Stocks Reversing Slightly Higher into Final Hour on Central Bank Hopes, Short-Covering, Technical Buying, Energy/Utility Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Around Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 13.99 +2.04%

• Euro/Yen Carry Return Index 144.84 +.37%

• Emerging Markets Currency Volatility(VXY) 11.75 +8.29%

• S&P 500 Implied Correlation 54.98 -1.75%

• ISE Sentiment Index 50.0 -10.71%

• Total Put/Call 1.04 -5.45%

• NYSE Arms .80 -48.18% 

Credit Investor Angst:

• North American Investment Grade CDS Index 76.29 +1.27%

• America Energy Sector High-Yield CDS Index 1,887.0 +1.93%

• European Financial Sector CDS Index 79.03 +2.27%

• Western Europe Sovereign Debt CDS Index 22.77 +4.50%

• Asia Pacific Sovereign Debt CDS Index 70.58 +2.59%

• Emerging Market CDS Index 335.06 +.76%
  

• iBoxx Offshore RMB China Corporates High Yield Index 120.81 -.23%

• 2-Year Swap Spread 25.0 unch.

• TED Spread 21.75 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -20.0 -.75 basis point

Economic Gauges:

• 3-Month T-Bill Yield .10% unch.

• Yield Curve 148.0 +2.0 basis points

• China Import Iron Ore Spot $56.31/Metric Tonne +.16%

• Citi US Economic Surprise Index -4.1 +1.8 points

• Citi Eurozone Economic Surprise Index 12.0 +.1 point

• Citi Emerging Markets Economic Surprise Index -7.7 -2.9 points

• 10-Year TIPS Spread 1.64 -2.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 4.80 +.51

Overseas Futures:

• Nikkei 225 Futures: Indicating -82 open in Japan 
• China A50 Futures: Indicating -156 open in China

• DAX Futures: Indicating +113 open in Germany

Portfolio: 

• Higher: On gains in my biotech/tech sector longs and emerging markets shorts 

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:  

• Yuan Bear in Wilderness in 2014 Now Warns of China Credit Crisis. In a March 2014 report, Daiwa Securities Co. senior economist Kevin Lai forecast a 10 percent drop in the yuan by the end of 2015 and warned China needed “very delicate” policy to avert a crisis. He’s still worried, and no longer so alone. The currency has devalued 3.7 percent since Tuesday morning, when the People’s Bank of China cut its daily reference rate by a record and said it would let the market play a greater role in the fixing. Lai, whose uber-bearish prediction is now halfway to fulfillment, estimates China has some $3 trillion of dollar-denominated debt outstanding which has suddenly become more expensive. “The PBOC is telling people that if they want to take their money out, please do,” Lai said in an interview Wednesday. “As the selling pressure increases, this could spin into a currency and a credit crisis. They’re exporting the crisis.” Chinese corporations have sold bonds and gotten bank loans offshore at a record pace in the past three years and now are the biggest component of major fixed-income indexes in the region. These issuers will buy dollars as they seek to protect themselves from the currency move, Lai said, increasing the pressure on the yuan and making it even more difficult to pay back their foreign dues. Already there are signs of cash draining from the country. The one-year sovereign yield jumped 20 basis points in two days and the similar interest-rate swap rose nine basis points.

• Schork Concerned on 'Orwellian' China Market Manipulation. (video)

• China’s Ailing Growth Fuels Surge in Emerging-Market ETF Hedges. (video) Emerging-market equities’ descent into a bear market amid a slowdown in China’s economy has ignited hedging in a popular exchange-traded fund. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, which tracks hedging costs on the iShares MSCI Emerging Markets fund, jumped to the highest level in 18 months versus a similar gauge for the Standard & Poor’s 500 Index. Investors in the ETF are bracing for more swings as they watch China’s deteriorating economy drag down developing markets amid the Federal Reserve’s intentions to tighten monetary policy for the first time in more than nine years.  

• Ukraine Says Attacks on Troops Intensify as Unrest Worsens. Ukraine said pro-Russian militants intensified attacks on government troops overnight in a bid to win ground, a sign the recent surge in fighting is worsening. Tensions in the 16-month conflict rose this week as the army reported renewed assaults on a village in the Donetsk region, an accusation the separatists deny. That prompted Ukraine to redeploy heavy artillery there that was removed under a February peace accord. The rebels, who control large swathes of the former Soviet republic’s easternmost regions, are trying to advance again toward the village, located near the port of Mariupol, military spokesman Andriy Lysenko said.

• Germany Says It Can’t Back Greek Bailout Plan Yet. Germany’s government withheld approval of the draft bailout plan for Greece, saying a bridge loan remains an option if a full aid program isn’t agreed in time for a payment to the European Central Bank due next week. Euro-area governments need time to assess the preliminary accord between Greece, its international creditors and the European Stability Mechanism before possible approval of a proposed 85 billion euros ($95 billion) in aid, Finance Ministry spokesman Juerg Weissgerber said Wednesday. The ministry expects to have a position on the draft memorandum of understanding by the end of the week, he said.

• Market's Partying Like It's 1998, VAR Models Need a Xanax. Take a quick gander at the analysis below and see if you don't agree it's a pretty good summary of the recent state of play in financial markets as China launched the latest salvo in the global currency wars by devaluing the yuan. 

• China Sends Ominous Message to Junk Bond Buyers Already on Edge. China just darkened the future for riskier corporate credit around the world. The world’s second-biggest economy shocked markets this week by depreciating its currency by the most in two decades, with the goal of aligning the yuan more closely to the market rate. In response, the average price of dollar-denominated junk bonds plunged to its lowest level since 2011. Debt of some energy companies, including Energy XXI Gulf Coast Inc. and Sandridge Energy Inc., fell more than 5 percent on Tuesday alone, Bank of America Merrill Lynch index data show. And China’s move deepened losses on obligations issued by U.S. metals and mining companies, which are already suffering their highest default rate since 2003. Why is a cut in the yuan’s value such a huge deal for U.S. corporate credit? Because it indicates that China’s growth is slowing down, perhaps more than analysts expected, which directly affects industrial companies that rely on continual demand from the $10.4 trillion economy. The problem is particularly acute for commodity producers that have already been struggling to meet their bills in the face of lower natural-resources values.

• Bearish Wagers on Brazil Stocks Rise to Record as Ibovespa Falls. Bets on further declines in Brazilian shares climbed to a record amid forecasts Latin America’s largest economy is heading toward the worst contraction in 25 years. The Ibovespa led losses in the Americas. Short interest in the iShares MSCI Brazil Capped exchange-traded fund was at 34.3 percent of shares outstanding as of Tuesday, according to data compiled by London-based Markit and Bloomberg. That’s the highest since at least 2006. The benchmark stock gauge slumped to a six-month low.

• Brazil’s Plummeting Currency Forces Wall Street to Play Catch-Up. The selloff in Brazil’s currency is getting so bad that strategists can’t keep up. Even after cutting their forecasts by 20 percent this year, the most for any major currency, the estimates still trail the real’s current trading level. Banco Bilbao Vizcaya Argentaria analysts are revising their forecasts for the third time in less than six weeks after the real’s descent to a 12-year low Thursday. Nine banks including Credit Suisse Group AG and Societe Generale SA already cut projections this month after the swoon rendered earlier calls obsolete. 

• First Blood to Ruble in New Currency War as Decline Exceeds Yuan. If China’s devaluation is going to set off a currency war, Russia will be pretty hard to beat. The yuan’s 1.8 percent plunge on Tuesday was topped by the 2.3 percent slide in the ruble, the largest of any major currency. Even before China’s announcement on Tuesday, most international futures traders were betting on further declines for the ruble, this quarter’s worst-performing major currency with a drop of 15 percent.

• German Economy Adds China Concerns to Greek Worries. (video)

• Europe Industrial-Output Slump Puts Damper on Short-Term Outlook. Industrial production in the euro area fell more than economists forecast in June, raising some questions about the state of the region’s recovery. After Eurostat reported a 0.4 percent slump on the month, leaving production down 0.3 percent over the quarter, Credit Suisse Group AG said the number “implies downside risks” to its forecast for gross domestic product. For economists at ING Groep NV, the report “sheds a concerning light on the manufacturing recovery in 2015.”

• Honeymoon Over for Renzi as Italian Reality Confounds Ambitions. The political honeymoon is long over for Italian Prime Minister Matteo Renzi, and it will be tough to square his latest vote-catching plan with the debt-plagued economy. The timid exit from a record-long recession has left many Italians frustrated, with youth unemployment at 44.2 percent in June. His popularity at a record low in public opinion polls, 40-year-old Renzi has pledged three years of tax cuts worth 35 billion euros ($39 billion) from 2016 to 2018 to regain momentum.   

• Emerging Bear-Market Slump Deepens as Yuan Pummels Currencies. Emerging-market stocks sank to the lowest level since 2011, extending declines in a bear market, and currencies slid as China’s falling yuan spurred bets developing nations will weaken their currencies to stay competitive. Investors exiting riskier assets drove stocks from Indonesia to South Africa and Turkey down at least 1.4 percent. Malaysia’s ringgit sank beyond 4 per dollar for the first time since 1998 as currencies in South Korea and Indonesia lost at least 1 percent. Eastern European currencies, regarded as haven investments amid central bank stimulus in the euro area, outperformed peers. Brazil’s real weakened for a second day and the Ibovespa dropped to the lowest level since March.

• China Spurs Rout in Europe Stocks Eclipsing Worst of Greece Saga. “Euro stocks have two strong winds pushing against them: the Chinese consumer is going to be hiding behind the weaker yuan, and stocks are selling in sympathy to the expected lack of exports,” said Daniel Weston, chief investment officer of Aimed Capital in Munich, Germany. “The demand expectation from China is having a big rethink.” Today’s selloff, led by automakers and consumer companies, was worse than the biggest one-day slides that accompanied Greek’s impasse with creditors in June and July. Losses in companies BMW AG and Daimler AG pushed the Stoxx 600 Auto & Parts gauge down 7.9 percent in two days, the most since 2011.

• Oil at $30 Is No Problem for Some Cost-Cutting Bakken Drillers. The lowest crude prices since 2009 might still not be enough to end the U.S. energy renaissance. Some parts of North Dakota’s Bakken shale play are profitable at less than $30 a barrel as companies tap bigger wells and benefit from lower drilling costs, according to a Bloomberg Intelligence analysis. That’s less than half the level of some estimates when the oil rout began last year. The lower bar for profitability is one reason why U.S. oil production has remained near a 40-year high even as crude prices fell more than 50 percent over the past year to the lowest level since March 2009.

• IEA Sees Oil Glut Through 2016 After Reaching 17-Year High. The global oil glut will last through 2016 as the strongest demand growth in five years and faltering supply fail to clear the surplus, according to the International Energy Agency. Record inventories will expand further even as consumption growth doubles in 2015 and supplies outside OPEC contract next year for the first time since 2008, the IEA predicted. Stockpiles won’t be diminished until the fourth quarter of next year, or even later if sanctions on Iranian crude are lifted, the agency said.

• Corn Futures Plunge as U.S. Unexpectedly Raises Forecast. Corn and soybeans slumped in Chicago by the maximum daily limit after the U.S. unexpectedly raised its crop forecasts from last month’s predictions, citing better yields than previously anticipated. The corn harvest will total 13.686 billion bushels, compared with 13.53 billion projected in July, the U.S. Department of Agriculture said Wednesday in its first survey-based estimate for the 2015-16 crop. That’s also higher than the 13.332 billion-bushel average of 31 analysts surveyed by Bloomberg News. Last year’s crop was a record 14.216 billion bushels. 

• Dudley Says He’s Hopeful for Fed Rate Liftoff in ‘Near Future’. The Federal Reserve is approaching the moment when it can start raising interest rates and the exact timing will be dictated by incoming economic data, said New York Fed President William C. Dudley. “Hopefully, we’re going to make progress in terms of our goals” for maximum sustainable employment and inflation of around 2 percent, Dudley told an audience on Wednesday after delivering a speech in Rochester, New York. “And so hopefully, in the near future, we’ll be able to actually begin to raise interest rates. When that is precisely, depends on the data.”

• Biotech on the Brink of Joining Half the S&P 500 Down 10% From High. The bull run in biotechnology is having its worst month in more than a year. Down in four of the last five days, companies tracked by the Nasdaq Biotechnology Index have fallen about 8 percent since July 20. They’re in danger of joining more than half the stocks in the Standard & Poor’s 500 Index nursing losses that meet the definition of a correction. Like cable television and movie stocks that plunged last week, biotech shares have been almost completely immune to weakness for more than six years, rising more than sixfold since March 2009. Weakness in the groups has been a troubling sign in an equity market where the Dow Jones Industrial Average has dropped in nine of the last 10 days.

• John Paulson Is Starting to Cash In on His Big Land Grab. Hedge-fund manager John Paulson, who made billions wagering against subprime mortgages, has started to profit from a U.S. housing bet that took longer to ripen: owning land. After acquiring about 35,000 lots since 2009, Paulson & Co. shifted toward selling last year and is accelerating its disposition pace, according to Michael Barr, who manages the firm’s real estate. Paulson’s funds had invested $770 million, mostly in lots bought out of bankruptcies or other distressed sales, and acquired two dozen communities in Arizona, California, Colorado, Florida and Nevada.

 Wall Street Journal:

• Goldman Sachs(GS) to Give Out ‘Secret Sauce’ on Trading. New open source platform is an attempt by Goldman to bolster its technology bona fides.

CNBC: 

• Cashin: These are the Street's real China concerns. (video)

• $30 oil coming sooner than you think: Kilduff. (video)

• Strategist: Financial market rout like 2008's is ahead.

Zero Hedge:

• 8 Capital Markets 'Threats' To The Central Bank Narrative.

• Caught On Tape: Mushroom Cloud Forms After Massive Explosion Rocks Chinese Port City. (pic)

• Greece Isn't Fixed... By A Long Way.

• "This Will End Badly" High Yield Bonds Tumble To Worst Since 2011. (graph)

• Italian Bond Futures Flash-Crash Into Close. (graph)

• Blood On The European Streets As EUR-Yuan Carry Unwinds Crush Stocks. (graph)

• Dow Gives Up Post-QE3 Gains, S&P Breaks Below Key Technical Support. (graph)

• BABA Battered To Record Lows. (graph)

• 10 Year Yields Plunge: A Very Confused Wall Street Tries To Predict What Happens Next. (graph)

• Hillary Clinton Turns Over E-mail Server To Feds As Bernie Sanders Surges Ahead In New Poll.

Business Insider: 

• This brokerage set up a secret team that traded against its own clients.

• Twitter(TWTR) is a messaging app now that it's finally removed the 140 character limit on direct messages.

• ALBERT EDWARDS WARNS: Prepare for overwhelming 'waves of deflation' to suck us into recession.

• Frugal customers are becoming an ominous threat to Macy's(M).

• China released 3 big economic stats and they were all bad.

Reuters:

• China central bank under pressure to weaken yuan further. China's move to devalue its currency reflects a growing clamor within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead, sources said. The yuan has fallen almost 4 percent in two days since the central bank announced the devaluation on Tuesday, but sources involved in the policy-making process said powerful voices inside the government were pushing for it to go still lower.

• Chinese Steel Exporters Cut Prices on Weaker Yuan. Chinese steelmakers cut prices $5-$10/t on rebar, billet, citing people familiar with the matter.

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.51%

Sector Underperformers:

• 1) Airlines -2.81% 2) I-Banks -2.76% 3) Gaming -2.52%

Stocks Falling on Unusual Volume:

• PN, KWEB, INCR, FOSL, AHP, FRPT, ACM, ASCMA, SLH, LPCN, M, ZBRA, HF, JD, BABA, CEA, CLM, FNBC, GOF, MMI, EVDY, BSTC, CCD, LHO, BAC, BLUE, PACW, RENT, YUM, INVN, SF, PANW, HT, TIF, AFSI, FTAI, YHOO, NVAX, PCTY, SIVB, SKX, GPRO, OCUL, GIII and VTL

Stocks With Unusual Put Option Activity:

• 1) HEDJ 2) KBH 3) CY 4) KSS 5) M
  

Stocks With Most Negative News Mentions:

• 1) LB 2) FOSL 3) T 4) M 5) BABA
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Mid-Cap Value -1.21%

Sector Outperformers:

• 1) Gold & Silver +4.53% 2) Utilities +.68% 3) Oil Service +.34%
  

Stocks Rising on Unusual Volume:

• W, ENV, FIS, CREE, PE, MYGN, FNV, AEM, GOLD, SLW, CDK, GG, CF and NEM

Stocks With Unusual Call Option Activity:

• 1) SWFT 2) PNK 3) FOSL 4) AGNC 5) CREE
  

Stocks With Most Positive News Mentions:

• 1) KELYA 2) CSC 3) GBT 4) FOGO 5) EXC
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 41.0% Above 100-day average
• 1 Sector Rising, 9 Sectors Declining
• 23.6% of Issues Advancing, 74.6% Declining
• 29 New 52-Week Highs, 237 New Lows
• 38.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 41.1
• Vix 15.8
• Total Put/Call 1.15
• TRIN/Arms 1.13

Wednesday Watch

Evening Headlines 

Bloomberg:

• Yuan Set for Biggest Two-Day Drop Since 1994 as China Central Bank Devalues. The yuan was set for its biggest two-day drop in two decades, dragging currencies lower across Asia, after the People’s Bank of China set the weakest reference rate since 2012. The yuan fell 1.4 percent to 6.4105 per dollar as of 9:59 a.m. in Shanghai, after sliding 1.8 percent on Tuesday. The central bank lowered its daily fixing by 1.6 percent to 6.3306, a 0.1 percent discount to the previous closing level of 6.3231. The yuan sank 1.6 percent in Hong Kong’s offshore trading. “Today’s weak fixing indicates the PBOC wants to see further depreciation in the yuan, as yesterday’s drop won’t be enough to prop up China’s exports,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “Capital will flee from China to the U.S. due to the economic slowdown and the yuan devaluation.”

• China’s Devaluation May Exacerbate Capital Outflows. (video)

• What’s China’s Biggest Problem? (video)

• Brazil Rating Cut by Moody’s to Cusp of Junk; Outlook Stable. Moody’s Investors Service lowered Brazil’s rating to the cusp of junk in the second downgrade since President Dilma Rousseff came to office. Stocks and the real pared losses as it signaled another cut isn’t likely soon. Brazil’s grade was cut by one notch to Baa3, with a stable outlook. Standard & Poor’s cut its rating to the lowest investment grade in March 2014, the nation’s first downgrade in a decade. The move adds pressure to Rousseff’s economic team, led by Finance Minister Joaquim Levy, who has reduced spending and raised taxes to shore up fiscal accounts. With Brazil’s economy heading for its worst contraction in a quarter century, government revenue is falling more than expected. “Weaker-than expected economic performance, the related upward trend in government expenditures and lack of political consensus on fiscal reforms will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next,” Moody’s said in a statement Tuesday.

• Emerging Market Stocks Enter Bear Market. Emerging-market stocks entered a bear market and currencies slid on concern China will curtail imports after the biggest slide in the yuan in two decades. The selloff took the MSCI Emerging Markets Index’s decline from a peak last September to 20 percent, the threshold for a bear market. The gauge declined 1.1 percent to 878.27 on Tuesday, ending a bull rally that started in 2012, according to data compiled by Bloomberg. The yuan helped lead declines among 24 developing-nation peers, as a Bloomberg index of 20 most-traded emerging currencies slumped 0.7 percent to a record low. Credit and currency markets in Brazil, Peru and Chile are exposed because of their reliance on China for exports, Commerzbank AG said. Russia and South Africa count China as their biggest trading partner. “There is a great deal of nervousness around emerging markets now that the general economic environment has been less favorable for them,” Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, said by phone. “The fact that China decided to let its currency drift lower will add even more pressure.”

• Australia Bank Capital Raisings Surpass Crisis After CBA Offer. Commonwealth Bank of Australia is planning a A$5 billion ($3.6 billion) rights offer that will take capital raising by the nation’s biggest banks this year to levels surpassing the global financial crisis. In response to stricter regulatory requirements -- put in place partly to buttress lenders against a possible slump in the country’s booming property market -- the bank and its three largest rivals have now revealed plans to raise A$16 billion this year. That exceeds the A$13 billion raised to bolster balance sheets in the aftermath of the 2008 financial crisis.

• Currency Rout Goes Global as Jen Sees Risk of 50% Loss on China. As bad as things are for emerging-market currencies, China is about to make them a whole lot worse. Its devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil's real to Indonesia's rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen. 

• Won Falls to Three-Year Low on Rate-Cut Bets After Yuan Devalued. The won fell to the lowest in more than three years amid speculation the Bank of Korea will cut interest rates further to spur growth after China devalued the yuan. South Korea faces uncertainties from China, the nation’s biggest overseas market, and persistent export weakness, Finance Minister Choi Kyung Hwan said at a meeting in Seoul Wednesday. The People’s Bank of China weakened the reference rate for its currency by record Tuesday amid a deepening slowdown in Asia’s largest economy. All 16 economists surveyed by Bloomberg see the BOK keeping borrowing costs at an unprecedented 1.5 percent on Thursday, after reductions in June and March. The won fell 0.3 percent to 1,182.88 a dollar as of 9:57 a.m. in Seoul, according to data compiled by Bloomberg. That’s the lowest since June 2012. The currency has declined 7.8 percent this year. 

• Malaysia Consumers Send Najib Warning on Growth as Ringgit Drops. There’s a growing risk for the Malaysian economy, and it’s not just the plunging currency, falling oil exports or the political scandal. The warning signs can be found right on the doorstep of Prime Minister Najib Razak’s party headquarters. At the Putra World Trade Centre in Kuala Lumpur, seat of the United Malays National Organisation, cafe employee Noraini Ibrahim is feeling gloomy and spending less due to rising living costs. The cashier even curbed festivities during Hari Raya Aidilfitri, the celebration that marks the end of the Muslim fasting month. 

• Singapore Stocks Head for Biggest Drop in Two Years on China. Singapore stocks tumbled, with the benchmark Straits Times Index heading for its biggest decline since June 2013 amid concerns China’s currency devaluation will hurt bank earnings and slow economic growth. The Straits Times Index sank 2.5 percent to 3,075.27 as of 10:37 a.m. in Singapore, the most in the Asia-Pacific region. DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., the nation’s three key lenders, slumped at least 2.9 percent, among the eight biggest decliners on the benchmark measure.

• Chinese Stocks Slump in Hong Kong as Yuan Plunges for Second Day. Chinese stocks trading in Hong Kong fell the most in a week after the central bank cut the value of the yuan for a second day. The Hang Seng China Enterprises Index in Hong Kong slid 1.1 percent to 11,138.24 at 9:55 a.m. local time.

• Asian Stocks Head for Almost Seven-Month Low as Yuan Tumbles. Asian stocks fell, with the regional benchmark index heading for its lowest close since January, after China cut the value of the yuan for a second day, sending equity indexes across the region lower. The MSCI Asia Pacific Index slumped 1.6 percent to 137.88 as of 10:42 a.m. in Tokyo.

• Cheap Debt Evaporates for Junk Companies in Oil's Cruel Summer. The weakest corporate borrowers are finding the days of free-flowing credit quickly evaporating. The weakest corporate borrowers are finding the days of free-flowing credit quickly evaporating. The $39.6 billion of junk-rated bonds and loans issued since July is the least since the summer of 2008, according to data compiled by Bloomberg. For those that are coming to market, many are paying up or struggling to find buyers at terms they can stomach. Appetite for energy companies, in particular, has vanished just as they need to refinance big credit lines they took out when oil was more than twice its current price.

• Slumping Yuan Threatens More Gloom for World’s Metals Producers. It’s just what global producers of steel and aluminum didn’t need: a yuan devaluation that makes the flood of exports from the world’s biggest producer even cheaper. China’s shipments of steel and aluminum, used in everything from fridges to skyscrapers, surged to a record this year as the slowing economy left a domestic surplus with nowhere else to go. The surprise move by the central bank, which left the yuan heading for the biggest two-day slump in 21 years, make the products cheaper still, threatening more pain for world rivals struggling with lower prices.

• Treasuries Are a Winner as China Exports Deflation Says Bill Gross. Bill Gross said deflation will wash up on other shores after China devalued its currency, sending investors into Treasuries. ``The weak Chinese economy seems to require a competitive devaluation against other Asian producers which points to weak global growth, lower commodity prices and again, lower inflation worldwide,'' Gross, money manager at Janus Capital Group Inc., wrote in an e-mailed response to questions after the People’s Bank of China cut the yuan’s reference rate by the most in two decades to combat an export slump. ``The disinflationary/deflationary effect will keep 10- and 30-year Treasuries well bid.’’

• Parts of 2 Clinton E-Mails Now Earmarked as ‘Top Secret'. Intelligence officials have “recommended that portions of two of the four e-mails” in former Secretary of State Hillary Clinton’s personal e-mail account flagged by the intelligence community’s inspector general “should be upgraded to the top secret level,” State Dept. Spokesman John Kirby says in a statement.

• Berkshire(BRK/A) Risks S&P Rating Cut on Leverage From Buffett Deal. Warren Buffett’s Berkshire Hathaway Inc. may be downgraded by Standard & Poor’s after agreeing to buy manufacturer Precision Castparts Corp. for about $37.2 billion. Buffett’s company was put on CreditWatch Negative because of “uncertainty around the funding of the acquisition and how it may affect current cash resources and leverage metrics at the holding-company level,” the ratings firm said in a statement Tuesday on Omaha, Nebraska-based Berkshire. “To fund the acquisition, Berkshire is likely to use some of the capital resources available at its insurance companies.”

Wall Street Journal: 

• Cheaper Chinese Currency Has Global Impact. By devaluating yuan, Beijing is turning to a controversial growth-boosting tactic whose effects reverberate far and wide. Beijing signaled with its currency devaluation that the domestic economic slowdown it has failed to reverse is no longer a problem confined within China’s borders. It is now the world’s problem, too. Chinese officials have cut interest rates four times in the past 12 months, increased the amount of money banks can lend out and pumped funds into the stock market—measures meant to boost domestic demand in the world’s second-largest... 

• Devalued Yuan Set to Take Bite Out of Apple(AAPL), Give Boost to Chinese Rivals. Weakened currency means reduced China revenue when converted to dollars, while local firms will enjoy lower costs. Apple Inc. may be one of the biggest losers from China’s surprise decision to devalue its currency, while the U.S. company’s Chinese rivals and the main assembler of its iPhone are expected to be among the biggest winners. Foreign companies such as Apple and fast-food retailer Yum Brands Inc. rely heavily on sales in the world’s second-largest economy. For them, a weaker yuan means less revenue when the currency is converted back into U.S. dollars. Chinese manufacturers, on the

• The Democrats’ Socialist Surge. Bernie Sanders drew a crowd of 27,500 in Los Angeles on Monday. In the age of Obama, a liberal with a statist agenda fits right in. People who follow politics probably know that Bernie Sanders, the U.S. senator from Vermont who is challenging Hillary Clinton for the Democratic presidential nomination, is a socialist. Whether they give a fig is a separate matter, which may tell you something about today’s Democrats.

Fox News:

• FBI has Hillary Clinton emails from home server, official says. (video) The FBI has taken possession of thumb drives containing Hillary Clinton's emails, some of which have been deemed to contain highly sensitive classified information, according to a U.S. official briefed on the matter. The official was not authorized to be quoted publicly and spoke on condition of anonymity. Clinton's lawyer, David Kendall, turned over the emails after the FBI determined that he could not remain in possession of the classified information, the official said. The State Department previously had said it was comfortable with Kendall keeping the emails at his Washington law office.

• Wounded Iraq veteran speaks out against Iran deal. (video)

• After nuke deal, European companies rush into Iran to sell tools of oppression. (video) The lifting of international sanctions on Iran has triggered a stampede of European companies beating a path to Tehran to secure contracts, but some of the equipment being offered has dark, dual purposes in the hands of the Islamic Republic’s oppressive government. The cranes made by Austrian manufacturer Palfinger could be used to transform Tehran’s skyline, but also have played a starring role in Iran’s infamous public executions, where convicted criminals are often hanged from the giant booms high above public squares. German company Herrenknecht, whose senior officials visited the Iranian capital last month, makes industrial drilling rigs critics say could be used to nestle nuclear facilities deep inside mountains. Other companies lining up to do business with the mullahs make equipment that also could be used against Iran’s enemies – or its populace. “It reminds me of the economy and the industry of the Third Reich,” said Ariel Muzicant, vice president of Europe’s Jewish Congress.

CNBC: 

• Death cross: Dow forms perilous pattern.

Zero Hedge: 

• Global Markets Turmoil After China Extends Currency War To 2nd Day - Devalues Yuan To 4 Year Lows. (graph)

• The Fed Is Out Of Options, "QE Is All It Can Do Here" Art Cashin Predicts. (video)

• How Much More Faith In Central Banks Is Left? (graph)

• Just As Brazil Hits Rock Bottom, Things Are About To Get Even Worse. (graph)

• An Economic Earthquake Is Rumbling.

• The Cable Industry's Scariest Chart. (graph)

• How Economic Growth Fails. (graph)

• Biggest US Dark Pool Busted For Rigging Markets, Engaging In Precisely The Manipulation It Warned Against.

• 1997 Asian Currency Crisis Redux.

• Even The Dumb Money Is Dumping Stocks Now. (graph)

• How One Hedge Fund Is Betting Against The $1.2 Trillion Student Loan Bubble. (graph)

• Manic Monday Becomes Turmoil Tuesday As China Rocks The Global Boat. (graph)

Business Insider:

• GUNDLACH: If oil goes to $40 a barrel something is 'very, very wrong with the world'.

• Japan's 'no-holds-barred money printing campaign' has mauled auto sales.

• Capital is fleeing China.

• JIM RICKARDS: The worst is not over in China.

• Senators want Obama to press Xi Jinping over China's 'extraordinary assault' on human rights.

Reuters:

• Senior U.S. lawmakers condemn 'provocative' China currency devaluation. Senior U.S. lawmakers from both political parties on Tuesday condemned China's surprise currency devaluation as a grab for an unfair export advantage and urged inclusion of currency manipulation curbs in a new Pacific Rim trade deal. Several members of Congress said the devaluation of the yuan by China's central bank on Tuesday raised serious concerns. Some suggested it was further proof China cannot be trusted on currency policy. China's 2.0 percent yuan devaluation came weeks ahead of the first state visit to the United States by Chinese President Xi Jinping amid other tensions over trade, cybersecurity and international development. "It's time for the administration to focus more intensively on China's cheating and label the country a currency manipulator," Democratic Senator Bob Casey, a member of the Senate Finance Committee, said in a statement.

• Index-linked stock funds signal less faith in wobbly China market. Beijing's efforts to support collapsing shares have pulled Chinese stocks back to around 4,000 points, but index-linked funds trading at discounts tell a less optimistic story. Exchange-trade funds (ETFs) listed overseas, which track China's main share indexes, suggest the stock market is valued as much as 10 percent lower, and the gap between what ETFs price in and the actual market may widen the more Chinese stocks are seen to be artificially propped up. Outflows in China ETFs began in mid-June when the market tumbled 30 percent in a span of just one month after a 110-percent rally from November to June. Selling intensified after Beijing rolled out interventionist policies to support the market and allowed hundreds of companies to suspend trade. "These ETFs are just a reflection that foreigners are losing faith in the China market," said Nitin Dialdas, chief investment officer at Mandarin Capital Limited in Hong Kong. "Perhaps these ETFs now reflect the true value of the underlying stock market, given the heavy intervention in onshore stocks."

Financial Times:

• ‘Enormous’ rise in EM debt rings alarms bells. Emerging market private sector debt has surged by an “enormous” 33 per cent of gross domestic product since the global financial crisis, heightening the risk of financial crises, according to new analysis by JPMorgan. The findings come amid mounting expectations that the US Federal Reserve is drawing close to its first rate rise since the crisis, a move many fear many reduce capital flows to emerging markets, potentially raising borrowing costs even if central banks do not raise policy rates in order to defend their currencies. JPMorgan’s analysis suggests that the debt burdens of emerging market companies and households have jumped from 73 per cent of GDP in 2007 to 106 per cent at the end of 2014, virtually as high as in the developed world.

Telegraph:

• Greek bail-out: the crucial unanswered questions. A bail-out deal has been agreed, so that's that. Right? If only things were as simple as that.

21st Century Business Herald:

• China May Ban Brokerages From Off-Exchange Finance. China may ban brokerages, fund management cos. from doing off-exchange financing via asset-management schemes, citing people familiar with the matter. The regulator plans to revise rules on what securities cos. are banned from asset management.

Evening Recommendations 

Morgan Stanley:

• Raised (GOOG) to Overweight, target $820.

Night Trading

• Asian equity indices are -1.75% to -1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 118.75 +4.5 basis points.

• Asia Pacific Sovereign CDS Index 68.75 +4.25 basis points.

• S&P 500 futures -.50%.

• NASDAQ 100 futures -.43%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (BABA)/.58

• (M)/.76

• (BGG)/.39

• (CACI)/1.71

• (CSCO)/.56

• (FLO)/.22

• (NTES)/1.98

• (NWSA)/.05

Economic Releases

10:00 am EST

• JOLTS Job Openings for June are estimated at 5350 versus 5363 in May. 

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,735,830 barrels versus a -4,407,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -770,830 barrels versus a +811,000 barrel gain the prior week. Distillate inventories are estimated to rise by +1,658,330 barrels versus a +709,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.58% versus a +1.0% gain prior.

2:00 pm EST

• The Monthly Budget Deficit for July is estimated to widen to -$137.0B versus -$94.6B in June.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Dudley speaking, China Retail Sales/Industrial Production reports, Eurozone Industrial Production report, BoJ Minutes, $24B 10Y T-Note auction, Wasde Crop report, weekly MBA mortgage applications report, (CVA) analyst day, (T) analyst conference, (XLNX) general meeting, Oppenheimer Tech/Internet/Communications Conference, Canaccord Growth Conference and the (ROG) investor day could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by industrial and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 25% net long heading into the day.