Stocks Surging into Final Hour on Central Bank Hopes, Less European/Emerging Markets/US High-Yield Debt Angst, Short-Covering, Biotech/Financial Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Almost Every Sector Rising
  

• Volume: Above Average

• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• Volatility(VIX) 19.88 -16.69%

• Euro/Yen Carry Return Index 118.57 +.84%

• Emerging Markets Currency Volatility(VXY) 10.78 -6.1%

• S&P 500 Implied Correlation 60.12 -6.47%

• ISE Sentiment Index 82.0 +51.85%
  

• Total Put/Call 1.15 -10.85%

• NYSE Arms .77 -55.43% 

Credit Investor Angst:

• North American Investment Grade CDS Index 86.20 -5.55%
  

• America Energy Sector High-Yield CDS Index 842.0 +2.10%

• European Financial Sector CDS Index 129.40 -5.31%

• Western Europe Sovereign Debt CDS Index 35.93 -1.83%

• Asia Pacific Sovereign Debt CDS Index 53.99 -3.43%

• Emerging Market CDS Index 294.65 -3.84%
  

• iBoxx Offshore RMB China Corporate High Yield Index 130.04 +.07%

• 2-Year Swap Spread 11.5 -.25 basis point
  

• TED Spread 37.5 -1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -38.25 +.75 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 71.74 +1.23%
• 3-Month T-Bill Yield .25% +1.0 basis point

• Yield Curve 85.0 -1.0 basis point
  

• China Import Iron Ore Spot $53.65/Metric Tonne -.39%

• Citi US Economic Surprise Index -20.5 +2.8 points

• Citi Eurozone Economic Surprise Index -.6 -3.6 points

• Citi Emerging Markets Economic Surprise Index -8.5 -1.3 points

• 10-Year TIPS Spread 1.40% +3.0 basis points
• 0.0% chance of Fed rate hike at Sept. 21 meeting, 0.0% chance at Nov. 2 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +272 open in Japan 
• China A50 Futures: Indicating +27 open in China

• DAX Futures: Indicating +40 open in Germany

Portfolio: 

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

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges and some of my emerging markets shorts

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:    

• Merkel Tells Cameron Before EU Summit: Don’t Delude Yourself. (video) German Chancellor Angela Merkel warned the U.K. to have no illusions about life outside the European Union, hardening her stance ahead of Prime Minister David Cameron’s first meeting with fellow EU leaders since triggering the political earthquake that’s shaken the bloc’s foundations. Merkel, in her toughest response yet to last week’s British vote to quit the 28-nation EU, said that the U.K. can’t expect favored treatment once it leaves and that there will be no informal talks on a new relationship before the government in London files its application for divorce. “There shouldn’t be the slightest misunderstanding about the conditions laid out in the European treaties for a case like this,” Merkel said in a speech to Germany’s parliament in Berlin on Tuesday. “My only advice to our British friends is: Don’t delude yourself about the necessary decisions that need to be taken.”
• Draghi Wishes for a New World Order Populists Will Love to Hate. Mario Draghi has just pushed the boundaries of central banking further into the realm of globalization, at a time when globalization is on the run. Following the work of Reserve Bank of India Raghuram Rajan and others, the European Central Bank president on Tuesday became the most senior global central banker so far to call for more explicit policy cooperation between jurisdictions. Draghi’s aim is to mitigate the damaging cross-border side-effects brought on by the combination of monetary activism and tighter global financial links. “We have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions,” Draghi said at the ECB’s annual policy forum in Sintra, Portugal. “In a globalized world, the global policy mix matters.” He made no explicit reference in the speech to the U.K.’s June 23 decision to quit the European Union, a powerful rejection by voters of globalization.
• There’s Risk of a ‘Buyer’s Strike’ in Stocks, Barclays Says. The selloff following the U.K.’s secession vote, the deepest two-day rout since 2008, may herald an extended period of risk aversion in the global stock market, says Barclays Plc. Active managers increased their exposure to risk assets in the week ahead of the U.K. vote on European Union membership, according to Keith Parker, the firm’s U.S. head of asset allocation. The result was an increase in equity positioning, a drop in cash levels and a surge in buying of cyclical stocks -- all of which signals stock mutual funds may be unprepared for a period of outflows, he said.
• Europe Bank Profits May Drop $35 Billion on Brexit, Goldman Says. Brexit may shave 32 billion euros ($35 billion) off European bank earnings through 2018, a 11 percent decline from what profits would have been without the economic shock, according to Goldman Sachs Group Inc. U.K. banks will be hurt the most as Britain’s vote to leave the European Union erases 10 billion euros of potential net income, Goldman Sachs analysts said in a note to clients on Tuesday. Banks in the Benelux and Nordic countries will suffer the least, they said. “We forecast a weaker outlook owing to lower volumes, margins and fees,” as well as higher credit risks, the group of analysts, led by Jernej Omahen, said in the note. “We also expect lower activity levels for capital markets and wholesale businesses, as well as lower asset values and flows in the asset-gathering business.”
• Japan Yields All Drop Below 0.1% First Time in Global Bond Surge. Japan’s benchmark bonds are now all yielding less than 0.1 percent for the first time, leading a global surge in sovereign debt, as the U.K.’s decision to leave the European Union threatened to slow growth and keep the Federal Reserve from raising interest rates. The rally in Japan pushed yields on the nation’s longest debt, the 40-year bond, to 0.065 percent. Australia’s and South Korea’s 10-year yields dropped to unprecedented levels.  Treasury prices slipped after yields approached records last week.
• South Korea Plans Supplementary Budget, Cuts Growth Forecast. South Korea plans a fiscal stimulus package of more than 20 trillion won ($17 billion) to cushion risks from corporate restructuring as external uncertainties grow with the U.K. ’s vote to leave the European Union. The package will include an extra budget of about 10 trillion won that mainly would be used to create jobs and support regional economies that would be hurt by corporate restructuring, according to government statements on policy outlook for the second half. The growth outlook for 2016 was reduced to 2.8 percent from 3.1 percent, while the government’s inflation projection was cut to 1.1 percent from 1.5 percent. About 10 trillion won in extra budget will be financed by funds left over from 2015 -- about 1.2 trillion won -- and excess tax revenue expected for this year, according to Lee Ho Seung, a director general of economic policy at the finance ministry. No government debt will be issued, he said. The other spending of more than 10 trillion won in the stimulus package will come from public funds and investments from state-owned companies.
• European Stocks Rebound as Investors Speculate on Policy Help. (video) European stocks advanced, snapping their worst two-day losing streak since 2008, as investors speculated that policy makers may take action to shore up markets after the post-Brexit rout. The Stoxx Europe 600 Index rose 2.6 percent to 316.7 at the close of trading. European stocks extended their two-day loss to 11 percent yesterday amid growing uncertainty surrounding the fallout from Britain’s shock vote to leave the European Union. The FTSE 100, which lost 5.6 percent over the same period, also recovered 2.6 percent today. The volume of European shares changing hands was 60 percent greater than the 30-day average, while for British equities, it was 74 percent higher.
• Gold Veteran Says Brexit May Be Start of ‘Major Bull Market’. Gold may stand at the start of a major bull market should the U.K.’s Brexit vote prove to be a forerunner of greater political and financial instability around the world, according to Evolution Mining Ltd.’s Jake Klein, a veteran of more than 20 years in the industry.
• Brexit Steamrolls Fed Model for Stock Bulls as Bond Yields Drop. The dangers of relying on valuation as a tool for market timing are on display right now in U.S. equities. At issue is something known as the Fed Model, a comparison of stock and bond yields that has been pointing bulls to equities for three months. As bond yields fell from their March highs, an investor guided by the theory would have bought shares, betting they’d rally as money flowed into them from fixed-income. As the last two days have shown, signals like this don’t always work. Stocks have plunged following the U.K. vote to secede, while bonds rallied and yields reached an almost four-year low. Stocks that were cheap in comparison to Treasuries have gotten significantly cheaper, a lesson that cost U.S. investors billions of dollars in lost market value.

Wall Street Journal:

• Stores Accepting Food Stamps Face Stricter Rules. Proposal sets up fight between corner stores and big chains like Wal-Mart, Kroger over $74 billion program.
• Teachers Union and Hedge Funds War Over Pension Billions. Labor leader aims to pull money from managers who promote retirement cutbacks; a billboard over Times Square.
• The Backlash That Became Brexit. Tired of being ignored in favor of liberal grievances, the middle clings to the one thing that keeps them relevant: their vote.

MarketWatch.com: 

• There have been only two times when profits have fallen this steeply without a recession. (graph)

Fox News: 

• House Benghazi report slams administration response to attacks. (video) A damning report authored by the Republican-led House committee probing the Benghazi terror attacks faulted the Obama administration for a range of missteps before, during and after the fatal 2012 attacks – saying top administration officials huddled to craft their public response while military assets waited hours to deploy to Libya. The report released Tuesday pointedly blamed a “rusty bureaucratic process” for the slow-moving response the night of the attack. The report said despite orders from President Obama and then-Defense Secretary Leon Panetta to deploy, the first military force did not do so until more than 13 hours after the attack started. The report said one anti-terrorism security team known as the FAST unit sat waiting for three hours in Rota, Spain, as Marines changed “in and out of their uniforms four times,” and even debated whether they should carry personal weapons, according to one witness. All together, the report said, “it would take nearly 18 hours” for that team to move.

CNBC:

• Don't get too happy about this stock rally.
• The Brexit and Article 50: CNBC Explains.
• Don't worry about iPhone 7 sales, 'a powder keg is forming'. (video) In a late Monday note, Cowen analysts said, "while iPhone 7 still looks about flat [with] iPhone 6S and macro risk is clear, our new installed base analysis suggests a 'powder keg' is forming." The note recommended that investors buy the stock.

Zero Hedge:

• Farage Slams The EU Parliament: "You're Not Laughing Now Are You?". (video)
• Bank of America(BAC): "If You Are Going To Panic, Panic Early".
• Draghi Warns Brexit Will Lead To "Competitive Devaluations", Years Of Low Growth.
• Juncker Refuses To Speak English In Address To EU Parliament.
• European Dead-Cat-Bounce Dies - Big Banks End Lower. (graph)
• Why Barclays Thinks The V-Shaped Recovery Is Dead: "Massive Redemptions Are Coming".
• UK Labour Party Leader Corbyn Loses Vote Of No Confidence.
• "People Need To Know The Real Hillary Clinton And How Dangerous She Is". (video)
• When It Comes To The US Economy, The Age Divide Has Never Been Wider. (graph)
• Richmond Fed Dead-Cat-Bounce Crashes To 3-Year Lows. (graph)
• What Is The Source Of Today's Buying Panic: RBC Explains.
• Bonds Ain't Buying It. (graph)
• Obamacare Accounted For 58% Of US "Growth" In The First Quarter.
• Case-Shiller Home Prices Rise At Slowest Pace In 8 Months As San Francisco Sales Slump. (graph)
• Final Q1 GDP Rises 1.1% Despite Worst Personal Consumption In Two Years. (graph)

The Irish News:

• Fine Gael MEP Brian Hayes warns of ‘Irexit' if EU clamps down on the Republic's corporation tax regime. AN influential Fine Gael figure has warned that EU efforts to dilute the Republic's generous corporation tax regime could see the south following the UK out of the EU. In an intervention that is unlikely not to have been sanctioned by the Dublin government, MEP Brian Hayes described EU demands for tax harmonisation as an "absolute red line issue". The Republic's business tax breaks have come in for scrutiny since it emerged that Apple, which has a large plant in Cork, enjoyed favourable rates.

Bear Radar

Style Underperformer:

• Large-Cap Value +1.0%

Sector Underperformers:

• 1) Foods +.1% 2) Gold & Silver +.1% 3) Utilities +.2%

Stocks Falling on Unusual Volume:

• SCOR, BW, WBC, LILA, MAN, TBRA, NTRA, TM, AHP, VVC, VIIX, FIZZ, QIHU, VRTS, DOW, ATHM, SHLM, DPS, FCN, MO, ASH, GIS, GOLD and TECD

Stocks With Unusual Put Option Activity:

• 1) XLY 2) NKE 3) XLI 4) FAST 5) DHI

Stocks With Most Negative News Mentions:

• 1) WBC 2) NAV 3) SCOR 4) DD 5) MAN

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth +1.4%

Sector Outperformers:

• 1) Steel +3.5% 2) Biotech +3.3% 3) Disk Drives +2.8%

Stocks Rising on Unusual Volume:

• XNCR, LBTYA, SIVB, PUK, NXTM, GBT, EPAM, IPHI and AAL

Stocks With Unusual Call Option Activity:

• 1) JBLU 2) MET 3) TPX 4) NAV 5) AA

Stocks With Most Positive News Mentions:

• 1) ESV 2) KND 3) MU 4) OLN 5) EROS

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running +20.2% Above 100-Day Average
• 5 Sectors Rising, 5 Sectors Declining
• 86.4% of Issues Advancing, 12.5% Declining
• 94 New 52-Week Highs, 12 New Lows
• 42.9% of Issues Above 200-day Moving Average
• Average 14-Day RSI 33.9%
• Vix 19.7 -17.5%
• Total Put/Call .92 -28.7%
• TRIN/Arms .90 -48.1%

Tuesday Watch

Evening Headlines
Bloomberg:  

• Markets in Revolt Demand Action From Johnson’s Brexiteer Crew. If investors were disgruntled by Britain’s vote to quit the European Union, the ensuing leadership vacuum is only adding to their malaise. A second day of financial-market tumult is ramping up pressure on U.K. lawmakers to say when and how they’ll leave the world’s biggest trading bloc -- and who it is that will lead the negotiations. By 10 p.m. London time the pound was down another 3.3 percent after Friday’s record 8.1 percent plunge, while shares in banks and homebuilders tumbled and credit weakened. Britain’s credibility with money managers, won through the Conservative Party’s austerity measures and reforms, is rapidly dissipating. And that’s not being helped by comments from Boris Johnson, the leading “Leave” campaigner, that the downside of a Brexit has been “wildly overdone.” The risk is that -- just as in the financial crisis of 2008 or the ensuing euro-area debt crisis -- market volatility becomes so intense officials are rushed into action. “Politicians underestimate the importance of a plan,” said Guillermo Hernandez Sampere, the head of trading at MPPM EK in Eppstein, Germany. His firm manages about 250 million euros ($275 million). “It doesn’t matter whether from the Brexiteers or the government. They need to make clear how and as of when new arrangements with the EU will shape up.”
• World’s Top Fortunes Fall $196.2 Billion Since Brexit Bombshell. Global markets erased another $69.2 billion from the combined net worth of the world’s 400 richest people Monday, bringing the total since the U.K. shocked investors with a vote to leave the European Union to $196.2 billion in the last two trading days.
• Asia Stocks Fall as Brexit-Fueled Turmoil Offsets Stimulus Hopes. Asian stocks retreated after Monday’s rally as uncertainty surrounding the path of Britain’s exit from the European Union overshadowed optimism that central banks will move to shore up confidence. The MSCI Asia Pacific Index slid 0.9 percent to 124.66 as of 9:05 a.m. in Tokyo. Japan’s Topix index fell 1.6 percent as the yen traded at 101.71 per dollar. The U.K. was stripped of its top credit grade by S&P Global Ratings, and Fitch Ratings also lowered the country’s rank, the latest verdicts on the country’s decision to leave the European Union that has left it in political and economic paralysis.
• Gross Says U.S. Recession Odds May Be 30% to 50% Post-Brexit. The odds of a U.S. recession may be as high as 50 percent following last week’s vote in the U.K. to exit the European Union, according to Bill Gross, manager of the Janus Global Unconstrained Bond Fund. The yield on 10-year U.S. Treasury bonds may fall to 1.25 percent from about 1.45 percent on Monday, Gross said during an appearance on Fox Business Network. The lower yield would still be attractive to investors compared with negative interest rates in Japan or Germany. That spread could drive up the value of the dollar and increase the odds of a recession to the 30 percent to 50 percent range, according to Gross. While Britain represents a small part of the global economy, Friday’s vote will slow trade, immigration and growth around the world, which have driven economic expansion for years, he said. “This is the end of globalization as we know it,” Gross said.
• Abortion Access Expected to Grow Across U.S. After Court Ruling. By rejecting a Texas abortion law Monday, the U.S. Supreme Court has set in motion a reshaping of the legal landscape across dozens of states where similar attempts to impose debatable medical requirements on clinics and providers are now in jeopardy. The demands of those laws -- that clinics meet hospital standards and doctors obtain admitting privileges at nearby hospitals -- had been among the most potent tools of abortion opponents in recent years, shuttering providers and reducing access in the name of improved health. The majority of justices said those requirements overstepped the state’s interest in protecting women’s health, instead imposing undue burdens on their constitutional rights. 
• Worst of Brexit Pain Yet to Be Felt in U.S. Credit, Banks Warn. (video) Morgan Stanley and UBS Group AG are telling their clients to brace for deeper losses in U.S. credit as a result of the U.K. vote to leave the European Union. While the "leave" camp’s win in the U.K. referendum has already rattled markets and caused U.S. corporate bond spreads to surge the most since the European sovereign debt crisis, credit strategists at the two banks say the worst is yet to come. Bonds aren’t cheap enough to warrant taking the risk that the market volatility isn’t temporary. "Despite the urge to step in and buy U.S. credit at modestly wider levels than a few days ago, we recommend patience," Morgan Stanley strategists led by Adam Richmond wrote in a note to clients Monday. "While the full impact of the U.K. leave may not be known for some time, the U.S. economy is not in a position to withstand a large shock."

Wall Street Journal:

• Strengthening Currencies Bedevil Central Banks. Upward pressure on Japanese yen, Swiss franc and U.S. dollar complicates efforts by policy makers to spur growth. Britain’s vote to leave the European Union has set off a fresh round of currency pressures in the world’s largest economies, further complicating efforts by central banks to spur growth.
• The Fed’s Market Mover Keeps Changing His Mind. James Bullard has developed an unrivaled reputation for shifting his stance on whether the Federal Reserve should raise interest rates.
• Poll Finds Opening for Third-Party Candidates as Clinton, Trump Remain Unpopular. Deep dislike for the two leading candidates could scramble the race as some voters seek alternatives. Deep dislike for the two leading presidential candidates is creating an opening for third-party hopefuls, potentially scrambling the race as voters cast about for alternatives, a new Wall Street Journal/NBC News poll shows.

Fox News:

• DOJ to institute mandatory bias training. (video)

MarketWatch:

• How China’s yuan could be the currency whipping boy of Brexit. Bank of America cuts China’s 2016 GDP view given shifting trade outlook.

Zero Hedge:

• Greenspan Warns A Crisis Is Imminent, Urges A Return To The Gold Standard. 
• The End Game Of Bubble Finance - Political Revolt.
• The Brexit Reaction Is The Reason Brexit Happened.
• Some Bad And Some Worse News For Stock Buybacks. (graph)
• The First Casualty Of Brexit: Italy Prepares €40 Billion Bank Bailout.
• Another Red Flag: Growth In Fast Food Visits Has Hit A Wall.
• Something Just Snapped In VIX. (graph)
• Behold Corporate Incest.
• Jim Rogers: Brexit Blowback "Worse Than Any Bear Market You've Ever Seen".
• "Death To All Zombies!"
• Chicago Is Pushing For A Massive Bailout Of Its Public School System.
• The Last Time Bonds Were Here, The Recession Started. (graph)
• Bonds & Bullion Bid But Brexit Blowback Batters Banks. (graph)

Business Insider:

• States are taking gun control laws into their own hands.
• Bernie Sanders is setting the stage for a convention fight over the Democratic platform.
• The UK just got hit with 2 downgrades.
• One of these 8 countries could be the next domino to fall.
• Even more internet censorship could be coming to China very soon.

Night Trading 

• Asian equity indices are -.75% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 150.25 -.5 basis point.
• Asia Pacific Sovereign CDS Index 56.0 +1.0 basis point.
• Bloomberg Emerging Markets Currency Index 71.06 +.27%. 
• S&P 500 futures +.58%. 
• NASDAQ 100 futures +.59%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (CCL)/.38
• (FDS)/1.63
• (AVAV)/-.10
• (NKE)/.48

Economic Releases  
8:30 am EST

• 1Q GDP (QoQ)is estimated to rise +1.0% versus a prior estimate of a +.8% gain.
• 1Q Personal Consumption is estimated to rise +2.0% versus a prior estimate of a +1.9% gain.
• 1Q GDP Price Index is estimated to rise +.6% versus a prior estimate of a +.6% gain.
• 1Q Core PCE (QoQ)is estimated to rise +2.1% versus a prior estimate of a +2.1% gain.  

9:00 am EST

• The S&P/CS 20 City MoM SA for April is estimated to rise +.6% versus a +.85% gain in March.

10:00 am EST

• Consumer Confidence for June is estimated to rise to 93.5 versus 92.6 in May.
• The Richmond Fed Manufacturing Index for June is estimated to rise to 3.0 versus -1.0 in May.
  

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Japan Retail Trade report and the (MA) general meeting could also impact trading today.

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