Friday Watch

Evening Headlines
Bloomberg: 

• ICBC Breach of Bad-Loan Buffer Shows China Banking Stresses. Industrial & Commercial Bank of China Ltd.’s breach of a regulatory requirement for bad-loan provision coverage added to signs of growing stress in the nation’s banking industry. ICBC avoided reporting a quarterly drop in profit on Thursday by letting provisions fall to 141 percent of existing nonperforming credit, below the 150 percent level required by the China Banking Regulatory Commission. The move let it eke out a 0.6 percent gain in net income for the first three months from a year earlier.
• Chinese Commodity Speculators Drop Out After $261 Billion Binge. The speculators that traded $261 billion in Chinese commodities in a single day last week are retreating as regulators prepare to step up control of the market. The value of futures traded across China’s three biggest commodity exchanges has shrunk 42 percent since investors spent 1.7 trillion yuan last Thursday on everything from steel bars to eggs. The amount that changed hands was on a par with the entire U.S. equities market on the same day. Markets in the world’s biggest consumer of raw materials have been gripped by a trading frenzy that’s drawn comparisons with the credit-driven stock market rally last year that preceded a $5 trillion rout. Exchanges have responded by raising margins and transaction fees to curb speculation while the securities regulator is said to have prepared measures to limit price fluctuations.
• Taiwan Economy Shrank in First Quarter as Weak Exports Drag. Taiwan’s economy contracted on a yearly basis for a third straight quarter as an export slump showed no signs of abating, adding urgency to President-elect Tsai Ing-wen’s pledge to revive growth when her term begins next month. Gross domestic product fell 0.84 percent in the three months through March from a year earlier, according to preliminary data released by the statistics bureau Friday. That compares with a 0.65 percent drop projected by the median estimate in a Bloomberg survey of economists and the 0.52 percent decrease in the third quarter.
• China's Stocks Head for Monthly Decline on Earnings Concern. China’s stocks headed for their steepest monthly decline since the start of the year as energy and financial companies slumped after PetroChina Co. reported its first quarterly loss since listing and the nation’s biggest bank barely eked out a profit. The Shanghai Composite Index has dropped 1.84 percent in April and was little changed on Friday as turnover slumped. PetroChina, the most heavily weighted stock, slid to its lowest level in two months. Industrial & Commercial Bank of China Ltd. lost the most in a week after it posted a 0.6 percent gain in net income by breaching a regulatory requirement for bad-loan provision coverage. The Hang Seng China Enterprises Index retreated for the first time in four days.
• Asian Stocks Extend Weekly Decline as Investors Weigh Earnings. Asian stocks fell, extending their weekly decline, after the Bank of Japan quashed expectations for further stimulus and investors scrutinized earnings from PetroChina Co. to China Petroleum & Chemical Corp. The MSCI Asia Pacific Excluding Japan Index retreated 0.3 percent to 416.93 as of 9:34 a.m. in Hong Kong, heading for a weekly loss of 1.5 percent and a 0.1 percent monthly decline. Stocks retreated this week as Japan’s central bank refrained from boosting monetary stimulus and earnings at companies from Canon Inc. to Oversea-Chinese Banking Corp. disappointed investors. Focus now turns to profit reports due from Citic Securities Co., China’s biggest brokerage, and Chinese manufacturing data due at the weekend. Japan’s market is closed Friday for a holiday. “Central banks look like they have run out of bullets to a degree,” Mark Lister, head of private wealth research at Craigs Investment Partners in Wellington, which manages about $7.2 billion, said by phone. “We’re getting to that point where there are limits to the results they can get from anything more they do. This points to a fragile outlook with still a lot of risks out there.”
• Iron Ore Bear Holds Fast Even After `the Market Got It So Wrong'. Iron ore’s surprise rally may be a thing of the past in just three months. Rising supply will top demand once more and the sudden jump in speculative trading in China that’s helped support gains is set to fizzle out, according to Brazil’s Itau Unibanco Holding SA. The commodity will probably soon be back below $50 a metric ton, and may end the year at about $42, Artur Manoel Passos, an economist in Sao Paulo at Latin America’s largest bank by market value, said in an interview. Last week, iron ore traded as high as $70.46.

Wall Street Journal:

• Caterpillar(CAT) to Close Five Plants, Shed 820 Jobs. Cutbacks part of strategy announced in September to scale back production and workforce in response to falling demand.
• U.S. Corporate Profits on Pace for Third Straight Decline. Slow global growth, energy slump weigh on earnings of S&P 500 companies.
• The Agony of a Trump Delegate. Rules may say they’re bound to The Donald, but many are thinking through their options.

Zero Hedge:

• Obama Admits Couldn't "Convince Americans Of Recovery", Bashes 'The Big Short'.
• Why The US Output Gap Means The 10 Year Is Going Below 1%. (graph)
• Junk Economics: Michael Hudson Rages "Wall Street Has Taken Over The Economy.. & Is Draining It".
• China Bond-Sale Cancellations Soar As BofA Warns "Default Risk Is Mispriced". (graph)
• "Why Our Children Should Hate Us" - Read The Lance Simmens Article Banned By The Huffington Post. (video)
• "Peak Oil Demand" - The Collapse Of The Old Oil Order.
• Why 'Good' Jobs Matter (In 1 Recovery-Crushing Chart). (graph)
• The Future Of America? – More Than Half Of All Adults Under-30 Now Reject Capitalism.
• Why Is JPM's "Quant Guru" Suddenly Worried About The "Endgame".
• Automating Ourselves To Unemployment.
• Earnings "Beats" & The Warning In Today's GDP Data. (graph)
• SEC Begins Crack Down On Non-GAAP Accounting Gimmicks. (graph)
• Amazon(AMZN) Soars After Smashing Expectations On Surge In Cloud Profits.
• Kamikaze-Kuroda & Carl Icahn Crush Facebook-Driven Stock-Feeding Frenzy. (graph)

Business Insider:

• Amazon(AMZN) plans to 'significantly' increase investment in video as it goes to war with Netflix.
• Valeant(VRX) might throw the entire pharmaceutical industry under the bus.
• China and Russia are boosting their military cooperation to try to contain the US.
• Goldman Sachs(GS) thinks dividend cuts are coming from big oil.

Financial News:

• China Should Enhance Risk Control for Financial Innovation. Financial innovation without proper risk prevention measures may create systemic risks and even disturb market order, according to a commentary. Regulation should cover all new forms of financial products and activities, the commentary says.

Macao Daily:

• Macau March Tour Group Visitors Fall 36.2% y/y. March tour group traveler arrivals fall to 564,000, lowest since March 2011, citing govt data.

Night Trading 

• Asian equity indices are -1.0% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 141.25 +2.5 basis points. 
• Asia Pacific Sovereign CDS Index 56.75 -1.0 basis point. 
• Bloomberg Emerging Markets Currency Index 73.35 +.03%. 
• S&P 500 futures +.01%. 
• NASDAQ 100 futures +.05%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (AMT)/1.26
• (COG)/-.14
• (CBOE)/.62
• (CVX)/-.16
• (CTB)/.97
• (ETN)/.85
• (XOM)/.32
• (IDXX)/.47
• (LM)/.70
• (MNST)/.74
• (LPNT)/.88
• (MCO)/1.07
• (ZEUS)/-.15
• (PSX)/.87
• (RCL)/.32
• (TYC)/.45
• (VFC)/.58  

Economic Releases 
8:30 am EST

• The 1Q Employment Cost Index is estimated to rise +.6% versus a +.6% gain in 4Q.
• Personal Income for March is estimated to rise +.3% versus a +.2% gain in February.
• Personal Spending for March is estimated to rise +.2% versus a +.1% gain in February.
• Real Personal Spending for March is estimated to rise +.1% versus a +.2% gain in February.
• The PCE Core (MoM) for March is estimated to rise +.1% versus a +.1% gain in February.    

9:00 am EST

• ISM Milwaukee for April.

9:45 am EST

• Chicago Purchasing Manager for April is estimated to fall to 52.8 versus 53.6 in March.

10:00 am EST

• Final Univ. of Mich. Consumer Sentiment for April is estimated to rise to 90.0 versus 89.7 in March.
  

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Fed's Kaplan speaking could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology 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 Substantially Lower into Final Hour on Global Growth Fears, Earnings Outlook Concerns, Yen Strength, Tech/Financial Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Slightly Below Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 14.1 +2.34%

• Euro/Yen Carry Return Index 128.24 -2.84%

• Emerging Markets Currency Volatility(VXY) 10.41 -10.33%

• S&P 500 Implied Correlation 55.15 +1.53%

• ISE Sentiment Index 129.0 +12.2%

• Total Put/Call .92 -8.91%

• NYSE Arms .87 +22.41% 

Credit Investor Angst:

• North American Investment Grade CDS Index 75.83 +2.8%
  

• America Energy Sector High-Yield CDS Index 1,020.0 -7.4%

• European Financial Sector CDS Index 85.62 -1.9%

• Western Europe Sovereign Debt CDS Index 26.19 +1.0%

• Asia Pacific Sovereign Debt CDS Index 56.0 -1.4%

• Emerging Market CDS Index 275.32 +.72%
  

• iBoxx Offshore RMB China Corporate High Yield Index 127.30 +.05%

• 2-Year Swap Spread 13.25 +1.5 basis points

• TED Spread 39.50 +.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -22.50 -.5 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 73.35 +.56%
• 3-Month T-Bill Yield .22% -2.0 basis points
  

• Yield Curve 105.0 +2.0 basis points
  

• China Import Iron Ore Spot $62.90/Metric Tonne +2.96%

• Citi US Economic Surprise Index -29.80 -2.0 points

• Citi Eurozone Economic Surprise Index -9.30 +4.5 points

• Citi Emerging Markets Economic Surprise Index 16.80 +.3 point

• 10-Year TIPS Spread 1.73% +5.0 basis points
  
• 26.1% chance of Fed rate hike at July 27 meeting, 42.3% chance at September 21 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -376 open in Japan 
• China A50 Futures: Indicating -10 open in China

• DAX Futures: Indicating -29 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:    

• China to Consider Starting Trading of Credit-Default Swaps. China is considering starting trading of credit-default swaps as the number of corporate nonpayments surges, according to people familiar with the matter. The National Association of Financial Market Institutional Investors, a central bank subsidiary which oversees interbank market bonds, last month sought opinions on CDS and credit-linked notes from market participants including banks and brokerages, according to the people, who asked not to be identified because the details haven’t been announced. China Foreign Exchange Trade System, which oversees interbank bond trading, held a meeting in Shanghai last week with some financial institutions on the products, they said.
• ICBC Joins Bank of China in Breaching Bad-Loan Coverage Rule. Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, avoided posting a quarterly drop in profit after letting its buffer for covering bad loans fall below a regulatory minimum.  The bank’s provisions for bad loans stood at 141.2 percent of existing nonperforming credit, compared with a regulatory minimum of 150 percent, the Beijing-based lender said in a statement to Hong’s Kong stock exchange on Thursday. One of China’s biggest banks, Bank of China Ltd., this week reported that it had breached the minimum provision rule, the first lender to do so. Government officials are considering loosening the requirement, a move that would lend support to banks’ profits as the lenders digest an increased volume of bad loans.
• London Luxury Hotels in Worst Year Since 2009 on Terror Risk. Jitters about everything from the risk of terrorism to Britain’s membership of the European Union are battering London luxury hotels as the world’s wealthiest travelers stay away. The city’s priciest hotels were only 65 percent occupied in the three months through March, according to data provider STR. That was the lowest for a first quarter since a global recession roiled the market in 2009 and down from 70 percent a year earlier. London’s top hotels include the Savoy and the recently reopened Lanesborough, where the Royal Suite with a complementary chauffeured Rolls-Royce costs about 25,000 pounds ($36,000) per night. 
• China's Stocks, Bonds, Yuan Are a Triple Losing Bet This Month. For the first time in two years, China’s stocks, bonds and currency are all a losing proposition. The Shanghai Composite Index has dropped 1.9 percent in April to a one-month low, the yuan is down 0.5 percent versus the dollar, while government and corporate bonds have tumbled, with the five-year sovereign yield rising 27 basis points. Only the nation’s commodities markets are looking buoyant as frenzied speculation prompted exchanges to take measures to cool trading.
• Europe Stocks Inch Higher Amid Mixed Earnings as Miners Advance. (video) European stocks edged higher as gains in commodity producers helped erase an earlier drop and investors assessed earnings reports. Anglo American Plc and ArcelorMittal jumped more than 6.9 percent, tracking metal prices higher. Banking results were also at the fore. Deutsche Bank AG rose 4 percent after it posted a surprise profit. Banco Bilbao Vizcaya Argentaria SA slid 6.8 percent after its quarterly earnings tumbled 54 percent, missing estimates. Lloyds Banking Group Plc lost 1.7 percent after its revenue and net income fell. The Stoxx Europe 600 Index added 0.2 percent at the close of trading. It fell as much as 1.5 percent earlier as the Bank of Japan refrained from boosting stimulus. 
• Billionaire Icahn Exits Apple Stake 3 Years After Buying. Billionaire Carl Icahn, who first disclosed his stake in Apple Inc. almost three years ago, has sold out of his position, the activist said Thursday. Icahn sold most of his remaining stake in February, Icahn told CNBC. Apple shares declined 1.7 percent as of 2:11 p.m. in New York, giving the company a market value of about $527 billion. They dropped more than 7 percent this year through Wednesday.
• Hamptons Home Sales Decline to Three-Year Lows. (video)
• Snapchat User Content Fuels Jump to 10 Billion Daily Video Views. The majority of people using Snapchat Inc.’s application are making videos, fueling a boom in watching them, the company is telling its investors. More than a third of Snapchat’s daily users create “Stories,” broadcasting photos and videos from their lives that last 24 hours, according to people familiar with the matter. Now users are watching 10 billion videos a day on the application, up from 8 billion in February, said the people, who asked not to be identified because the information isn’t public.
• Abbott(ABT) to Buy St. Jude Medical(STJ) in Deal Valued at About $25 Billion. (video) Abbott Laboratories agreed to buy heart-device maker St. Jude Medical Inc. for $25 billion, its biggest ever acquisition as the industry consolidates to gain bargaining power with hospitals. St. Jude Medical shareholders will receive $46.75 in cash and 0.8708 shares of Abbott common stock, representing a total of approximately $85 per share, according to a statement Thursday.

Fox News:

• Three relatives of San Bernardino shooter arrested. (video) Three relatives of the San Bernardino terrorists who killed 14 in December were arrested Thursday on federal conspiracy, marriage fraud and false statement charges, the FBI announced. The arrests don’t appear to stem from any actions related to the terror attack, but rather a marriage-for-citizenship scam allegedly enacted between Enrique Marquez, Jr. and Mariya Chernykh. Marquez is already in jail and awaiting trial for conspiring with one of the San Bernardino attackers, Syed Rizwan Farook, in terror plots that never materialized. Marquez is also accused of supplying weapons to Farook and his wife for the San Bernardino attack.

CNBC: 

• Kensho stats: Surging yen may keep lid on stocks. "The U.S. dollar and yen relationship has been a primary driver of the bull market in equities — as cheap borrowing costs in Japan and a rising dollar have fueled a global carry trade. That trade appears to be unwinding," BKCM's Brian Kelly wrote in note to clients Thursday. 
• Apple(AAPL) feels a market force even more powerful than gravity. There's a frightening reason Apple disappointed investors this quarter that doesn't start and end with how much it trailed Wall Street consensus estimates. Same goes for Google, Microsoft, Netflix, Visa and Starbucks. Yes, all these companies disappointed investors in earnings or outlook for the rest of 2016. But here's the fundamental disappointment across all the companies for anyone who follows the market. In a word: overcapacity.
• More evidence the tablet market is sinking fast.

Zero Hedge:  

• This Is Where America's Runaway Inflation Is Hiding. (graph)
• Krugman's Solution Is "The Fiscal Equivalent Of War" - Japan Agrees.
• Volume Collapses As China Commodity Exchanges Ordered To "Curb Speculation". (graph)
• An Inconvenient Truth For Equity Bulls. (graph)
• As Oil Rises, US Shale Companies Have Begun Increasing Oil Production.
• Gold & Silver Soar - Lead The Way Post-Japan "Policy Error". (graph)
• Worst GDP Print In 2 Years Sparks Stock Surge To Scene Of Kuroda's Kamikaze Moment. (graph)
• JPM(JPM) Summarizes Earnings Season So Far: "At -8%, The S&P500 Q1 EPS Growth Is The Worst Since ’09". (graph)
• What Americans Spent The Most Money On In Q1. (graph)
• Dear Janet: Thanks For Helping The Average American. (graph)
• US Economy Grew At Just 0.5% In Q1, Missing Expectations, Lowest Growth Rate In Two Years. (graph)
• 2,607 Days Later, The "Most Hated Bull Market Ever" Is Now The Second Longest In History. (graph)
• Global Stocks Plunge After Bank Of Japan "Shock". (graph)

Business Insider:

• Ted Cruz: John Boehner 'allowed his inner Trump to come out'. This is something that's not publicly known. During the government shutdown, I reached out to John Boehner, and I offered for [Utah Sen.] Mike Lee and me to come over and work with the speaker and actually get something done to stop the disaster that is Obamacare. John Boehner's response was, "I have no interest in talking to you. What could possibly be accomplished by talking. No I will not meet." So when he says I'm the worst guy he's ever worked with, he's never worked with me.
• The new Valeant(VRX) CEO's pay package is putting the company in serious danger.
• Things aren't looking too good for semiconductors.
• Italian authorities arrest ISIS suspects and uncover an attack plot.

Fortune: 

• Here's How Long China’s Debt-Fueled Rebound Can Last. The lag time between government boosts and growth is about 6 months.

Reuters:

• EXCLUSIVE-China securities regulator orders major commodities exchanges to control futures speculation-sources. China's securities regulator ordered the country's major commodity futures exchanges this week to control speculative trading activity, sources told Reuters, after a surge in prices sparked fears of a boom-and-bust cycle. In response, commodity futures exchanges in Dalian, Shanghai and Zhengzhou ordered major institutional investors that lack a commodities background to rein in their trading, three people with direct knowledge of the situation said. The sources didn't define what was meant by a lack of background in commodities. Investors, including hedge funds and retail investors, have placed big bets on Chinese commodities futures this year, driving up contracts including in iron ore, rebar, cotton and even eggs. The rally has prompted many analysts to warn of similarities with a boom in the country's stock markets, which reversed into a sharp crash last summer.

The Telegraph:

• House prices fall almost everywhere as property market takes on 'uncomfortable' feel.