Wednesday Watch

Evening Headlines

Bloomberg:

• China Is Losing Its Emerging Markets Growth Engine. China’s export growth to emerging markets that helped it weather the global financial crisis has fallen away, adding to the drag on manufacturers as demand from advanced economies fails to pick up the slack. Exports to developing nations fell 6 percent in the second quarter while those to fuel-exporting countries in the Middle East and beyond flat-lined after a 22 percent plunge in the first three months. Weaker oil and commodities prices were the main causes along with the war in Syria that’s undercut demand across the Middle East, according to exporters and foreign buyers interviewed last week at the biennial Canton Fair in Guangzhou.
• Fastest-Growing China Provinces Can’t Quit Investment Addiction. When it comes to China’s economy, investment is still king. In the five fastest-growing provinces, total fixed-asset investment exceeded the sum of their gross domestic product in the first three quarters of this year, according to new data from 29 of 31 provincial governments. In Chongqing, Guizhou, Tianjin, Jiangxi and Anhui, combined total investment was 6.56 trillion yuan ($969 billion) versus their combined economic output of 6.37 trillion yuan, the data show. 
• Asian Stocks Decline on U.S. Election Angst as Yen Strengthens. Asian stocks fell with U.S. equity index futures amid mounting anxiety ahead of next week’s American presidential election. The yen strengthened, while the Swiss franc and gold maintained gains from the last session as investors favored haven assets. The MSCI Asia Pacific Index sank toward a two-week low after the S&P 500 Index sank to its lowest since July. The yen was near a one-week high following the steepest surge in more than two months for the Swiss franc, while gold traded close to its highest price since the start of October and Australian government debt advanced. U.S. crude fell for a fourth day, ahead of an update on American stockpiles. New Zealand’s dollar appreciated after strong jobs data damped prospects of further interest-rate cuts in the nation. The MSCI Asia Pacific Index declined 0.6 percent as of 9:16 a.m. Tokyo time, led by losses in consumer discretionary shares. Japan’s Topix index dropped 1.4 percent, the biggest decline among regional markets open for trading. 
• Microsoft: Windows Flaw Used By Hackers Linked to Russians.

Wall Street Journal:

• Iraqi Forces Enter Islamic State Stronghold of Mosul. Gunfire is heard in a neighborhood inside the Islamic State-held city. Iraqi security forces entered Mosul on Tuesday, with the crackle of gunfire in densely populated neighborhoods signaling a dangerous new stage of urban combat for control of the Islamic State-held city.

Fox News:

• Trump, Pence vow to 'repeal and replace' ObamaCare as enrollment begins. (video) Donald Trump and Mike Pence marked the start of ObamaCare open enrollment Tuesday by railing against the program's rising consumer costs and pledging to make repealing and replacing President Obama's signature health care law a first order of business if elected. Trump, speaking in Valley Forge in the battleground state of Pennsylvania, called the Affordable Care Act a “catastrophe” that needed to be replaced immediately. 
• Early-absentee voters can still change ballots in at least four states. (video)

MarketWatch:

• Amazon’s(AMZN) ‘change of polarity’ helps confirm bearish chart breakdown.

Zero Hedge:

• October US Auto Sales Post Slight Headline Beat On Massive GM Inventory Build.
• 5 Separate FBI Cases Are Probing Virtually Every One Of Hillary's Inner-Circle.
• FBI Unexpectedly Releases Documents Related To 2001 Probe Into Clinton Foundation.
• Zombie Drillers: A Halloween Horror Story For Oil Markets.
• BofA Institutional Clients Sell Stocks For A Record 21 Straight Weeks Due To Soaring Redemptions.
• Recessions, Predictions, & The Stock Market.
• Venezuela's Currency Disintegrates: Bolivar Plummets 20% In One Week. (graph)
• Gundlach: "We Got The Bearish Signal; Stocks Are Going Down - You Can Feel It".
• RBC: "Be Prepared For Another 'Vol-Control' Deleveraging Wave".
• Crude, Gasoline Tumble After Biggest Inventory Build In 8 Months. (graph)
• Stocks Slammed To Longest Losing Streak Since Aug 2015 Crash. (graph)

Business Insider:

• STURM RUGER(RGR): Demand for guns exploded this summer likely because of election campaigning.
• Rents are plunging in the most expensive markets.

Night Trading 

• Asian equity indices are -1.25% to -.5 % on average.
• Asia Ex-Japan Investment Grade CDS Index 117.75 +4.5 basis points. 
• Asia Pacific Sovereign CDS Index 35.75 +.25 basis point.
• Bloomberg Emerging Markets Currency Index 72.14 -.08%. 
• S&P 500 futures -.05%. 
• NASDAQ 100 futures -.02%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (ENR)/.50
• (VIAB)/.65
• (WEN)/.10
• (MT)/.18
• (UHAL)/8.58
• (FLO)/.21
• (NTES)/3.20
• (SHAK)/.14

Economic Releases
8:15 am EST

• The ADP Employment Change for October is estimated to rise to 165K versus 154K in September.

9:45 am EST

• ISM New York for October.   

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,580,910 barrels versus a -553,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,005,450 barrels versus a -1,956,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,754,910 barrels versus a -3,354,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise +.49% versus a +.6% gain prior.

2:00 pm EST

• The FOMC is expected to leave the benchmark Fed Funds rate at .25-.5%.
  

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Eurozone Manufacturing PMI, China Services PMI, weekly MBA Mortgage Applications report and the Goldman Industrials Conference could also impact trading today.

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

Stocks Falling into Final Hour on Rising Election Uncertainty, European/Emerging Markets/US High-Yield Debt Angst, Yen Strength, Healthcare/REIT Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Slightly Above Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 19.5 +14.2%

• Euro/Yen Carry Return Index 120.14 -.05%

• Emerging Markets Currency Volatility(VXY) 10.0 +1.1%

• S&P 500 Implied Correlation 64.75 +14.0%

• ISE Sentiment Index 61.o +3.0%
  

• Total Put/Call 1.48 +42.31%

• NYSE Arms .91 -.92% 

Credit Investor Angst:

• North American Investment Grade CDS Index 79.84 +1.7%
  

• America Energy Sector High-Yield CDS Index 634.0 +4.31%

• European Financial Sector CDS Index 99.63 +2.76%

• Western Europe Sovereign Debt CDS Index 18.94 -.37%

• Asia Pacific Sovereign Debt CDS Index 35.69 +.32%

• Emerging Market CDS Index 247.74 +2.54%
  

• iBoxx Offshore RMB China Corporate High Yield Index 132.52 -.03%

• 2-Year Swap Spread 24.25 +1.0 basis point

• TED Spread 54.5 -6.25 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -46.25 +2.0 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.17 -.15%
• 3-Month T-Bill Yield .35% +5.0 basis points

• Yield Curve 100.0 +2.0 basis points
  

• China Import Iron Ore Spot $65.33/Metric Tonne +1.48%

• Citi US Economic Surprise Index -8.3 -.2 point

• Citi Eurozone Economic Surprise Index 41.2 +.4 point

• Citi Emerging Markets Economic Surprise Index -4.0 +9.9 points

• 10-Year TIPS Spread 1.73% -1.0 basis point
• 68.0% chance of Fed rate hike at Dec. 14 meeting, 70.0% chance at Feb. 1 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -217 open in Japan 
• China A50 Futures: Indicating -31 open in China

• DAX Futures: Indicating -35 open in Germany

Portfolio: 

• Higher: On gamins in my biotech sector longs, index hedges and emerging markets shorts

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:

• China Starts Credit-Default Swap Trading as Bond Failures Spread. Faced with mounting bond failures, China has started trading of credit-default swaps on the nation’s interbank market. Trading began Monday, according to a statement on the website of the National Association of Financial Market Institutional Investors, a unit under the nation’s central bank. Industrial Bank Co. and Bank of China Ltd. were among the institutions to conduct transactions, using China United Network Communications Ltd.’s bonds as underlying debt, said a person familiar with the matter, asking not to be identified because the authorities haven’t disclosed the information. The swaps, which provide insurance against nonpayment on bonds, can help investors hedge against credit risks after 21 securities defaulted this year, compared with only seven in 2015.
• Better Earnings Season Marred as Shire Sends Europe Stocks Down. (video) European companies may be heading for their most encouraging earnings season in a year, but disappointing results from heavyweights including Shire Plc and Standard Chartered Plc are hogging the limelight. About half of the Stoxx Europe 600 Index’s members have released quarterly results, and of those, 62 percent have beaten profit estimates, according to strategists at JPMorgan Chase & Co., marking the best scorecard since the second quarter of 2015. But despite upbeat news from Royal Dutch Shell Plc and China on Tuesday, worse-than-estimated results at Shire and Standard Chartered dragged the equity gauge down 1.1 percent to its lowest level since July 11 at the close of trading. Since reaching a four-month high in September, stocks have struggled to break higher on concern over monetary-policy tightening, the efficacy of European Central Bank stimulus amid mixed economic data, and the U.S. elections. The Stoxx 600 fell 1.2 percent in October, posting its first back-to-back monthly declines since the start of the year, with a late slide in energy shares and earnings ambiguity exacerbating investor concerns.
• Oil's Heading to $40 If OPEC Fails, Says Goldman. (video)
• Buy Gold No Matter Who Wins the Election, HSBC Says. The precious metal could reach levels not seen since 2013. 
• Equity Traders Are Preparing for a Tsunami Amid Tranquil Seas. Markets have been unusually calm in the run-up to the U.S. presidential election, with realized one-month volatility for the S&P 500 index tumbling throughout October. But traders are preparing for this to end very soon, as evidenced on Tuesday morning by the surge in the CBOE Volatility Index to above 18 — a level it hasn't breached since mid September. The index, also known as the VIX, is a measure of the S&P 500's implied volatility over the next month derived from options prices.

Wall Street Journal:

• Election Offers Stark Choices on Supreme Court’s Future. Hillary Clinton and Donald Trump have laid out differing visions for who they would name to fill open seats.

Fox News:

• 'Kept me out of jail': Top DOJ official involved in Clinton probe represented her campaign chairman. (video)

Zero Hedge:

• Podesta To Mills: "We Are Going To Have To Dump All Those Emails".
• More Bad News For Hillary? (graph)
• Three Out Of Four Americans Believe The Media Wants Hillary To Win.
• Don’t Sweat The Election. The Next Crisis Is Already Baked Into The Cake.
• US Yield Curve Steepens To 5-Month Highs As Rate-Hike Odds Soar. (graph)
• The Obamacare Tipping Point.
• Eli Lilly(LLY) Plunges To 7 Month Lows After Bernie Sanders Tweet. (graph)
• S&P Breaks Support, Tumbles To 3-Month Lows As VIX Tops 19. (graph)
• Syrian Refugees Admitted Into The U.S. Surge 675% So Far In 2016.
• Hillary And The Ghosts Of Watergate.
• Italy Seen More Likely To Exit Eurozone Than Greece; Italian Bond Yields Surge. (graph)
• US Construction Spending Contracts YoY For First Time Since 2011. (graph)
• "Widespread Reticence To Take On Extra Staff" Despite US Manufacturing PMI At 1 Year High As Inflation Soars. (graph)
• Trump And Clinton Build Legal Armies For Possibility Of A Contested Election.
• Podesta Part 25: Wikileaks Releases Another 2,460 Emails, Total Is Now 41,969.

Business Insider:

• Trump vaults to lead in major poll just one week from Election Day. 
• Meet Huma Abedin, the top Clinton aide now at the center of the email investigation.
• iPhone users are abandoning their loyalty to Apple(AAPL).

Bear Radar

Style Underperformer:

• Small-Cap Value -1.2%

Sector Underperformers:

• 1) Steel -3.1% 2) Hospitals -2.4% 3) REITs -2.4%

Stocks Falling on Unusual Volume: 

• INST, BKD, TRNC, PBI, BOKF, ADPT, RAIL, LMNX, LB, CTL, LVLT, HZO, BTI, NLS, NAP, GLT, STON, GOOD, IHG, PLOW, ALLE, AYR, SHPG, SRCLP, ICLR, IDXX, MHK, BWXT, LL, TEX, STON, OXY, MDC, AXL, SCAI, HEES, CSAL, CSU and HCP

Stocks With Unusual Put Option Activity:

• 1) OXY 2) GPS 3) FDX 4) COH 5) TXN

Stocks With Most Negative News Mentions:

• 1) LB 2) TEX 3) WMB 4) JNPR 5) MA

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Value -.7%

Sector Outperformers:

• 1) Gold & Silver +3.4% 2) Gaming +2.0% 3) Biotech +.4%

Stocks Rising on Unusual Volume:

• IDTI, SPR, AMKR, PBF, ADM, MLM, HW, CNX and CWEI

Stocks With Unusual Call Option Activity:

• 1) ADM 2) VIAB 3) ETSY 4) LVLT 5) RRC

Stocks With Most Positive News Mentions:

• 1) VRX 2) GILD 3) OCN 4) ZBH 5) SAFM

Charts:

• ETFs Rising on Unusual Volume
• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running +14.4% Above 100-Day Average
• 0 Sectors Rising, 10 Sectors Declining
• 28.0% of Issues Advancing, 69.2% Declining
• 27 New 52-Week Highs, 51 New Lows
• 51.6% of Issues Above 200-day Moving Average
• Average 14-Day RSI 36.6%
• Vix 18.6 +9.0%
• Total Put/Call 1.6 +50.0%
• TRIN/Arms .85 -7.1%