Tuesday Watch

Evening Headlines
Bloomberg:

• These Are the Red Lines Europe Won't Cross in Brexit Talks. U.K. Prime Minister Theresa May faces a daunting array of demands from European Union nations when the time comes to negotiate Britain’s future relationship with the bloc, an analysis of the region’s 27 other members shows. The survey, based on responses from ministries, public comments from government officials and interviews with policy makers, reveals European leaders are laying down their own red lines as May’s team weighs what it wants to seek in the Brexit talks. The result is a complex patchwork of priorities -- from an insistence on freedom of movement to the sovereignty of Gibraltar -- that may run counter to what the U.K. wants to achieve and that it will have to seek to satisfy if May is to meet her commitment of making a success of Britain’s withdrawal from the EU.
• Asian Stocks Extend Gains With Crude Near $43 as Copper Retreats. Asian shares rose a fourth day, extending their advance at an almost one-year high as U.S. crude oil traded near its highest price in two weeks. Copper declined ahead of data on Chinese prices. Mining and consumer stocks drove gains in the regional benchmark, with Japanese equities up following a pullback in the yen. U.S. crude traded just below $43 a barrel after jumping 2.9 percent Monday as OPEC said the current bear market in the commodity would be short-lived. Copper declined following a rally in industrial metals, while New Zealand’s dollar strengthened. Corn extended its climb, leading gains among crop futures. The MSCI Asia Pacific Index added 0.2 percent as of 9:55 a.m. Tokyo time, with sub-indexes of raw-materials providers and industrial shares climbing at least 0.2 percent.
• OPEC Still Faces the Same Obstacles to Agreeing Oil-Output Limit. (video) An informal OPEC meeting next month is unlikely to deliver any agreement to limit production because several members including Iran are still pumping below capacity. Members of the Organization of Petroleum Exporting Countries are planning to hold talks next month on the sidelines of the International Energy Forum in Algeria, the group’s president Mohammed Al Sada said Monday. But the same obstacles that prevented an agreement on proposals to freeze output in April or fix a new production target in June are still there, according to UBS Group AG. “We still haven’t reached the moment when OPEC members will agree to a production agreement, as Iran has not yet recovered its pre-sanction production levels,” Giovanni Staunovo, an analyst at UBS, said by e-mail. “Nigerian and Libyan oil output are also currently below capacity.” 
• Aluminum Seen Falling Another 11% as China Boosts Supply: Chart.
• Tech Giants at the Debt Buffett.
• Gap(GPS) Shares Drop as Dismal Store Traffic Drags Down July Sales. Gap Inc., the biggest U.S. apparel-focused retailer, fell in late trading after posting July comparable sales that missed analysts’ estimates and indicated that foot traffic at its stores might not improve as much as expected later in the year. Same-store sales -- a key benchmark -- dropped 4 percent in July, the San Francisco-based retailer said in a statement Monday.

Wall Street Journal:

• Are Negative Rates Backfiring? Here’s Some Early Evidence. Economists worry that people and businesses are saving more, instead of spending.
• Chinese Traders Roil Commodity Markets. China has become a mover of global prices; trading volume on the Shanghai and Dalian exchanges has exploded.

Fox News:

• Clinton, Trump clash on economy. (video) Hillary Clinton clashed from afar with Donald Trump on the economy Monday, accusing him of peddling “old, tired ideas” that benefit the “really wealthy” – after the Republican nominee hammered the Democrats' “job-killing” agenda in a speech of his own where he unveiled a revised plan to jolt the economy by slashing taxes and regulations. Trump delivered his economic address early Monday afternoon in Detroit, touting a plan he called a "night-and-day-contrast" with the “job-killing, tax-raising, poverty-inducing Obama-Clinton agenda.”
• Parents of 2 Benghazi victims sue Hillary Clinton for wrongful death, defamation. (video) The parents of two of the four Americans who died in the Benghazi attack in 2012 filed a lawsuit Monday against Democratic presidential nominee Hillary Clinton, alleging her "reckless handling" of classified information contributed to their deaths.

Zero Hedge:

• Millennial 'Guru' Urges Millennials Living "Paycheck-To-Paycheck" To "Spend Now, Save Later".
• "Zika Zone" Turns Into Ghost-Town As Planes Spray Neurotoxic Insecticide Over Florida Residents.
• In First Autopilot Crash In China, Tesla(TSLA) Model S Driver Crashes In Beijing With Autopilot Engaged.
• Japan Orders Military To 'State Of Alert' As North Korea Accuses US Of Seeking 'Preemptive Nuclear Strike'.
• Why Morgan Stanley Still Expects The 10Y Treasury To Drop To 1%, In 4 Charts.
• A Crisis Of Intervention.
• ISIS Releases Photos Of Latest Batch Of Captured US Weapons. (pic)
• These Are The 10 Most Crowded Trades According To UBS.
• Ignore The Latest Jobs Data Hype: The Worst Expansion In 30 Years Continues.
• Bonds Bid, Stocks Skid As Crude Chaos Continues On Lowest Volume Day Of 2016. (graph)

Business Insider:

• UN hears details of bombings, chemical weapons use, and suffering in Aleppo, Syria.
• JIM GRANT: 'Central bank acrobatics' could result in a banking crisis.

Night Trading 

• Asian equity indices are -.25% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 114.25 -2.0 basis points.
• Asia Pacific Sovereign CDS Index 44.5 -1.0 basis point.
• Bloomberg Emerging Markets Currency Index 72.96 -.04%. 
• S&P 500 futures +.02%. 
• NASDAQ 100 futures +.04%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (COH)/.41
• (EXC)/.56
• (HCP)/.70
• (INCY)/-.02
• (MWW)/.03
• (RRGB)/.80
• (STE)/.77
• (VRX)/1.48
• (FOSL)/.08
• (JAZZ)/2.81
• (MYL)/1.13
• (SCTY)/-2.56
• (TDW)/-.74
• (DIS)/1.61
• (YELP)/.15 

Economic Releases 
6:00 am EST

• The NFIB Small Business Optimism Index for July is estimated at 94.5 versus 94.5 in June. 

8:30 am EST

• Preliminary 2Q Non-Farm Productivity is estimated to rise +.4% versus a -.6% decline in 1Q.
• Preliminary 2Q Unit Labor Costs are estimated to rise +1.8% versus a +4.5% gain in 1Q.
  

10:00 am EST

• Wholesale Inventories MoM for June are estimated unch.  versus a +.1% gain in May.
• Wholesale Sales MoM for June are estimated to rise +.5% versus a +.5% gain in May.
• The IBD/TIPP Economic Optimism Index for August is estimated to rise to 47.3 versus 45.5 in July.  

Upcoming Splits 

• None of note

Other Potential Market Movers

• The UK Industrial Production report, German Trade Balance report, US weekly retail sales reports, $24B 3Y T-Note auction, Jefferies Industrials Conference, Oppenheimer Tech/Internet/Communications Conference, UBS Financial Services and the (ORLY) analyst day could also impact trading today.

BOTTOM LINE:  Asian indices are mostly higher, boosted by technology and mining shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Reversing Slightly Lower into Final Hour on Earnings Outlook Concerns, Technical Selling, Profit-Taking, Drug/Homebuilding Sector Weaknes

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 11.61 +1.93%

• Euro/Yen Carry Return Index 118.62 +.59%

• Emerging Markets Currency Volatility(VXY) 9.52 +.42%

• S&P 500 Implied Correlation 42.72 -2.8%

• ISE Sentiment Index 110.0 -20.9%
  

• Total Put/Call .97 +5.43%

• NYSE Arms .79 -19.2% 

Credit Investor Angst:

• North American Investment Grade CDS Index 71.42 +.91%
  

• America Energy Sector High-Yield CDS Index 742.0 -1.82%

• European Financial Sector CDS Index 86.25 -1.66%

• Western Europe Sovereign Debt CDS Index 23.66 -4.13%

• Asia Pacific Sovereign Debt CDS Index 44.36 -2.58%

• Emerging Market CDS Index 244.50 -3.85%
  

• iBoxx Offshore RMB China Corporate High Yield Index 131.59 +.11%

• 2-Year Swap Spread 28.75 +2.5 basis points
  

• TED Spread 53.50 +1.5 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -43.75 unch.
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.99 +.52%
• 3-Month T-Bill Yield .26% unch.

• Yield Curve 87.0 unch.
  

• China Import Iron Ore Spot $61.56/Metric Tonne +1.35%

• Citi US Economic Surprise Index 19.10 -1.8 points

• Citi Eurozone Economic Surprise Index 29.8 +1.6 points

• Citi Emerging Markets Economic Surprise Index 1.0 +.9 point

• 10-Year TIPS Spread 1.51% unch.
• 29.2% chance of Fed rate hike at Nov. 2 meeting, 47.4% chance at Dec. 14 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +5 open in Japan 
• China A50 Futures: Indicating +23 open in China

• DAX Futures: Indicating -17 open in Germany

Portfolio: 

• Lower: On losses in my biotech/medical sector longs and emerging market shorts
  

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• China’s Great River of Steel Swells as Trade Tensions Build. There’s a river of steel flooding from China despite the best efforts of governments around the world to dam the flow from the top producer, with data on Monday showing that overseas shipments held above 10 million tons in July. Sales increased 5.8 percent on-year to 10.3 million metric tons last month, compared with 10.9 million tons in June, according to China’s customs administration. Exports in the first seven months expanded 8.5 percent to 67.4 million tons, a record volume for the period. That’s in line with what South Korea, the world’s sixth-largest producer in 2015, makes in an entire year.
• China’s Exports Remained Sluggish Last Month. (video)
• China Sees Second Shipbuilder Default This Year as Economy Slows. A Chinese shipbuilder failed to make a bond payment due Monday, becoming the second such company to default in the onshore market this year. Wuhan Guoyu Logistics Industry Group Co., which is based in the central province of Hubei, didn’t transfer funds for interest and principal payment to the Shanghai Clearing House before the due time, according to a statement Monday. The firm issued the 400 million yuan ($60 million) of one-year bonds at 7 percent in 2015.
• Hong Kong Property Stocks Are Hottest Since Eve of 1997 Collapse. Hong Kong real estate shares haven’t been this hot since the city’s last housing bubble burst almost two decades ago. The industry’s benchmark equity gauge has surged 37 percent from this year’s low in January, climbing to the highest level versus Hong Kong’s Hang Seng Index in 19 years on July 29. The last time property companies performed that well relative to the broader market was October 1997, just before the Asian financial crisis sparked a collapse in Hong Kong’s real estate market.
• China Crude Imports Fall to 6-Month Low as Teapot Demand Slows. China’s crude imports fell to the lowest level in six months as demand from independent refineries eased. Net fuel exports surged to a record. The world’s biggest energy user imported 31.07 million metric tons of crude in July, according to data released by the General Administration of Customs on Monday. That’s about 7.35 million barrels a day, the slowest pace since January. Meanwhile, net fuel exports jumped to 2.49 million tons last month.
• Goldman Sachs Says Buy Dollar as Traders Play Catch Up With Fed. (video) Goldman Sachs Group Inc. is telling clients to buy the dollar as the market underprices the odds of a Federal Reserve interest-rate increase this year. In a note, Robin Brooks, Goldman Sachs’s chief currency strategist, said the likelihood of a rate hike by year-end is 75 percent after the U.S. Labor Department released stronger-than-forecast payroll data on Aug. 5, up from 65 percent. The futures market is pricing in about a 50 percent chance, up from 36 percent the week before.
• Don’t Count on Trump or Clinton to Fix Your Bridges and Potholes. The U.S. presidential candidates are trying to outdo each other in pledging federal money for the country’s crumbling infrastructure. Bank of America Merrill Lynch says they have the wrong approach. It’s best that states and cities finance their projects through the municipal-bond market because federal taxation isn’t effective and lacks accountability, according to a report led by Philip Fischer, head of municipal research at the unit of Bank of America Corp.
• Fannie, Freddie Could Need $126 Billion in Crisis, Test Shows. Fannie Mae and Freddie Mac could need as much as $125.8 billion in bailout money from taxpayers in a severe economic downturn, according to stress test results released Monday by their regulator. The Federal Housing Finance Agency said that the government-controlled companies, which back nearly half of new mortgages, would need at least $49.2 billion.
• Delta(DAL) Struggles to Restart Flights After Power-System Failure. (video) Delta Air Lines Inc. struggled to restart its worldwide operations after a computer failure halted flights for hours and grounded thousands of passengers. 

Wall Street Journal:

• Are Negative Rates Backfiring? Here’s Some Early Evidence. Economists worry that people and businesses are saving more, instead of spending. Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.

Fox News:

• Report: Clinton's jobs push as senator fell flat, helped donors. (video)

CNBC:

• Donald Trump just made a major change to his tax plan. 
• Social Security's looming $32 trillion shortfall. (video)
• New high benchmark trifecta is actually bearish. The Nasdaq composite, S&P 500 and S&P SmallCap 600 indexes simultaneously closed in record territory for the first time since April 1998 on Friday, an unusual, broad-based bull market feat that may actually mean lower-than-average returns are ahead, S&P Capital IQ U.S. equity strategist Sam Stovall wrote in a note to clients.

Zero Hedge:

• "Most Hated Rally" Now Fully Embraced Amid Record Speculative Equity Longs, VIX Shorts. (graph)
• August Corporate Bond Issuance Breaks All Records Thanks To Relentless Demand For Yield.
• Hope Springs Eternal.
• Video Captures Moment Of Horrific Suicide Bombing In Pakistan Hospital Which Kills At Least 70.
• Monday Humor? Spanish Bond Yield Plunges Below 1% For First Time Ever. (graph)
• Buffett Exits Entire Credit Default Swap Exposure, As Citi's Appetite For Derivative Destruction Surges.
• "Poorer Than Your Parents?" New Study Shows 81% Of Americans Worse Off Than In 2005.
• Oil Surge Continues As Short Squeeze Accelerates. (graph)
• Fed's Labor Market Indicator Bounces Back At Fastest Pace Since 2015. (graph)
• IMF Studies Piketty’s Work On Income Inequality, Finds There Is "No Empirical Evidence” To Support Claims.
• Oil Spikes On Renewed OPEC Supply Cut Chatter, Just As Hedge Funds Turn Record Short. (graph)

Business Insider:

• Reports: Anti-Trump Republican official mounting independent presidential bid.
• Former Iranian president writes letter to Obama demanding $2 billion in frozen assets.
• Copper is waving a red flag for China's economy.
• Turkey's president is heading to Russia to meet with Putin, and 'he is essentially blackmailing the West'.

Bear Radar

Style Underperformer:

• Large-Cap Growth -.4%

Sector Underperformers:

• 1) Drugs -1.6% 2) Computer Services -1.0% 3) Steel -.9%

Stocks Falling on Unusual Volume: 

• SAEX, BMY, CLM, PPH, BGSF, CRF, NVO, NAP, LMT, LILAK, AHS, TEAM, DF, IRMD, DVAX, OLED, MRK, QTWO, CCRN, EBIX, SHEN, BCC, LILA, BITA, CENTA and AGN

Stocks With Unusual Put Option Activity:

• 1) COH 2) BID 3) BMY 4) HLT 5) JCP

Stocks With Most Negative News Mentions:

• 1) CYH 2) FRED 3) SHEN 4) BCC 5) RPTP

Charts:

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