Wednesday Watch

Evening Headlines
Bloomberg:

• Japan 20-Year Yield Falls to Zero as Treasuries Rally to Record. Japan’s 20-year government bond yield dropped to zero for the first time Wednesday, with ultra-low yields worldwide failing to deter a rush by investors for the safest assets. Treasuries advanced for a fourth day, after yields renewed record lows Tuesday in the 10- and 30-year securities, with the fallout from the shock U.K. vote to leave the European Union clouding the outlook for global growth. Benchmark 10-year Australian and Japanese sovereign bond yields also dropped to a record. The 20-year JGB yielded 0.015 percent as of 9:19 a.m. in Tokyo, after dipping to zero. The 10-year note yield fell to a record minus 0.265 percent, while the 30-year yield reached an unprecedented 0.03 percent.
• North Korea Opens Floodgates at Dam Near Border With South. North Korea released water from a dam near its border with South Korea without warning, raising fears of flooding in the South amid torrential rain in recent days. North Korea appears to have gradually opened the floodgates at around 6 a.m. Wednesday, Yonhap News reported, citing an unidentified South Korea military official. The water level under a bridge on the Imjin river in South Korea rose suddenly, Yonhap said. South Korea has been closely monitoring the water level at the Hwanggang Dam, just north of the border. While the military has said it doesn’t believe North Korea would engage in a “flooding attack,” the Defense Ministry had been preparing to provide emergency assistance if North Korea suddenly opened the floodgates.
• It’s Dollar’s Time Now Post-Brexit, Top Currency Forecaster Says. For currency strategists, the past quarter was all about Brexit and calling the pound correctly. Now, the most-accurate forecaster is counting on a dollar resurgence to stay ahead of the pack.
• Yuan Trails Asian Peers as China Seen Favoring Weakness: Chart.
• Yen Gains for Second Day as Pound Touches 31-Year Low on Brexit. The yen rose, heading for its biggest two-day gain in more than a week, as Britain’s vote last month to leave the European Union sent investors seeking haven assets and pushed the pound to its weakest level in more than three decades. Japan’s currency climbed at least 0.5 percent against all 16 of its major counterparts, while the pound surpassed lows reached in the immediate aftermath of Britain’s June 23 referendum. M&G Investments suspended a 4.4 billion-pound ($5.7 billion) real-estate fund on Tuesday, following on the heels of Aviva Investors and Standard Life Investments after a flurry of redemption requests. “The yen is taking the brunt of the pound selling,” said Takuya Kawabata, an analyst at Gaitame.com in Tokyo. “It’s a risk-off market triggered by the pound. We need to continue to remain wary of risk aversion prompted by the U.K.” The yen rose 0.6 percent against the dollar to 101.18 as of 9:02 a.m. in Tokyo Wednesday, after gaining 0.8 percent Tuesday. The pound declined 0.4 percent to $1.2977 after hitting a 31-year low of $1.2950.
• Asian Stocks Sink With Pound as Investors Hunt Down Havens Again. Risk aversion took hold off markets once again, torpedoing Asian stocks, the pound and high-yielding currencies amid concern over the impact of a potential European slowdown. The yen jumped with gold as government bond yields slid. Japan led equity losses, with the Topix index headed for a one-week low and crude oil’s slump below $47 a barrel weighing on commodity producers in the region. The yen climbed to its strongest level this month, while the pound extended losses at a 31-year low after Bank of England chief Mark Carney said risks from the U.K.’s vote to leave the European Union had started to crystallize. The Korean won weakened with the Australian and New Zealand dollars. Australian 10-year yields sank to an all-time low as rates on 20-year Japanese debt hit zero for the first time. Gold climbed for a sixth session. The MSCI Asia Pacific Index fell 1 percent as of 9:10 a.m. Tokyo time, declining for a second session after ending a four-day rally on Tuesday. Materials producers and consumer-discretionary shares drove losses.
• Williams Says 2016 Fed Rate Hike Warranted If His Forecast Met. Federal Reserve Bank of San Francisco President John Williams said Britain’s vote to exit the European Union probably won’t derail the U.S. economy, leaving the Fed scope to raise interest rates this year if his growth and inflation expectations are met. “I would see the Brexit, as it’s played out so far, as being a relatively modest risk to the U.S. outlook,” Williams said in a telephone interview on Tuesday, explaining that the move may lower economic growth for the year by about a tenth of a percentage point to just under 2 percent. Williams, who next votes on policy in 2018, said he still expects unemployment to drop to 4.5 percent this year and for inflation to continue moving up. If that outlook comes to fruition, a rate hike would be appropriate this year, though he declined to “get into projections about when and what.”

Wall Street Journal:

• Thieves Go High-Tech to Steal Cars. Police say vehicle electronics co-opted to bypass ignition controls in late-model vehicles.
• Jim Comey’s Clinton Standard. He shows how she broke the law then rationalizes no indictment.

Zero Hedge:

• The Revolt Against Globalism... Is Going Global.
• She Said, He Said - Clinton Vs. Comey. (video)
• The Central Bank Credibility 'Death Cross'. (graph)
• Tesla(TSLA) Drops On Report Of Another "Autopilot" Crash And Rollover.
• Do Not Show This Chart To Your Stockbroker. (graph)
• Small Business Owner Explains Options: "Close, Hike Prices, Or Eliminate Jobs".
• The Poisonous Gap Between Paper Wealth And Real Wealth.
• Banks Battered As Bond Yields 'Comey-kaze' Dive To Record Lows. (graph)

Business Insider:

• Abenomics is facing its voters once again.
• AP FACT CHECK: Hillary Clinton's claims about her emails collapsed under the FBI investigation.
• ISIS' global suicide-bombing campaign is only just beginning.
• Ted Cruz says he has 'serious concerns' about FBI director's integrity.
• The UK is stronger than the EU, even after Brexit.
• ISIS is tightening its grip on Yazidi women and children forced to become sex slaves.

Telegraph:

• Property market turmoil has eerie echoes of start of financial crisis.

Night Trading 

• Asian equity indices are -1.50% to -.75% on average.
• Asia Ex-Japan Investment Grade CDS Index 139.75 +1.75 basis points.
• Asia Pacific Sovereign CDS Index 53.5 +.25 basis point.
• Bloomberg Emerging Markets Currency Index 71.85 -.19%. 
• S&P 500 futures -.31%. 
• NASDAQ 100 futures -.36%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (GBX)/1.08
• (MSM)/1.00
• (WBA)/1.14

Economic Releases  
8:30 am EST

• The Trade Deficit for May is estimated at -$40.0B versus -$37.4B in April.

9:45 am EST:

• The Final Markit US Services PMI for June is estimated at 51.3 versus a prior estimate of 51.3.

10:00 am EST

• The ISM Non-Manufacturing Composite for June is estimated to rise to 53.3 versus 52.0 in May.

2:00 pm EST

• The FOMC June 14-15 Meeting Minutes.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The ECB's Draghi speaking, Fed's Dudley speaking, Fed's Tarullo speaking, Germany Factory Orders, weekly MBA mortgage applications report and the (AV) investor day call 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.

Stocks Falling into Afternoon on Rising European/Emerging Markets/US High-Yield Debt Angst, Oil Decline, Yen Strength, Financial/Energy Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Below Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 16.56 +12.1%

• Euro/Yen Carry Return Index 117.48 -1.72%

• Emerging Markets Currency Volatility(VXY) 10.12 +.10%

• S&P 500 Implied Correlation 56.67 +4.56%

• ISE Sentiment Index 51.0 -54.46%
  

• Total Put/Call 1.19 +29.35%

• NYSE Arms 1.42 +64.15% 

Credit Investor Angst:

• North American Investment Grade CDS Index 79.22 +3.56%
  

• America Energy Sector High-Yield CDS Index 756.0 -.29%

• European Financial Sector CDS Index 115.0 +4.03%

• Western Europe Sovereign Debt CDS Index 31.81 +2.58%

• Asia Pacific Sovereign Debt CDS Index 53.51 +1.19%

• Emerging Market CDS Index 274.57 +2.64%
  

• iBoxx Offshore RMB China Corporate High Yield Index 130.39 +.31%

• 2-Year Swap Spread 17.25 +1.25 basis points
  

• TED Spread 40.0 +1.25 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -40.25 -1.75 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.04 -.76%
• 3-Month T-Bill Yield .24% -1.0 basis point

• Yield Curve 81.0 -5.0 basis points
  

• China Import Iron Ore Spot $55.93/Metric Tonne -.52%

• Citi US Economic Surprise Index -13.4 +.9 point

• Citi Eurozone Economic Surprise Index 15.9 +6.7 points

• Citi Emerging Markets Economic Surprise Index -13.90 -.7 point

• 10-Year TIPS Spread 1.42% -5.0 basis points
• 2.0% chance of Fed rate hike at Sept. 21 meeting, 2.0% chance at Nov. 2 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -204 open in Japan 
• China A50 Futures: Indicating -152 open in China

• DAX Futures: Indicating -55 open in Germany

Portfolio: 

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

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my emerging markets shorts

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg: 

• A Prime Minister, a Referendum and Italy’s Turn to Get Worried. It’s now a familiar refrain: A European prime minister calls a referendum, his job could be on the line and markets are getting worried. This time it’s not Britain’s David Cameron but Italy’s Matteo Renzi, who has called a vote on an ambitious overhaul of the political system aimed at ending the country’s unstable governments. If he loses, Renzi has promised to quit, an outcome that Citigroup Inc. called probably the biggest risk in European politics this year outside the U.K. The vote is expected in October, though it is already spooking investors and Italian bonds are once more under-performing their Spanish peers. The yield on 10-year Italian securities overtook those on similar-maturity Spanish debt for the first time in almost a year on June 27, a day after Spain’s Acting Prime Minister Mariano Rajoy defied opinion polls to consolidate his position in a general election. A public opinion poll by Euromedia Research said that 34 percent of Italians would vote against Renzi’s plan, with 28.9 percent in favor, 19.4 percent undecided on which way to vote and 17.7 percent undecided on whether to vote. The poll based on 1,000 interviews was conducted on July 1. No exact date for the referendum has been set.
• Italy’s Bonds Fall With Its Banking Crisis Back in the Spotlight. Italy’s bonds fell for a second day as the crisis in the nation’s banking sector deepened, with regulators pressing lenders to raise capital and clean up their balance sheets. Yields on the nation’s 10-year government securities rose, having reached their lowest in more than a year last week. Italy is considering injecting fresh capital into Banca Monte dei Paschi di Siena SpA to boost the finances of its third-biggest lender before stress-test results, a person with knowledge of the plan said.
• Italian Bank Risk Surges as Capital Needs Fuel Bail-In Concerns. Measures of debt risk for Italian banks surged amid concern that government plans to shore up capital ahead of regulatory stress tests may require losses for junior creditors. The cost of insuring Italy’s biggest lenders soared and bonds fell. Credit-default swaps on subordinated bonds of Banca Monte dei Paschi di Siena SpA surged to a record and now signal a 63 percent probability of default within five years.
• Pound Tumbles to 31-Year Low as Brexit Starts to Inflict Damage. The pound fell to its weakest level in three decades against the dollar, surpassing lows reached in the aftermath of Britain’s vote to leave the European Union. Sterling touched $1.30 and sank to its lowest since 2013 against the euro as evidence piled up that the Brexit vote is hurting confidence in the U.K. economy. M&G Investments suspended a 4.4 billion-pound ($5.7 billion) real-estate fund on Tuesday, following on the heels of Aviva Investors and Standard Life Investments after a flurry of redemption requests.
• Euro-Area Economy Lacking Momentum Adds to Brexit Concerns. The euro-area economy continued growing at a lackluster pace in June, ahead of the U.K.’s referendum on its European Union membership. A Purchasing Managers Index for manufacturing and service activity was unchanged at 53.1 in June from a month earlier, London-based Markit Economics said on Tuesday. That compares with a preliminary reading of 52.8. Almost all the responses were collected before the British referendum, when it opted to quit the EU. The PMI data point to an expansion in gross domestic product of 0.3 percent in the second quarter, according to Markit chief economist Chris Williamson -- half the pace of the three months through March. The lack of momentum is likely to be a particular concern for officials who are now bracing for the impact of Brexit on the region’s fragile recovery.
• China’s Looming $8 Billion IPO Has Risks Tied to Shadow Banking. Postal Savings Bank of China Co., the company preparing for an initial public offering that may raise $8 billion, has plunged into shadow-banking arrangements that could make investors question its reputation as sleepy and safe. The Beijing-based lender, ubiquitous in small-town China, disclosed 953 billion yuan ($143 billion) of interbank investments in “special purpose vehicles” in a prelisting document filed to Hong Kong’s stock exchange on Monday. Those holdings of wealth management products, trust investment plans, asset management plans and securities investment funds have almost doubled since 2014 and are up more than 500 percent since 2013. The lender didn’t immediately respond to an e-mail seeking comment.
• European Stocks Slide for 2nd Day as Growth Worry Adds to Brexit. (video) European shares extended declines into a second day, after a rally that lifted them by the most since February, amid indications the region’s economic growth lacks momentum. The Stoxx Europe 600 Index dropped 1.7 percent at the close of trading. All 19 industry groups retreated, with U.K. insurers sliding on signs of turmoil from the Brexit vote and miners tracking commodities lower. Purchasing managers’ indexes on manufacturing and services signaled lackluster growth in the euro area in June, with indicators pointing to France as the weakest performer.
• Energy-Dependent States Reeling From Two-Year Commodity Crunch. Energy-dependent U.S. states stepped over the threshold of fiscal 2017 only to face revenue shortfalls precipitated by the two-year-old oil and gas industry rout. Some aren’t sure how they will pay for schools, health care, infrastructure and universities. Lawmakers in Alaska, Oklahoma, Louisiana and North Dakota already pared budgets by billions, raising taxes and cutting programs to the bone to fill deficits. These states, as well as Wyoming, are in the throes of recession even as the U.S. enters the seventh year of an economic expansion. "We have a cash flow problem," said Democratic Louisiana Governor John Bel Edwards on June 24, after his legislature ended the longest session in its 204-year history. "There is every possibility we are going to have to take out a loan to pay regular, ordinary bills."
• World’s Top Oil Trader Says Prices Won’t Rise Much Further. (video) Oil prices won’t rise much further over the next year and a half as demand growth slows and refiners comfortably meet gasoline consumption, according to the world’s largest independent oil-trading house. “I cannot see the market really roaring ahead,” Vitol Group Chief Executive Officer Ian Taylor told Bloomberg Television in an interview. “We have a lot of oil in the system and it will take us considerable time to work that off.” Since rallying from a 12-year low of $27.10 a barrel in January, Brent crude has been hovering around $50 a barrel for the last month. The international benchmark will probably end the year “not too far away from where we are today” and rise to about $60 by the end of 2017, Taylor said.
• Corn Heads Back to Bear Market as U.S. Rains Spark Reversal. Corn futures are heading back to a bear market less than a month after entering bull territory as U.S. rains ease crop concerns and boost yield potential. November soybeans had the biggest-ever drop for the contract.
• Nickel Falls Most in Eight Weeks on Philippines Supply Outlook. Nickel fell the most in eight weeks on concern that the government may take longer than expected to close mines that don’t meet environmental rules in the Philippines, the biggest supplier of ore to China.
• Treasuries Rally to Record as Global Negative-Yield Pool Deepens. Treasuries rallied, with yields resuming a descent to record lows, as the growing pool of negative-yielding debt worldwide boosted the appeal of U.S. securities. Benchmark 10- and 30-year yields fell to unprecedented levels, extending gains in Treasuries for a third trading session, as signs of slowing growth in Europe ended a five-day rally in global stocks. A U.S. jobs report July 8 may offer clues to the direction of the Federal Reserve’s next interest-rate move.
• Delta Leads Airline Drop After Passenger Revenue Gauge Weakens. Delta Air Lines Inc. led a decline among U.S. carriers after saying a closely watched financial measure weakened more than expected. Passenger revenue for each seat flown a mile, a benchmark gauge for airlines, fell 5 percent in the second quarter, Delta said in a statement Tuesday. The carrier had previously forecast a decline of as much as 4.5 percent.
• Punch-Drunk U.S. Stocks Keep Dodging as Strategists See Peak. They don’t go up. Neither do they stay down. That’s the story of U.S. stocks, which three months after a 10 percent correction and mired in the longest decline of the seven-year bull market just shook off another global shock and rallied back to even. The 5.3 percent selloff of June 24 and 27 is now a blip on a chart after $1 trillion in market value was erased and restored over eight days. The volatility never swayed Wall Street equity strategists, who let stand forecasts for shares to reach records in 2016. While U.K. secession joins a lengthening list of ills for investors that include falling profits, soaring valuations and the presidential race, events of the last two weeks show just how hard it is to land a blow on equities when economic growth is too fast to signal a recession, and too slow to steel the Federal Reserve.
• Why Warren Buffett's Favorite Indicator Isn't Giving an Accurate Read of the U.S. Economy.

Fox News:

• FBI’s Comey: Clinton 'extremely careless' about emails, but bureau will not advise criminal charges. (video) FBI Director James Comey announced Tuesday that despite evidence Hillary Clinton was “extremely careless” in her handling of classified emails on a private server, the bureau will not recommend to the Department of Justice that criminal charges be brought against the former secretary of state. 

CNBC:

• US oil reserves surpass those of Saudi Arabia and Russia. (video)
• Italian banks may make the next weak spot in Europe.
• Markets worry as Italian banks face the perfect storm. (video)

Zero Hedge:

• Peak FBI Corruption? Meet Bryan Nishimura, Found Guilty For "Removal And Retention Of Classified Materials".
• FBI Recommends "No Charges" Against Hillary Clinton. (video)
• Crude Crashes Most In 9 Months. (graph)
• Goldman Warns, 'Second Leg Of Weakness" Coming As Cable Crashes To 31-Year Lows At 1.3000. (graph)
• Domino #3: M&G Suspends Trading In $6 Billion UK Property Fund.
• Saxo Fears "Cascading Implosion" As Italian Bank Collapse Continues. (graph)
• Domino #2: UK's Aviva Property Fund "Frozen" Due To "Lack Of Immediate Liquidity".
• What Happens Next? (graph)
• Chart Of The Day - Factory Orders Collapse To Longest Streak In US History. (graph)
• A Look Inside Europe's Next Crisis: Why Everyone Is Finally Panicking About Italian Banks. (graph)

Business Insider:

• 3 'risk-off' trades are going crazy right now.
• Paul Ryan: FBI's decision not to bring charges against Hillary Clinton 'defies explanation'.
• The FBI just contradicted a key element of Hillary Clinton's email defense.
• REPORT: A 'chilling' wave of torture, abductions, and killings is sweeping across Syria.
• Bad news for Apple: People are holding on to their iPhones longer. (graph)
• Forget Brexit — Italy is poised to tear Europe apart.
• Paul Ryan blasts Donald Trump tweet as 'ridiculous' and 'anti-Semitic'.

The Telegraph:

• S&P scoffs at 'Armageddon' warnings for Britain.

Bear Radar

Style Underperformer:

• Small-Cap Value -2.1%

Sector Underperformers:

• 1) Oil Service -5.9% 2) Banks -3.2% 3) Computer Hardware -2.6%

Stocks Falling on Unusual Volume:

• XBIT, KWEB, LILA, HOG, IXUS, EZU, CVT, ST, MPW, ARA, PRA, SGY, RDY, PUK, ASPS, E, LGF, AZZ, SOXX, NRZ, ASML, HRI, DRI, CBG, CORR, LGF, ZION, HOG and DHR

Stocks With Unusual Put Option Activity:

• 1) BK 2) NOV 3) NUE 4) MRO 5) EWW

Stocks With Most Negative News Mentions:

• 1) SWKS 2) PBR 3) ILMN 4) RDC 5) HOG

Charts:

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