Stocks Slightly Lower into Final Hour on European Debt Angst, Yen Strength, Profit-Taking, Energy/Biotech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 10.23 +4.28%

• Euro/Yen Carry Return Index 129.35 -.24%

• Emerging Markets Currency Volatility(VXY) 8.10 -.98%

• S&P 500 Implied Correlation 39.62 -1.86%

• ISE Sentiment Index 77.0 -43.4%
  

• Total Put/Call .95 +5.6%

• NYSE Arms 1.06 -9.38%

Credit Investor Angst:

• North American Investment Grade CDS Index 62.31 -1.03%
  

• America Energy Sector High-Yield CDS Index 365.0 -1.44%

• European Financial Sector CDS Index 68.74 +3.09%

• Western Europe Sovereign Debt CDS Index 8.95 +2.9%

• Asia Pacific Sovereign Debt CDS Index 19.29 +.44%

• Emerging Market CDS Index 194.20 +.82%
  

• iBoxx Offshore RMB China Corporate High Yield Index 138.65 +.02%

• 2-Year Swap Spread 23.0 -.5 basis point

• TED Spread 27.25 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -36.50 -1.5 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.93 -.07%
• 3-Month T-Bill Yield .92% unch.
  

• Yield Curve 93.0 -2.0 basis points
  

• China Import Iron Ore Spot $58.50/Metric Tonne unch.

• Citi US Economic Surprise Index -37.50 -1.3 points

• Citi Eurozone Economic Surprise Index 48.90 -7.1 points

• Citi Emerging Markets Economic Surprise Index 15.60 -4.1 points

• 10-Year TIPS Spread 1.84 +1.0 basis point
  
• 90.5% chance of Fed rate hike at July 26 meeting, 95.5% chance at Sept. 20 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -33 open in Japan 
• China A50 Futures: Indicating +8 open in China

• DAX Futures: Indicating -9 open in Germany

Portfolio: 

• Slightly Higher: On gains in my medical/tech sector longs 

• Disclosed Trades: None

• Market Exposure: 100% Net Long

Today's Headlines

Bloomberg:

• Trump Blasts Germany Again as Merkel Talks Up India Ties. (video) President Donald Trump blasted Germany anew over trade and defense, ratcheting up a dispute with Chancellor Angela Merkel that risks getting personal and undermining a trans-Atlantic bond that is the bedrock of U.S.-European relations. Trump’s comments came in an early-morning tweet on Tuesday issued just as Merkel hosted Indian Prime Minister Narendra Modi in Berlin, where they held a joint cabinet meeting and signed cooperation agreements. Modi suggested that India will adhere to the Paris climate accords, while Trump makes up his mind.

• Fed's Brainard Says Soft Inflation May Warrant Rate Rethink. (video) Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. “If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” Brainard said in prepared remarks Tuesday. She said her baseline expectation is that “it likely will be appropriate soon to adjust the federal funds rate” and start shrinking the balance sheet.

• The End of Cheap Chocolate? Cocoa Futures Surge Most on Record. Cocoa prices soared amid signs of tighter supplies in Ivory Coast, the world’s top grower, raising prospects that chocolate costs will climb. July futures jumped as much as 6.8 percent, the most ever for the contract. Farmers in West Africa are already locking in more forward sales for next year’s crop than traders were expecting, a sign that supplies from the current harvest are beginning to ebb.

Wall Street Journal:

• Fed Officials Likely to Raise Rates in June, Finalize Plans to Reduce Portfolio. A potential political fight over the U.S. budget could cause the Fed to rethink its plans for later in the year.

Fox News:

• North Korea eyed as US readies missile defense test. (video)

CNBC:

• The S&P 500 just did something that has meant gains 100 percent of the time. (video)

• Trump is threatening Europe...with the truth. (video)

• Electric vehicle demand to skyrocket, but won't kill gasoline just yet, says analyst.

• Breakout or head fake? Here’s what the bulls need to watch for.

Zero Hedge:

• Texas Democrat Threatens To Kill Republican On Legislative Floor After He Called ICE On Protesting Illegal Immigrants.

• Dallas Fed President: "A Stock Market Correction Could Actually Be A Healthy Thing".

• Is This The "Mystery" Massive Long Supporting The Oil Market? (graph)

• Trump Calls For Senate 'Nuclear Option' To Avoid Shutdown, Claims "Dems Would Do It".

• Time To Add Housing To The Bubble List?

• "Precarious" Debt Crisis "Could Reverberate Around The World".

• Consumer Confidence Drops To Weakest Since Feb As 'Soft' Data Slump Continues. (graph)

• Amazon(AMZN) Tops $1000 For First Time Ever, Bezos Up Over $19 Billion Year-To-Date.

• US Home Prices Rise At Fastest Pace In 3 Years To Record Highs. (graph)

• Personal Spending Growth Tumbles To 7-Month Lows After Dramatic Revisions. (graph)

• Trump Blasts Germany In First Tweet Of The Day.

• Deutsche Bank(DB) Downgrades European Banks To Underweight.

Business Insider:

• Steve Cohen reportedly is prepping the biggest hedge-fund launch ever.

• 17 remain in 'critical care' after Manchester terror attack.

• Ariana Grande, Coldplay, Justin Bieber, and Katy Perry to play benefit concert in Manchester on Sunday.

• Red-hot tech stocks are getting a boost from an unexpected source.

Bear Radar

Style Underperformer:

• Small-Cap Value -.7%

Sector Underperformers:

• 1) Oil Service -1.6% 2) Biotech -1.3% 3) Airlines -1.2%

Stocks Falling on Unusual Volume: 

• NTNX, AMBA, EDIT, HRTX, MOMO, BITA, VEEV and WB

Stocks With Unusual Put Option Activity:

• 1) EWW 2) WLL 3) NOW 4) S 5) WMB

Stocks With Most Negative News Mentions:

• 1) AMBA 2) WLL 3) CALM 4) BWLD 5) WTW

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth +.1%

Sector Outperformers:

• 1) Steel +1.9% 2) Computer Hardware +1.7% 3) Disk Drives +1.3%

Stocks Rising on Unusual Volume:

• XTLY, APPN, ATW, TRUP, BFR, RYAM, LABL, LPL, COOL, SBRA, ICHR, TIVO, HNP, MTCH, MRAM, HUBG, ADI, MMC, NVDA, AMRI, GSK, PLUS, NSC, SBAC and UHAL

Stocks With Unusual Call Option Activity:

• 1) CYTR 2) ADI 3) CMCSA 4) FOLD 5) PVH

Stocks With Most Positive News Mentions:

• 1) MU 2) MNKD 3) ZNGA 4) TEX 5) SYMC

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -11.6% Below 100-Day Average
• 5 Sectors Rising, 5 Sectors Declining
• 27.9% of Issues Advancing, 68.5% Declining
• 63 New 52-Week Highs, 36 New Lows
• 45.6% of Issues Above 200-day Moving Average
• Average 14-Day RSI 36.2%
• Vix 10.4 +6.3%
• Total Put/Call .90 unch.
• TRIN/Arms .78 -33.5%

Tuesday Watch

Today's Headlines

Bloomberg:

• Draghi Says Euro Area Still Requires ECB Monetary Support. (video) The euro area still needs expansive monetary stimulus to restore stable inflation even as its economy accelerates, European Central Bank President Mario Draghi said. “We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary,” Draghi told lawmakers on Monday in Brussels. “Domestic cost pressures, notably from wages, are still insufficient to support a durable and self-sustaining convergence of inflation toward our medium-term objective.”

• Merkel Says U.S. Ties Shouldn't Deter Europe From Own Path. German Chancellor Angela Merkel said she remains a “committed trans-Atlanticist” who wants strong ties with the U.S., even as she renewed her warning that reliable relations with her country’s closest post-World War II ally may be a thing of the past. Following global reaction to comments she made Sunday, Merkel stood her ground for a second day, saying it was good that last week’s Group of Seven summit “didn’t paper over” a clash on climate change that pitted President Donald Trump against the other six leaders.

• Japan’s Unemployment Rate Holds at Two-Decade Low in April.

• Luxury Spending to Rebound in 2017 on Europe, China, Bain Says. Tourism in Spain and the U.K. will lead a rebound in European luxury spending this year, while Chinese domestic consumption also increases, Bain & Co. said, raising its forecast for global growth in 2017. Sales of items such as designer handbags and fine jewelry will rise 2 percent to 4 percent to as much as 259 billion euros ($290 billion), Bain said in a report Monday. The consultancy had predicted growth of 1 percent to 2 percent in December, and the forecasts exclude currency swings.

• Robots May Help Defuse Demographic Time Bomb in Japan, Germany. Manufacturing powerhouses will find it easier to adapt. Japan and Germany may be sitting on a ticking demographic time bomb where aging populations begin to drag down economic growth. Good thing they’re also prime candidates for robot revolutions. Increased automation and more use of robotic technology in these manufacturing powerhouses could help cushion the impact, according to Moody’s Investors Service.

• A Quick Guide to How Brazil's New Political Crisis May Play Out.

• Stocks Meander in Holiday-Hit Trading; Pound Rises. Global stocks were mixed and the dollar and euro traded sideways amid thin trading as investors weighed the latest comments from a Federal Reserve official on the path of U.S. borrowing costs and Mario Draghi’s dovish message to the European Parliament. With markets in the U.K., U.S. and China closed for holidays, volumes were depressed, limiting price movements. Sterling led gains among G-10 currencies as it recouped some of Friday’s retreat, and Italian assets fell as former Prime Minister Matteo Renzi raised the prospect of an early election. Brazil’s real dropped in the wake of Friday’s decision by Moody’s Investors Service to lower the country’s credit outlook, while Mexico’s peso was little changed even after bullish wagers fell. South Africa’s rand dropped after President Jacob Zuma survived a bid by some members of his party to oust him. The Stoxx Europe 600 Index fell by less than 0.1 percent as of 12:57 p.m. in New York.
  Futures on the S&P 500 Index rose by less than 0.1 percent after the underlying gauge closed at a record high on Friday.

Wall Street Journal:

• GOP’s Proposed Tax Changes Are No Match for Status Quo. Republicans’ boldest ideas for changes are on political life support as plans collide with the tax system’s reality.

• Robert Mueller Gets Off to Fast Start as Special Counsel in Russia Probe. Former FBI head builds staff, budget for investigation into meddling in 2016 election.

• Credit Scores Hit Record High as Recession Wounds Heal. More than six million U.S. adults will have personal bankruptcies disappear over the next five years, according to a recent report. 

• Apple(AAPL): Supercycle Hopes Drive Super-sized Bets. Ahead of developers’ conference, investors are stacking bets on Apple’s next iPhone.

• For Hotels, There’s No Room Left for Online Travel Agencies. Major chains launch marketing campaigns to woo customers away from Expedia, Priceline. 

• What We Remember on Memorial Day. From the Civil War to Vietnam and beyond, Americans have struggled to reconcile the duty to honor the war dead with the need to pass historical judgment.

Fox News:

• President Trump gives Memorial Day Address at Arlington National Cemetery. (video)

CNBC:

• Bitcoin correction sees nearly $4 billion wiped off value of the cryptocurrency as price falls 19%.

• San Francisco Fed's Williams: US economy doesn't need a fiscal package.

• Digital video game sales hit $7.7 billion in April, easing from record high.

Zero Hedge: 

• Three Leakers Of Classified White House Information Said To Be Identified, Expected To Be Fired.

• "We Have Told Each Other Everything" - Highlights From Macron's First Meeting With Putin.

• Hong Kong's Housing Market Has Become "A Sea Of Madness" Central Bank Warns.

• A Problem Emerges With Europe's "Recovery": Companies Crippled By Soaring Payment Delays.

• Euro Slides After Greece Hints At Default. (graph)

• Remembering A Still Falling Hero: Small Business.

• Economists Puzzled By Unexpected Plunge In Saudi Foreign Reserves.

• Sperry: How Team Obama Tried To Hack The Election.

• Ignore OPEC, It's China That Dictates Oil Prices.

• Will The Crazy Global Debt Bubble Ever End?

• Simple (Economic) Math - Businesses Are No Longer Willing To Afford Labor.

• Italian Stocks Tumble, Yields Jump On Sudden Fears Of Early Elections.

• Markets Wrap: Stocks Flat In Quiet Session With US, UK And China Closed For Holiday.

Business Insider:

• TRUMP: North Korea shows 'great disrespect' to China 'by shooting off yet another ballistic missile'.

Night Trading

• Asian indices are -.25% to unch. on average.

• Asia Ex-Japan Investment Grade CDS Index 90.75 +.25 basis point.

• Asia Pacific Sovereign CDS Index 19.25 unch.

• Bloomberg Emerging Markets Currency Index 72.91 -.11%.

• S&P 500 futures +.03%.

• NASDAQ 100 futures +.04%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (AMWD)/1.01

• (PRGO)/1.01

• (NX)/.05

Economic Releases
8:30 am EST

• Personal Income for April is estimated to rise +.4% versus a +.2% gain in March. 

• Personal Spending for April is estimated to rise +.4% versus unch. in March.

• The PCE Core MoM for April is estimated to rise +.1% versus a -.1% decline in March.

9:00 am EST

• The S&P CoreLogic CS 20-City MoM for March is estimated to rise +.8% versus a +.69% gain in February.

10:00 am EST

• The Conference Board Consumer Confidence Index for May is estimated to fall to 119.9 versus 120.3 in April.
  

10:30 am EST

• Dallas Fed Manufacturing Activity for May is estimated to fall to 15.5 versus 16.8 in April.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Eurozone CPI report, Deutsche Bank Financial Services Conference and the KeyBanc Industrial/Automotive/Transports Conference could also impact trading today.

BOTTOM LINE: Asian indices are slightly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.