Wednesday Watch

Evening Headlines

Bloomberg:

• China's $8.5 Trillion Shadow Bank Industry Is Back in Full Swing. China’s shadow banking is back in full swing, an unintended side effect of the government’s campaign against financial leverage, which has curbed traditional lending and squeezed bond financing. Data from the central bank Friday showed that off-balance sheet lending surged 754 billion yuan ($109 billion) in March, taking the first quarter’s total increase to a record 2.05 trillion yuan. Efforts by the People’s Bank of China to curb fresh lending may have prompted borrowers, especially real estate developers, to resort to alternative forms of financing, said Xu Gao, chief economist at Everbright Securities Co.

• Beware the Rally in Emerging-Market Currencies. Beware the rally in emerging-market currencies: the best quarterly performance in almost seven years is about to reverse. That’s the message from the most-accurate forecaster of developing-nation Asian currencies last quarter: Wells Fargo & Co. “We don’t see continued appreciation through the rest of the year,” said Nicholas Bennenbroek, head of currency strategy at the U.S. bank in New York. “Federal Reserve interest-rate increases should continue at a steady pace, which should weigh on most foreign currencies, including Asian currencies.”

• Japan 10-Year Yield Falls to Zero for First Time in Five Months. Japan’s benchmark 10-year bond yield fell to zero percent for the first time since November as U.S. Treasury yields plunged on weak economic data, while lingering tensions over North Korea and uncertainty over France’s presidential election keep haven demand intact. The 10-year Treasury yield fell eight basis points Tuesday to a five-month low of 2.17 percent. The Guardian reported the U.S. military is considering shooting down North Korean missile tests, citing two unidentified people briefed on the planning. The U.S. is closely monitoring the situation in North Korea, a White House spokesman said.

• Canada Puts Housing Speculators on Notice as Toronto Prices Soar.

• Asian Stocks Drop After Weak U.S. Trading Session. Japan’s Topix index fell 0.1 percent.
  Australia’s S&P/ASX 200 Index lost 0.5 percent and South Korea’s Kospi index declined 0.3 percent. Hang Seng futures slid 0.1 percent.

Wall Street Journal:

• Banks Rack Up Advisory Fees as Fiduciary Rule’s Future Hangs. Trump administration may scrap the Obama-era rule, but Wall Street already sees benefits of recurring fees over commissions.

• U.S. Carl Vinson Carrier Wasn’t on Way to North Korea. Despite representations by Trump and defense advisers, Vinson was thousands of miles away on exercises off northwest coast of Australia.

Fox News:

• Double threat? ISIS and Al Qaeda are in talks to join forces, Iraq's VP says. (video)

CNBC:

• Verizon(VZ) CEO said he may be interested in merger with Disney(DIS), Comcast(CMCSA) or CBS(CBS).

• PetSmart(PETM) is acquiring Chewy.com for $3.35 billion in largest e-commerce acquisition.

• The French election is a big deal — and it has more than one scary outcome for markets. (video)

• Trump: 'We're going to surprise you' with speed of tax reform.

Zero Hedge:

• Meet Brad Birkenfeld: "Lucifer's Banker".

• IBM(IBM) Tumbles After Posting Lowest Revenue In 15 Years, 20th Consecutive Quarter Of Declining Sales.

• Three People Killed In Fresno Shooting Spree; Shooter Screamed "Allahu Akbar", Hated "White People".

• Obama, Comey Relied On Discredited Dossier To Obtain FISA Warrant On Trump Campaign.

• Wall Street Is Pouring Money Back Into Shale.

• Stockman: We're Borrowing Our Way To Economic Disaster.

• WTI/RBOB Tumble After Unexpected Build In Gasoline Inventories. (graph)

• 'May'hem Strikes - Dollar & Bond Yields "Pounded" To Post-Election Lows. (graph)

Business Insider:

• Hillary Clinton reportedly blamed everyone but herself for her humiliating defeat to Trump. 

• MARK CUBAN: Gary Cohn is leading a 'Democratic invasion' of Trump's White House. Billionaire business mogul Mark Cuban said Tuesday that Gary Cohn, head of President Donald Trump's National Economic Council, is leading a "Democratic invasion of the White House." Cuban, the owner of the NBA's Dallas Mavericks and star of ABC's "Shark Tank," told the Fox Business Network that was why Trump is becoming more centrist, according to Fox Business reporter Charlie Gasparino. "50% of non-military leadership are Democrats," Cuban said, pointing to Cohn, Treasury Secretary Steve Mnuchin, senior adviser Jared Kushner, and assistant to the president Ivanka Trump.

Night Trading 

• Asian equity indices are -.5% to -.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 103.0 +1.75 basis points. 

• Asia Pacific Sovereign CDS Index 24.25 +.5 basis point.

• Bloomberg Emerging Markets Currency Index 72.35 +.01%.

• S&P 500 futures +.12%. 

• NASDAQ 100 futures +.13%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ABT)/.43

• (ASML)/.92

• (BLK)/4.90

• (MS)/.90

• (AMTD)/.41

• (TXT)/.45

• (USB)/.80

• (AXP)/1.27

• (BMI)/.27

• (CP)/2.49

• (CSX)/.43

• (EBAY)/.48

• (KMI)/.18

• (QCOM)/1.20

• (SCSS)/.46

• (STLD)/.79

• (URI)/1.55

• (VMI)/1.63

Economic Releases
10:30 am EST 

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,033,330 barrels versus a -2,166,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,633,330 barrels versus a -2,973,000 barrel decline the prior week. Distillate inventories are estimated to fall by -788,890 barrels versus a -2,153,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.11% versus a +.2% gain the prior week.
  

2:00 pm EST

• US Fed releases Beige Book report. 
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Rosengren speaking, Eurozone CPI/Trade Balance reports and the weekly MBA Mortgage Applications report could also impact trading today.

BOTTOM LINE:  Asian indices are modestly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher.  The Portfolio is 75% net long heading into the day.

Stocks Falling into Final Hour on Less Economic Optimism, European Election Worries, Earnings Concerns, Financial/Pharma Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 14.50 -1.09%

• Euro/Yen Carry Return Index 121.41 +.29%

• Emerging Markets Currency Volatility(VXY) 9.19 -.43%

• S&P 500 Implied Correlation 45.89 -.78%

• ISE Sentiment Index 80.0 -22.33%
  

• Total Put/Call .65 -23.53%

• NYSE Arms 1.42 +119.18%

Credit Investor Angst:

• North American Investment Grade CDS Index 68.79 +1.40%
  

• America Energy Sector High-Yield CDS Index 362.0 +.27%

• European Financial Sector CDS Index 94.31 +.50%

• Western Europe Sovereign Debt CDS Index 13.72 +2.85%

• Asia Pacific Sovereign Debt CDS Index 23.94 +1.35%

• Emerging Market CDS Index 212.80 +.52%
  

• iBoxx Offshore RMB China Corporate High Yield Index 136.85 +.10%

• 2-Year Swap Spread 32.0 -.75 basis point

• TED Spread 35.0 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -30.0 +1.75 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.34 +.06%
• 3-Month T-Bill Yield .80% unch.
  

• Yield Curve 100.0 -5.0 basis points
  

• China Import Iron Ore Spot $66.25/Metric Tonne n/a

• Citi US Economic Surprise Index 6.60 -3.9 points

• Citi Eurozone Economic Surprise Index 38.50 -.1 point

• Citi Emerging Markets Economic Surprise Index 39.7 +.4 point

• 10-Year TIPS Spread 1.85 -4.0 basis points
  
• 43.7% chance of Fed rate hike at June 14 meeting, 49.1% chance at July 26 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -68 open in Japan 
• China A50 Futures: Indicating -51 open in China

• DAX Futures: Indicating +11 open in Germany

Portfolio: 

• Lower: On losses in my biotech/medical sector longs

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

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:

• What Does the U.K. Snap Election Mean for Brexit? (video) Prime Minister Theresa May’s call for a June 8 election reverses her opposition to an early vote. The last election in 2015 took place a year before the U.K. voted in a referendum to leave the European Union. As May prepares for two years of Brexit talks, her Conservative Party enjoys the widest public-opinion margin in three decades over the main opposition Labour Party. That gives her a chance to cement her position and widen her majority.

• U.S. Firms in China Face Worst Conditions in Decades: AmCham. U.S. companies in China face one of the most challenging environments in decades this year, the American Chamber of Commerce in China said.

• Chinese Stocks Are Unnerving Investors Again as Losses Steepen. The stability in China’s stock market this year is showing signs of cracking. In just three days the Shanghai Composite Index has fallen 2.4 percent, the steepest such decline since mid-December. The psychologically key 3,200 level has been breached for the first time in two months, while a measure of volatility is climbing.

• European Stocks Slide With FTSE 100 as May Calls for Election. (video) U.K. equities tumbled after Prime Minister Theresa May called for a snap election, with European stocks in a broad decline as markets reopened after the Easter holiday. The Stoxx Europe 600 Index plunged 1.1 percent at the close. All but one industry group fell, with miners leading declines as iron-ore prices tumbled. The exporter-heavy FTSE 100 Index tumbled 2.5 percent in its biggest drop since the aftermath of the Brexit vote as the pound rose after May called for a general election in June.

• Industrial Metals Are Diving. 

• IMF Raises Global Forecast While Warning of Protectionism Threat. (video) The emergence of protectionist forces could undermine a modest brightening of the global growth outlook and is putting severe strain on the post-World War II economic order, the International Monetary Fund said. The IMF raised its forecast for global growth to 3.5 percent this year, up 0.1 percentage point from January, the Washington-based fund said in the latest update to its World Economic Outlook. Expansion will pick up to 3.6 percent in 2018, unchanged from the projection three months ago. The upgrade offers a glimmer of optimism following a trend in recent years of the fund downgrading its growth forecasts.

Wall Street Journal:

• Hollywood’s New Script: You Can’t Make Movies Without China. The U.S. movie industry has become reliant on China’s investors and its more than a billion potential moviegoers—a relationship with strings attached.

• Malls Deploy Technology to Lure—and Keep—Shoppers. Faced with declining sales and disappearing stores, mall owners turn to smartphones, apps and social media. 

CNBC:

• Since 1990, market gains double when this happens — and it just did. (video)

• Zuckerberg lays out Facebook's(FB) 'act two': augmented reality.

• Economist Zandi, who predicted Trump 'lengthy recession,' changes his tune. (video)

• UnitedHealth(UNH) raises its 2017 outlook despite the uncertainty over Obamacare repeal.

• Buy McDonald's(MCD) because of its new menu offerings, digital ordering, Bernstein says.

• Here’s why Georgia’s special election isn’t the big threat to Trump Dems are making it out to be.

Zero Hedge:

• Pentagon Considers Shooting Down North Korea Missile Tests.

• Fund Managers Revolt: Cut Allocation To "Record Overvalued" US Stocks To Lowest Since 2008. (graph)

• Cable Flash Smash: Pound Explodes As Stops Taken Out. (graph)

• US Macro Data Crashes Most In 7 Years - What Happens Next? (graph)

• "It's Very Shocking" - Georgia's Cobb County Waited 2 Days Before Admitting Critical Voting Machines Stolen.

• Trump To Crack Down On Visa "Abuse" In "Hire American" Executive Order.

• Theresa May Calls For Snap UK General Election To Get Brexit Support. (graph)

• Free Money! Is The Fed Paying Banks $22 Billion To Not Lend? (graph)

• Factory Output Tumbles In March. (graph)

• Housing Starts Drop Most In 4 Months; Single-Family Starts Collapse In The Midwest. (graph)

Business Insider:

• Cardinal Health(CAH) is buying Medtronic's(MDT) medical supplies businesses for $6.1 billion.

• 'Facebook(FB) killer' Steve Stephens found dead in Pennsylvania.

• If the latest iPhone 8 rumors are true, Samsung should be worried.

• Bank of America(BAC) beats, has record quarter in investment banking.

The Telegraph:

• The markets are betting Theresa May's snap general election will provide greater certainty (and a softer Brexit).

Bear Radar

Style Underperformer:

• Large-Cap Value -.4%

Sector Underperformers:

• 1) Hospitals -1.8% 2) Drugs -1.4% 3) Steel -1.4%

Stocks Falling on Unusual Volume: 

• GLPG, CUDA, HCC, GWW, CAH, HOG, GS, KATE, POST, MCK, AGIO, ABC, UAL and RF

Stocks With Unusual Put Option Activity:

• 1) RRC 2) TWX 3) HOG 4) KATE 5) SLV

Stocks With Most Negative News Mentions:

• 1) HOG 2) ABC 3) AEO 4) OMED 5) VRX

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth -.3%

Sector Outperformers:

• 1) Papers +.7% 2) Gaming +.7% 3) Restaurants +.4%

Stocks Rising on Unusual Volume:

• CAB, TTS, SSYS, IGT, AZUL, CYTK, APFH, BUFF, TIS, LECO, AN, GIMO, DY, CORE, LL, CHDN, EGBN, SNV, SAVE, UNH, ELS, AKTX and INVN

Stocks With Unusual Call Option Activity:

• 1) HAIN 2) XBI 3) DDD 4) NFLX 5) TIF

Stocks With Most Positive News Mentions:

• 1) BUFF 2) SSYS 3) XIN 4) AFL 5) MCD

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running +.7% Above 100-Day Average
• 8 Sectors Rising, 2 Sectors Declining
• 35.3% of Issues Advancing, 60.5% Declining
• 60 New 52-Week Highs, 18 New Lows
• 55.1% of Issues Above 200-day Moving Average
• Average 14-Day RSI 38.8%
• Vix 14.8 +1.0%
• Total Put/Call .77 -9.4%
• TRIN/Arms 1.07 +72.0%