Tuesday Watch

Evening Headlines
Bloomberg: 

• Bass Said to Start Separate Fund for China-Related Trades. Kyle Bass, the hedge fund manager predicting massive losses for Chinese banks because of nonperforming loans, is raising money to start a dedicated fund for bets in the country, according to a person with knowledge of the matter. Bass, the founder of Dallas-based Hayman Capital Management, will be holding calls with investors over the next few days to provide more details, said the person, who asked not to be named because the matter is private. As of mid-February, Bass already had about 85 percent of his main fund’s portfolio in China-related trades, he said at the time. Bass told investors earlier this year that China’s banking system may see losses more than four times those suffered by U.S. banks during the financial crisis, though analysts from China International Capital Corp. and Macquarie Securities have said his estimate overstates the real situation. The International Monetary Fund this month estimated China may have $1.3 trillion in loans extended to borrowers that don’t have sufficient income to cover interest payments, with potential losses equivalent to 7 percent of the country’s gross domestic product.
• Alere Said to Get Default Notice From Creditors on Filing Delay. Alere Inc., the medical-testing supplier under federal scrutiny, received a notice of default from a group of bondholders after the company delayed filing its 2015 financial statement, according to people with knowledge of the matter. Alere, which agreed in February to be bought by Abbott Laboratories for about $5.8 billion, hasn’t disclosed a default notice through regulatory filings. Some of the company’s senior lenders were told, over a private reporting system, of a March 21 default notice, the people said. They were given the information this month while Alere was negotiating for more time to file the annual financial report, said the people, who asked not to be identified because the information was private.
• SK Hynix Posts Lowest Profit in Three Years as Chip Prices Tank. SK Hynix Inc., an Apple Inc. supplier, posted its lowest quarterly profit in three years after sputtering demand for smartphones and computers pressured memory-chip prices. Operating income fell 65 percent to 561.8 billion won ($489 million) in the three months ended March, the Icheon, South Korea-based company said. That compares with the 593.4 billion-won average of analyst estimates compiled by Bloomberg and is the smallest since the first quarter of 2013.
• Asian Stocks Slip as Yen Rallies Ahead of Fed, BOJ; Oil Rebounds. Asian equities extended losses into a third day, led by Japanese shares as the yen solidified its rebound and investors looked ahead to central bank meetings in Tokyo and Washington later this week. Crude oil resumed gains while industrial metals fell. Mining shares and banks led the regional benchmark to a four-day low as exporters drove Japan’s Topix index down 0.6 percent amid a revival in the local currency. Gold maintained an advance as anxiety over oil’s swings and the forthcoming policy reviews from the Federal Reserve and Bank of Japan supported haven assets. West Texas Intermediate crude clawed back some gains following a 2.5 percent slide on Monday amid resurgent concern over the global glut. Zinc led base metals lower as copper dropped a second day. The MSCI Asia Pacific Index lost 0.4 percent as of 10 a.m. Tokyo time, with the Topix falling a second day.
• Goldman(GS) Says China Iron Ore Speculation ‘Concerns Us the Most’. Goldman Sachs Group Inc. has expressed its concern about the surge in speculative trading in iron ore futures in China, saying that daily volumes are now so large that they sometimes exceed annual imports. The increase in futures trading in the world’s largest importer was among factors that have lifted prices, according to a report from analysts Matthew Ross and Jie Ma received on Tuesday. Iron ore volumes traded on the Dalian Commodity Exchange are up more than 400 percent from a year ago, they said. “While increased fixed-asset investment in China, a bring-forward of steel production (ahead of a government curtailment) and mining disruptions help to explain the strong rally in the iron ore price, the one driver that concerns us the most is the increased speculation in the Chinese iron ore futures market,” they wrote.

Wall Street Journal:

• Regulators to Call for Banks to Have Year’s Worth of Liquidity. Rule to be proposed Tuesday would affect large U.S. banks and could crimp industry profits, critics say. Large U.S. banks would have to prove they have enough cash to withstand severe market turmoil lasting as long as a year under a new rule set to be proposed Tuesday. The regulation would require about 30 of the country’s biggest banks to adjust their balance sheets, cutting the odds they would run into the kind of funding crunch that crippled Bear Stearns and Lehman Brothers in 2008. But critics say it could also crimp banks’ profits by forcing them to devote more resources to low-return investments or...
• President Xi Jinping’s Most Dangerous Venture Yet: Remaking China’s Military. The Chinese leader’s plan to revamp the armed forces, a milestone in the nation’s emergence from isolationism, faces hurdles at home.
• Curt Schilling the Science Guy. From climate change to restrooms, Democrats are increasingly the anti-science party.

Barron's: 

• Troubling Signs for Many Big Tech Stocks.

Fox News:

• Islamic extremists behead Western hostage in Philippines. Islamic extremists in the Philippines beheaded one of three Western hostages taken captive months ago, Canadian Prime Minister Justin Trudeau told reporters Monday.

CNBC:

• Don’t buy into this ‘complacent’ rally, strategists warn. (video) Where did all the volatility go? Despite a slew of quarterly earnings misses, the most popular measure of expected volatility in the S&P 500, the CBOE Volatility Index, has remained notably tranquil. 
• LeEco CEO Jia Yueting says Apple is outdated. (video) Apple is "outdated" and losing momentum in China, billionaire entrepreneur Jia Yueting told CNBC in his first international television interview. Jia is chief executive and chairman of Chinese conglomerate LeEco (formerly LeTV), which is best known for being the "Netflix of China," but has a product range that includes smartphones, televisions, mountain bikes and, most recently, electric vehicles. 
• This quarter's earnings season trend—layoffs. (video) Layoffs and restructuring are starting to look like the trends of this earnings season. Halliburton originally scheduled its earnings call for Monday morning, but announced on Friday that it will delay the report to May 3. This past quarter, the company paid $2.1 billion in restructuring costs, partly attributable to severance costs. Halliburton laid off 6,000 people during the quarter.

Zero Hedge:

• Despite Record Liquidity, Chinese Repo Rates Are Rising Again. (graph) 
• BofA's "Economic Shock" Bear Case In 4 'Fragile' Charts. (graph)
• A Look Inside Europe's Largest Foreigner "Ghetto".
• Semiconductors Tell The Real Story Of The Global Economic Slowdown.
• Pioneer Announces It Will Add More Rigs As Soon As Oil Hits $50.
• Bad News For Trannies: "These Headcount Numbers Aren't Encouraging". (graph)
• "We Haven't Seen This Is In Our Lifetimes" - CEO Says "Alberta Is In A Depression".
• The Awful Lull Before The Storms Of Summer Strike.
• Bullion Pops & Trannies Drop As S&P Signals "Golden Cross". (graph)

Business Insider:

• A new report signals disaster for American shopping malls. 
• Things are so bleak in the oil industry that an offshore-drilling company got a 90% discount on a $700 million rig.
• Here's what to expect from Apple this week.
• This chart shows one reason why Facebook(FB) should be terrified of Snapchat.
• Obama is going to leave behind a giant mess in the Middle East.
• One of the most lucrative oil jobs is facing more layoffs.

Reuters:

• CN Rail lowers profit forecast as weak freight volumes weigh. Canadian National Railway Co (CNR.TO) lowered its full-year earnings forecast, citing weaker-than-expected freight demand in some markets and a strengthening Canadian dollar. Canada's biggest railroad, which reported a 4.3 percent fall in first-quarter revenue, said it now expected 2016 adjusted earnings per share to match last year's C$4.44. The company in January forecast mid- to single-digits EPS growth.

Night Trading 

• Asian equity indices are -.25% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 140.75 +2.25 basis points. 
• Asia Pacific Sovereign CDS Index 58.0 +2.0 basis points. 
• Bloomberg Emerging Markets Currency Index 72.46 -.03%. 
• S&P 500 futures +.18%. 
• NASDAQ 100 futures +.22%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (MMM)/1.92
• (AKS)/-.11
• (ABX)/.10
• (BAX)/.29
• (BP)/-.02
• (COH)/.42
• (GLW)/.28
• (DD)/1.04
• (LLY)/.84
• (FCX)/-.16
• (HSY)/1.07
• (IR)/.37
• (LXK)/.77
• (LMT)/2.61
• (ODP)/.13
• (PCAR)/.96
• (PH)/1.44
• (PG)/.82
• (R)/1.05
• (SPG)/2.54
• (WHR)/2.69
• (WYN)/1.11
• (AFL)/1.63
• (AKAM)/.63
• (AAPL)/2.00
• (T)/.69
• (BXP)/1.58
• (BWLD)/1.78
• (CHRW)/1.82
• (CMG)/-1.05
• (EBAY)/.45
• (FE)/.76
• (KLAC)/.97
• (PNRA)/1.50
• (PSA)/2.19
• (RHI)/.64
• (TWTR)/.10
• (X)/1.25  

Economic Releases 
8:30 am EST

• Preliminary March Durable Goods Orders are estimated to rise +1.9% versus a -3.0% decline in February.
• Preliminary March Durables Ex Transports are estimated to rise +.5% versus a -1.3% decline in February.
• Cap Goods Orders Non-Defense Ex Air are estimated to rise +.6% versus a -2.5% decline in February.

9:00 am EST

• The S&P/CS 20 City MoM SA for February is estimated to rise +.8% versus a +.8% gain in January.

9:45 am EST

• Preliminary Markit US Services PMI for April is estimated to rise to 52.0 versus 51.3 in March.

10:00 am EST

• Consumer Confidence for April is estimated to fall to 95.8 versus 96.2 in March. 
• Richmond Fed Manufacturing for April is estimated to fall to 12.0 versus 22.0 in March.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The China industrial profits report, $34B 5Y T-Note auction, weekly US retail sales and the (KMX) analyst day could also impact trading today.

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

Stocks Lower into Final Hour on European/Emerging Markets/US High-Yield Debt Angst, Oil Decline, Yen Strength, Commodity/Transport Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 14.4 +8.7%

• Euro/Yen Carry Return Index 130.92 -.15%

• Emerging Markets Currency Volatility(VXY) 10.80 +1.31%

• S&P 500 Implied Correlation 56.40 +2.51%

• ISE Sentiment Index 67.0 -33.66%

• Total Put/Call .78 -21.21%

• NYSE Arms 1.77 +61.26% 

Credit Investor Angst:

• North American Investment Grade CDS Index 74.88 +1.95%
  

• America Energy Sector High-Yield CDS Index 1,060.0 +2.14%

• European Financial Sector CDS Index 86.27 +5.42%

• Western Europe Sovereign Debt CDS Index 26.48 +.17%

• Asia Pacific Sovereign Debt CDS Index 57.95 +3.27%

• Emerging Market CDS Index 286.44 +1.02%
  

• iBoxx Offshore RMB China Corporate High Yield Index 127.13 +.02%

• 2-Year Swap Spread 13.0 -.5 basis point
  

• TED Spread 40.75 +.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -23.25 -.25 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.45 -.18%
• 3-Month T-Bill Yield .24% +1.0 basis point
  

• Yield Curve 107.0 +1.0 basis point
  

• China Import Iron Ore Spot $66.07/Metric Tonne -.37%

• Citi US Economic Surprise Index -25.10 unch.

• Citi Eurozone Economic Surprise Index -15.80 +1.4 points

• Citi Emerging Markets Economic Surprise Index 16.40 +.4 point

• 10-Year TIPS Spread 1.66% +1.0 basis point
  
• 21.6% chance of Fed rate hike at June 15 meeting, 33.9% chance at July 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +40 open in Japan 
• China A50 Futures: Indicating -29 open in China

• DAX Futures: Indicating +26 open in Germany

Portfolio: 

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

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:    

• RBS Sees China `Black Swan' Risk From Loans for Non-Bank Finance. Chinese banks’ surging lending to non-bank financial institutions such as fund managers may pose a “black swan” risk for the nation’s financial system, according to Royal Bank of Scotland Group Plc. Lending to such firms had become “the biggest driver of overall credit growth,” Harrison Hu, the firm’s chief Greater China economist, wrote in a note Monday. Non-bank financial institutions include companies, such as brokerages and fund managers, that aren’t allowed to accept deposits, Hu said. The surge in lending brought with it the risk of an “abrupt reversal” that could trigger an event like China’s cash squeeze of mid-2013 if it wasn’t properly handled, Hu wrote. “Chinese banks’ lending to the NFIs has been skyrocketing,” Hu said. While it would be normal for such increases to take place over five or 10 years, it was “quite a different thing if banks pile up substantial credit and leverage within only one year,” he said.
• Over 90% of China Bond Funds Dropped Last Week Amid Default Woe. More than 90 percent of Chinese bond funds’ net asset value dropped last week as spreading corporate note defaults fueled investor concerns. A market value of assets held by 718 bond funds dropped in the five days through April 22, accounting for 95.6 percent of all the fixed-income funds tracked by Shanghai-based research firm Howbuy. The average decline for the week was 1.03 percent, the biggest since the week ended Jan. 8, according to Howbuy. “The sentiment in the corporate bond market is quite weak,” said Ni Xinchen, a researcher at Howbuy. “Investors are concerned corporate defaults will spread.”
• China's Rate Swaps Rise to One-Year High as Stimulus Bets Fade. China’s interest-rate swaps rose to a 12-month high on bets a pick-up in economic growth and signs of speculative trading in commodities and property will prevent the central bank from adding to stimulus. The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, increased six basis points to 2.62 percent at 4:30 p.m. in Shanghai, the highest since April 2015. The People’s Bank of China will keep benchmark interest rates on hold until the fourth quarter, according to economists in an April 15-20 survey.
• Danger Signs in the World's Top Housing Market. At first glance, the world’s best-performing housing market bears few of the usual hallmarks of a bubble about to pop.Reliance on mortgages is low, and Turkish homeowners reliably repay their loans, helped by house prices that rose faster than in any other country last year. The risk, at a time when construction has grown to make up a bigger share of the country’s investments than in China, is with the builders rather than the buyers. The share of Turkey’s borrowing represented by developers is higher than at any time in the last decade, and represents almost a fifth of all corporate loans, according to the nation’s banking association. An increasing portion of those debts is going bad, with the industry’s portion of non-performing loans nearly doubling in the past five years. “Mortgages are not the problem,” said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. “Developer leverage is.”
• Warnings Flash for China's Red-Hot Steel Market on 47% Surge. Warnings are stacking up fast after China’s eye-popping steel rally. Fitch Ratings Inc. said prices lifted in part by heightened speculation are destined to slump, while a bank in Singapore flagged the risk of a boom-bust cycle reminiscent of China’s equity market. The rapid advance isn’t sustainable as mills are expected to bring back idled capacity, raising supply, Fitch said in a report on Monday. Price gains have been driven by a seasonal recovery in activity that’s been exacerbated by increased speculation in the futures market, according to analyst Laura Zhai.
• Morgan Stanley(MS) Says China Commodity Jump Stuns World Markets. (video) The recent spike in speculative trading in commodities in China has stunned global markets, according to Morgan Stanley, which cited a jump in local activity for steel, iron ore and cotton as well as eggs and garlic. “Now China’s speculators engage commodities,” analysts including Tom Price and Joel Crane said in an e-mailed note on Monday. “China’s latest speculative spike has stunned global markets.” Trading in China of commodity derivatives including steel rebar surged last week after data showing a rise in credit in the world’s top commodity user spurred speculation that prices may extend gains as demand improved. The increase prompted exchange authorities in Asia’s top economy to tighten rules on the trading of some contracts, including rebar. “The move to cap the trade suggests that China’s enhanced credit liquidity may soon be curtailed,” Morgan Stanley said in the note. “This, together with China’s upcoming Labor Day holiday, should see a short-term pullback in trade activity and commodities prices,” it said, referring to the May 1 break.  
• German Business Confidence Unexpectedly Weakened in April. German business confidence unexpectedly deteriorated in the latest sign that Europe’s largest economy is losing some of its pace. The Munich-based Ifo institute’s business climate index fell to 106.6 in April from 106.7 the previous month. The median estimate in a Bloomberg survey of economists was for an increase to 107.1. 
• Morgan Stanley(MS) Sees More Downgrades to European Profits: Chart. Morgan Stanley equity strategists see further downside to European earnings estimates. The bank projects that profits at Stoxx Europe 600 Index companies will slide 5 percent this year because of weak global growth, headwinds from the commodity and financial sectors and evaporating currency tailwinds. That’s more bearish than the average analyst forecast of 2.2 percent, which has already been cut from 8.2 percent six months ago.
• Emerging-Market Stocks, Currencies Decline on Oil as Fed Looms. Emerging market stocks and currencies fell as a retreat in oil and concern the Federal Reserve may turn more hawkish at its meeting this week damped demand for riskier assets in developing nations. Chinese stocks extended last week’s losses after commodity exchanges moved to cool trading in raw materials and data showed stronger demand for workers, suggesting the central bank won’t offer additional measures to boost growth. Petroleo Brasileiro SA, the Brazilian state-controlled oil producer, lead a gauge of developing-nation energy stocks lower as Brent crude fell as much as 1.9 percent. Saudi shares rose the most in seven weeks after approval of a plan for a post-oil era. The MSCI Emerging Markets Index fell 0.7 percent to 839.10 at 11:25 a.m. in New York, heading for the lowest close in two weeks. All 10 industry groups declined, led by raw-material stocks.
• European Stocks Retreat as Miners Slide, German Data Disappoint. (video) European shares declined for a third day as energy and commodity producers slid, while investors assessed growth prospects following worse-than-expected German business-confidence data. Anglo American Plc and BHP Billiton Ltd. fell at least 5.8 percent, leading miners to the biggest decline of the 19 industry groups on the Stoxx Europe 600 Index, as base metals retreated. Royal Dutch Shell Plc lost 2.2 percent, dragging oil companies lower as crude slid. Royal Philips NV dropped 4.3 percent after saying it is considering an initial public offering of its lighting business. The Stoxx 600 slipped 0.5 percent to 346.68 at the close of trading, paring earlier declines of as much as 0.9 percent.
• Hedge-Fund Investor Aurora to Return $5.4 Billion to Clients. Hedge-fund investor Aurora Investment Management will return the $5.4 billion it oversees to clients over the coming months after a takeover of the firm collapsed, according to a letter to investors seen by Bloomberg News. The move follows the termination of a deal last week under which the Chicago-based firm was to be sold to 50 South Capital Advisors by its parent company, Natixis Global Asset Management. Aurora was started more than 28 years ago by Roxanne Martino and invests in a selection of hedge funds. “After considering a variety of strategic alternatives, we have decided that it is in the best interests of our investors to return the capital in our funds in a manner that will treat all investors fairly and equitably,” Aurora told clients in the letter sent April 22. Ted Meyer, a spokesman for Natixis, confirmed the contents of the letter.
• Debt Market's Perilous Oil Proxy.

Zero Hedge: 

• The Most Dangerous Divergence. (graph)
• "The Damage Could Be Massive" - How Central Banks Trapped The World In Bonds. (graph)
• "China Is Hoarding Crude At The Fastest Pace On Record". (graph)
• Hillary Unleashes Million-Dollar Professional Internet Troll Army.
• Oil Slides After Report Of Big Cushing Build. (graph)
• The True Story Of Q1 Earnings: Deutsche Admits "Results So Far Are Disappointing; Our 1Q Est. Is At Risk". (graph)
• A Bird's-Eye View Of How The US Economy Is Falling Apart (In 4 Simple Charts).
• Fund CIO Explains "The Only Way To Make Money This Year".
• "This Is Not A Good Time To Be In Business": Dallas Fed Disappoints, Contracts For 16th Straight Month. (graph)
• New Homes Sales Suffer 3rd Monthly Drop - Worst Streak Since July 2011. (graph)
• In Shocking Finding, The Bank Of Japan Is Now A Top 10 Holder In 90% Of Japanese Stocks. (graph)

The Telegraph

• Banks will reach a point when they can no longer cut rates. Is this it?

Bear Radar

Style Underperformer:

• Small-Cap Growth -1.1%

Sector Underperformers:

• 1) Hospitals -3.2% 2) Steel -2.8% 3) Oil Service -2.7%

Stocks Falling on Unusual Volume:

• PRGO, RYAM, AFSI, EXPR, CDW, KN, ENDP, TARO, SQM, PKX, SLGN, CWEI, BFR, KMB, PHG, ATRA, WAT, HABT, MBLY, YPF, ENDP, DQ, TX, SGNT, SOHU and MPAA

Stocks With Unusual Put Option Activity:

• 1) BAX 2) UTX 3) MMM 4) UNH 5) COH

Stocks With Most Negative News Mentions:

• 1) CYH 2) HERO 3) GPRO 4) CDW 5) HUBG

Charts:

• ETFs Falling on Unusual Volume
• Stocks Falling on Unusual Volume