consequence of its heavy weighting toward low-priced banks. Use average or median multiples instead and a different picture emerges: Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets. “The market rally is more fragile than in 2007,” Francis Cheung, a strategist at CLSA Ltd. in Hong Kong, wrote in a June 12 report. “With the de-rating of banks and other large SOEs that make up the largest part of the index, it is likely more accurate to compare valuation with median PE.” The Shanghai index lost 3.5 percent at the close Tuesday, taking its decline this week to 5.4 percent. 
• Guotai Junan Targets $4.8 Billion in Biggest China IPO Since ’10. Guotai Junan Securities Co., China’s largest brokerage by revenue, is capitalizing on a world-beating stock rally by seeking $4.8 billion in the nation’s biggest initial share sale in almost five years. Guotai Junan will sell shares at 19.71 yuan each to raise as much as 30.1 billion yuan ($4.8 billion), the brokerage told Shanghai’s stock exchange on Tuesday. It will be the biggest domestic initial offering since China Everbright Bank Co. raised $3.2 billion in August 2010, data compiled by Bloomberg show.
• Europe Stocks Halt 2-Day Drop as Swiss Shares Rise; Greece Falls. European stocks rebounded from their biggest two-day drop since April, helped by a rally in German shares. Greek shares fell amid a debt impasse. The Stoxx Europe 600 Index added 0.6 percent to 385.49 at the close of trading. It reversed losses of 1.1 percent after the European Commission said it would restart talks with Greece if offered new proposals. Germany’s DAX Index also swung to gains, rising 0.5 percent as a drop in the euro helped exporters. Spanish and Portuguese shares erased declines exceeding 1.5 percent.
• Copper Falls to 3-Month Low as Metals Sag on Growth Woes. Copper fell to a three-month low on concern that a cooling economy in China and Greece’s debt turmoil will stymie global growth, cutting demand for raw materials. Investors this month pulled $37.6 million from U.S. exchange-traded funds backed by industrial metals, a 10 percent drop that is the biggest of any commodity group, data compiled by Bloomberg show. Money managers have turned net-bearish on copper for the first time since February, U.S. government data show.
• CBO Warns on Growing U.S. Debt. (video)

Wall Street Journal:

• House Gives Itself Until July 30 to Reconsider Trade Legislation. Vote to extend deadline leaves President Obama’s trade agenda in limbo.

Fox News: 

• Trump announces White House bid, joins crowded GOP field. (video)

ZeroHedge: 

• What's The Real Unemployment Rate In The US? (graph)
• Forget "Happy Endings" - One Bank Sees Greek "Disorderly Default" As The Most Likely Outcome.
• There Is One Problem With Europe's So-Called Austerity. (graph)
• Fed Frontrunning Trumps Hellenic Turmoil (For Now). (graph)
• Fannie Mae Is At It Again: Loan-To-Value Ratio Now Higher Than During Housing Bubble. (graph)
• Spot The Mindblowing Housing Permits Outlier. (graph)
• "Lehman Weekend" Looms For Greece As Europe Readies "Emergency" Sunday Meeting.
• Regulators Try To Clamp Down On Soaring China Margin Loans "Without Triggering Panic". (graph)
• "Eurozone Breakup" Fears Soar As Fund Managers Now Think Probability Of Greek Deal Same As Default. (graph)
• "Major" Equity Index Breaking Down. (graph)
• Cashing In On The Death Of The "American Dream": Rental Permits Soar Most Since 1990. (graph)
• Housing Starts Plunge 11% As April "Bounce" Fades, Permits Soar To 8 Year High. (graph)
• OMT Decision By EU Top Court Sets Europe On Renewed "Collision Course" With Germany.

Business Insider:

• Stratfor has 11 chilling predictions for what the world will look like a decade from now.
• 2 shocking polls show a Democratic challenger picking up steam against Hillary Clinton.
• The FBI is investigating the St. Louis Cardinals for allegedly hacking the Houston Astros.
• ISIS is gaining momentum in the worst possible way.

Telegraph: 

• Greek PM: IMF has 'criminal' responsibility for situation - live. Finnish finance minister says Greece needs a "miracle" as European stocks slide on fears of Greek crisis contagion. 
• Grexit beckons: Greece on brink of euro exit as it faces economic meltdown. Embattled country could be forced out by Germany after politicians warn 'enough is enough' as it lurches towards default on €1.5bn debt.

Bear Radar

Style Underperformer:

• Mid-Cap Growth +.19%

Sector Underperformers:

• 1) Coal -2.06% 2) Gold & Silver -1.15% 3) Hospitals -.91%

Stocks Falling on Unusual Volume:

• CAPL, AAVL, TAHO, OSK, SXCP, LAKE, CMT, CI, GBX, BLCM, SUPN, HUM, MEI, CNSI, WLDN, ZPIN, DOOR, LECO, MMLP, SSTK, ATRA, XNET, ONCE, URI, TEX, URI and KEYW

Stocks With Unusual Put Option Activity:

• 1) CAG 2) HLT 3) ADBE 4) MGM 5) ETN
  

Stocks With Most Negative News Mentions:

• 1) AAVL 2) URI 3) AIG 4) SPF 5) GBX
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Small-Cap Value +.33%

Sector Outperformers:

• 1) HMOs +1.08% 2) Foods +.86% 3) REITs +.74%
  

Stocks Rising on Unusual Volume:

• COTY, CDK, ALKS, POZN, BCC and AERI

Stocks With Unusual Call Option Activity:

• 1) CAG 2) HLT 3) AXLL 4) LYB 5) TBT
  

Stocks With Most Positive News Mentions:

• 1) EBAY 2) AERI 3) LMT 4) UA 5) COTY
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 11.4% Below 100-day average
• 8 Sectors Rising, 2 Sectors Declining
• 51.0% of Issues Advancing, 44.7% Declining
• 40 New 52-Week Highs, 69 New Lows
• 47.6% of Issues Above 200-day Moving Average
• Average 14-Day RSI 40.5
• Vix 15.33
• Total Put/Call .82
• TRIN/Arms .94