Stocks Surging into Afternoon on Less European/Emerging Markets/US High-Yield Debt Angst, Short-Covering, Oil Bounce, Commodity/Tech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Every Sector Rising
  

• Volume: Slightly Above Average

• Market Leading Stocks: Outperforming
  

Equity Investor Angst:

• Volatility(VIX) 16.64 -11.25%

• Euro/Yen Carry Return Index 118.99 +.20%

• Emerging Markets Currency Volatility(VXY) 10.37 -3.45%

• S&P 500 Implied Correlation 55.75 -3.59%

• ISE Sentiment Index 62.0 -8.82%
  

• Total Put/Call 1.20 +6.19%

• NYSE Arms .66 +17.6% 

Credit Investor Angst:

• North American Investment Grade CDS Index 81.11 -4.20%
  

• America Energy Sector High-Yield CDS Index 806.0 -4.69%

• European Financial Sector CDS Index 116.50 -9.97%

• Western Europe Sovereign Debt CDS Index 32.13 -10.57%

• Asia Pacific Sovereign Debt CDS Index 50.876 -4.85%

• Emerging Market CDS Index 272.16 -7.13%
  

• iBoxx Offshore RMB China Corporate High Yield Index 130.02 -.01%

• 2-Year Swap Spread 12.75 +1.25 basis points
  

• TED Spread 36.75 -.75 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -40.25 -2.0 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.36 +.84%
• 3-Month T-Bill Yield .25% unch.

• Yield Curve 85.0 unch.
  

• China Import Iron Ore Spot $53.89/Metric Tonne +.45%

• Citi US Economic Surprise Index -20.1 +.4 point

• Citi Eurozone Economic Surprise Index .5 +1.1 points

• Citi Emerging Markets Economic Surprise Index -10.0 -1.5 points

• 10-Year TIPS Spread 1.42% +2.0 basis points
• 1.9% chance of Fed rate hike at Sept. 21 meeting, 3.9% chance at Nov. 2 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +219 open in Japan 
• China A50 Futures: Indicating -59 open in China

• DAX Futures: Indicating -14 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg:     

• Hollande Takes Aim at City of London in Euro Clearing Threat. (video) The City of London is facing the first direct threat to its role as Europe’s dominant financial center as French President Francois Hollande takes aim at a key pillar of the U.K. industry. European Union member states should prepare to take over euro-denominated clearing that will no longer be possible in the U.K., Hollande said. “The City, which could handle clearing operations in euros thanks to the U.K.’s presence in the EU, won’t be able to do them any more,” the French head of state said after the first day of an EU summit in Brussels. Hollande is the second French leader to target London’s leading role in clearing euro-denominated transactions since Britons decided last week to leave the EU. Francois Villeroy de Galhau, governor of the Bank of France and a member of the ECB’s Governing Council, said on Saturday that clearing cannot be located in London without following EU rules. Hollande wanted to illustrate the consequences of last week’s Brexit decision, and he will make clearing a key point in exit talks with the U.K., according to French officials who asked not to be identified. The EU will seek concessions from Britain in return for continued access to the single market, the officials said. EU officials have said repeatedly that freedom of movement for workers and adhering to market regulations are conditions for access to the single market. The negotiations may determine where clearing will fit in the U.K.’s future financial relationship with the EU, one of the officials said.
• EU Calls for ‘Orderly’ Brexit at Historic Meeting Minus U.K. (video) European Union leaders called for an orderly British withdrawal from the bloc to minimize instability as they pledged to learn lessons from the U.K.’s political earthquake and do better at serving their citizens. As EU government chiefs took the historic step of meeting without one of the bloc’s members for the first time, they lamented the British decision to part ways then began to lay plans for a new union minus its second-largest economy. That included setting the parameters of Britain’s future relationship with the EU, and insisting that negotiations to finalize secession won’t be started until the U.K. gives official notification of departure.
• Brexit Vote Stokes Euro Breakup Concern Among Investors: Chart.
• Pound Extends Rally From 1985 Low as Post-Brexit Markets Calm. (video) The pound extended its advance from a three-decade low as traders took advantage of the global market rout to go on a buying spree. Stocks, oil and higher-yielding euro-zone bonds all recovered some of the losses seen in the wake of Britain’s vote to leave the European Union. Sterling is still down 8 percent since the nation went to the polls June 23, though the U.K.’s FTSE 100 stocks index wiped out its post-Brexit slide.
• Bitter Scotland Weighs Its Own Divorce. (video) Despite voting to stay in the European Union in last week’s Brexit referendum, Scots now face being forced to leave after being outvoted by a predominantly English majority. That realization has brutally exposed the lopsided nature of the U.K., a union of four nations in which there are almost 10 English voters for every Scottish one. 
• Italian Bank-Rescue Push Falters as Merkel Sticks to the Rules. Prime Minister Matteo Renzi’s efforts to shore up Italy’s struggling banks ran into a roadblock, as German Chancellor Angela Merkel insisted on sticking to the rules put in place since the financial crisis to prevent taxpayer bailouts. “We can’t do everything all over again every other year,” Merkel told reporters after a European Union summit in Brussels on Wednesday. The bloc’s laws on the resolution and recapitalization of banks “offer enough leeway for the specific conditions in individual member states.”
• Nomura Joins Yen Capitulators, Raises Forecast 17% on Brexit. Long-time yen bear Nomura Holdings Inc. has finally bowed to the market forces that drove the currency to 99 per dollar for the first time since 2011. It’s far from alone. HSBC Holdings Plc, Citigroup Inc., and Mizuho Financial Group Inc. join Japan’s biggest brokerage in raising year-end yen forecasts by as much as 20 percent after the U.K.’s decision to leave the European Union spurred a rush for the currency as a haven. The median of  estimates compiled by Bloomberg has shifted 3.6 percent stronger this month, the most for year-end forecasts within any year since 2011, when the yen was on its way to a record high following the devastating earthquake and tsunami in March.
• India Central Bank Sees Sharp Rise in Bank Risk on Bad Loans. (video) Risks to India’s banking industry have “sharply increased” since September as surging bad loans drag lenders’ profitability to the lowest since at least 1999, according to the Reserve Bank of India. Banks’ return on assets fell to 0.4 percent at the end of March from 0.8 percent a year earlier, according to the central bank’s Financial Stability Report released Tuesday. The industry’s gross bad-loan ratio jumped to a 13-year high of 7.6 percent, following a six-month RBI audit of banks’ bad-debt disclosures. Under a “baseline stress scenario,” that ratio may rise to 8.5 percent by next March, the deadline set by RBI Governor Raghuram Rajan for banks to clean up soured credit, the report showed.
• Rosenberg: Vancouver Housing Market in ’Outright Bubble’. (video)
• Europe Stocks Recoup More Brexit Losses as Commodity Shares Rise. (video) European equities rose for a second day, recovering more of the declines triggered in the immediate aftermath of the U.K.’s decision to leave the European Union. The Stoxx Europe 600 Index climbed 3.1 percent at the close of trading, with miners and energy producers as the best performers.
• San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs. Office landlords are bracing for a cooling of San Francisco’s red-hot market as weaker startup valuations and lower venture-capital funding temper years of runaway growth in the technology-industry hub. The city’s office-vacancy rate jumped in the second quarter by the most since the last recession, while the amount of space available for sublease almost doubled, according to a report to be released this week by brokerage Cushman & Wakefield Inc. New lease deals have tumbled so far this year. With demand seen cooling further, office owners who benefited from years of heated leasing by the likes of Uber Technologies Inc., Airbnb Inc. and Twitter Inc. are now rushing to seal deals and capture rents near record highs. They’re seeking to sign longer leases with creditworthy companies before prices slide, renewing agreements well ahead of their expiration and offering concessions, including free rent and cash for space improvements, according to J.D. Lumpkin, a managing director at Cushman & Wakefield in San Francisco. “We may not be in a free fall, but it’s a sign of things to come,” Lumpkin said. “Those who are smart know it’s time to get aggressive and lock in credit tenants that you want for the next five, seven, 10 years in new leases and do whatever it takes.”
• Millennials Are Pretty Cocky About Their Investing Skills.
• Apple(AAPL) to Face More Scrutiny as China Cracks Down on Apps. More than half a billion Chinese smartphone users face increased monitoring of their mobile app usage thanks to new laws targeting operators including Apple Inc. App stores and providers must establish the identity of users, while monitoring and reporting postings that contain banned content. The legitimacy of developers who post apps for download must also be verified, according to new rules posted on the Cyberspace Administration of China’s website. All app stores and providers are now required to keep a record of users’ activity for 60 days. And in an effort to boost privacy protection, they must now seek a user’s consent before collecting personal information, location data and contacts lists.

Wall Street Journal: 

• Death Toll From Istanbul Airport Attack Rises. Islamic State implicated in early investigation, Turkey’s prime minister says. The death toll from the brutal attack on this city’s main airport rose to 41, including 13 foreign citizens, and dozens more are injured, officials said Wednesday, as condolences and condemnation poured in from the country’s allies.
• Climate Denial Finally Pays Off. A series of Journal editorial page-bashing ads shows the climate cause in mid-crackup.
• Clinton’s Benghazi Cover Story. She wonders why she’s so distrusted. Here’s the reason.

MarketWatch.com:

• After GE ruling, here are the too-big-to-fail banks and financial firms.

Fox News:

• 'Defies reality': Kerry takes heat for claiming airport attack a sign of ISIS desperation. (video) Secretary of State John Kerry faced swift criticism Wednesday for suggesting the terror attack at Istanbul’s Ataturk Airport was evidence the Islamic State is getting “desperate” – an assessment one top Republican official said “defies reality.” Kerry made the remarks late Tuesday at the Aspen Ideas Festival in Colorado, referring to ISIS by the name Daesh.
• Americans not always told when named on ISIS ‘kill lists,’ lawmaker demands answers from FBI. (video)

CNBC:

• Wall Street charting legend Yamada sees dying bull. Similar to previous market tops in 2007 and during the dot-com bubble in 2000, a sideways trading market paired with fading momentum does not bode well for stocks, the founder of Louise Yamada Technical Research Advisors explains in an exclusive video for CNBC PRO. She started the independent research company in October 2005 after a 25-year career as the top chart analyst at Citigroup.

Zero Hedge:

• 'Elites' Called To Arms: "It's Time To Rise Up Against The Ignorant Masses".
• Hillary Superpac Has Taken $200,000 In Banned Donations.
• The Real 'Fear' Index Just Went To '11'. (graph)
• Another Attempt To Explain The Volumeless Rally, Now From JPM: "A Function Of Disbelief And Skepticism". (graph)
• BofA: To Save Markets Central Banks Just Made Inequality And Populism Even Worse.
• Brexit, A Step In The Right Direction: The Optimistic View.
• There Is Now A Staggering $11.7 Trillion In Negative Yielding Debt. (graph)
• Brexiteers 1 : 0 Scaremongers - UK Stocks Erase All Brexit Losses.
• Puerto Rico To Default On July 1 After Senate Passes Bailout Bill.
• The Prison Of Peoples - France's Le Pen Calls For European 'Spring'.
• What's Driving This Ramp? The Biggest Short Squeeze In 5 Years. (graph)
• Scotland Is About To Have Its Own Currency And Much More: How JPM Sees Brexit Playing Out.
• Oil Jumps Above $49 As Crude Production Tumbles, Inventories Drop. (graph)
• Pending Home Sales Crash Most In 6 Years - 'Supply' Blamed. (graph)
• Brexit: Here Are The Latest Known Unknowns.
• "Panic May Have Passed... But This Is Far From Over". (graph) 
• April Spending Exuberance Plunges Back To Earth In May As Income Growth Slows. (graph)

Business Insider:

• The hottest tech IPO around is rocketing up another 18%.

Reuters:

• ECB happy to stay put after Brexit vote as markets regain pose-sources. The European Central Bank is in no rush to ease its monetary policy in response Britain's vote to leave the European Union, taking comfort in a calmer-than-feared market reaction, several sources have told Reuters. The Brexit vote has hit the shares of euro zone banks and is likely to act as a drag on the euro zone economy, as ECB President Mario Draghi told EU leaders on Tuesday. It is also raising fundamental questions about the future of the EU. But conversations with around a dozen officials familiar with the ECB's thinking showed that the bank found some reassurance in the market rebound this week and was happy to take a wait-and-see stance, given the lack of hard evidence about the actual impact of Brexit.

Xinhua:

• Lou Says China Struggling to Meet Annual Fiscal Target. Outlook for achieving China's annual target for national fiscal revenue is not optimistic, citing China's Finance Minister Lou Jiwei delivering the state council report to National People's Congress Standing Committee. The Chinese economy is generally running steady in reasonable range this year, while facing great downward pressure, he said. Lou said China will set limits to control debt scale at local govt level.

Bear Radar

Style Underperformer:

• Large-Cap Growth +1.4%

Sector Underperformers:

• 1) Utilities -.2% 2) Papers +.6% 3) Agriculture +.8%

Stocks Falling on Unusual Volume:

• CM, SWNC, AVAV, SWN, ALV, DSLV, HNP, DBL, FLKS, ZBRA, DQ, ZBIO, PCRX, ALXN, LFUS, TBRA, RARE, CLX, NDRM and BMRN

Stocks With Unusual Put Option Activity:

• 1) TXN 2) SMH 3) IEF 4) FXE 5) EWG

Stocks With Most Negative News Mentions:

• 1) SCOR 2) ALV 3) CCCL 4) FSB 5) HYH

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Value +1.8%

Sector Outperformers:

• 1) Gold & Silver +3.5% 2) Disk Drives +3.4% 3) Gaming +3.0%

Stocks Rising on Unusual Volume:

• TSRO, DRII, PVTB, CLVS, TDOC, USLV, SGY, CNK, SGRY, VOYA, HT, NTAP, VAC and WYN

Stocks With Unusual Call Option Activity:

• 1) DRII 2) GALE 3) ALLY 4) ERX 5)RRC

Stocks With Most Positive News Mentions:

• 1) BT 2) BP 3) CCL 4) ARMH 5) AZN

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running +13.0% Above 100-Day Average
• 10 Sectors Rising, 0 Sectors Declining
• 85.5% of Issues Advancing, 12.2% Declining
• 215 New 52-Week Highs, 7 New Lows
• 46.5% of Issues Above 200-day Moving Average
• Average 14-Day RSI 37.4%
• Vix 17.0 -9.2%
• Total Put/Call 1.26 +11.5%
• TRIN/Arms .91 +62.2%

Wednesday Watch

Evening Headlines
Bloomberg:  

• Merkel Says No Way Back From Brexit as Cameron Regrets Defeat. (video) European Union leaders said there could be no turning back for the U.K. after Prime Minister David Cameron used his last EU summit to express disappointment at his failure to win the referendum he called on Britain’s membership. “As of this evening, I see no way back from the Brexit vote,” German Chancellor Angela Merkel told reporters after the meeting in Brussels on Tuesday. “This is no time for wishful thinking, but rather to grasp reality.” Fellow government chiefs lined up to warn Cameron that delaying the period before the U.K formally activates the EU’s exit mechanism will prevent the start of negotiations over any future relationship. The prime minister repeated the message he’d given back home: despite the uncertainty it’s causing, that will be the job for his successor.
• El-Erian: Anti-Establishment Movement to Get Louder. (video)
• Trouble in Renewable Energy Spotted in China’s Idled Wind Farms. Trouble may be brewing in China’s renewable energy industry if idled wind farms are anything to go by. The nation’s clean-energy investment binge has made it the world leader in wind, accounting for about one in every three turbines currently installed, according to the Global Wind Energy Council. In turn, Xinjiang Goldwind Science & Technology Co., which makes the machines, has pushed past its western rivals such as Vestas Wind Systems A/S and General Electric Co.
• Japan’s Retail Sales in May Unchanged, Showing Weak Recovery. Japan’s retail sales were unchanged in May, underscoring the challenge Prime Minister Shinzo Abe faces in boosting consumer spending and reviving the economy. Sales were flat in May from the previous month, when they dropped, the trade ministry reported Wednesday. The median forecast of economists surveyed by Bloomberg was for no gain. Favorable factors included sales of machinery and equipment, while sectors including food and beverages were negative. From a year earlier, sales fell 1.9 percent, compared with a forecast decline of 1.6 percent in the survey. The biggest contributor to the drop was fuels, reflecting declines in oil prices. Even as oil prices have risen recently the level is still lower compared with last year.
• Brexit Risks Pile Up for Hitachi Construction, CEO Says. The risks are piling up for Japan’s construction equipment makers in the aftermath of Brexit. Already contending with China’s slowdown and a rout in commodities prices, Hitachi Construction Machinery Co. now faces two new threats after the U.K.’s vote to quit the European Union: the yen’s rapid appreciation and fears that Brexit could hit demand in Europe, according to its chief executive officer. “The yen has been strengthening sharply and that’s the biggest impact on our business,” Yuichi Tsujimoto said in an interview Tuesday. “Immediate risks are the currency movement and the European economy.”
• Japan Executives Saw Yen Gaining Most in 2016 Even Before Brexit. Japanese executives were expecting the yen to outperform its peers this year even before the U.K.’s decision to quit the European Union set off global market turmoil that drove the currency to its highest since 2013. Some 57 percent of more than 100 traders, strategists and corporate treasurers polled at a Bloomberg seminar in Tokyo on June 14 expected the Japanese currency to stand out as the strongest performer against the greenback this year, with 15 percent choosing the Swiss franc and 12 percent picking the Australian dollar. While 76 percent of respondents expected further Bank of Japan easing in 2016, the potential for the U.S. to raise interest rates was cited as the biggest issue likely to affect the yen.
• Asian Stocks Advance Amid Global Rebound on Stimulus Speculation. Asian stocks rose, following a rally in global equities, amid optimism that policy makers will introduce measures to limit the economic fallout from U.K. leaving the European Union. The MSCI Asia Pacific Index advanced 1 percent to 126.64 as of 9:03 a.m. in Tokyo. A gauge of global equities climbed by most in a week as investors watched for signs that central banks and governments will help ease the post-Brexit market turmoil. Federal Reserve Governor Jerome Powell said global risks have shifted further to the downside after Britain’s vote to exit the EU, introducing new uncertainties that may merit reassessing monetary policy.
• Fed’s Powell Says Brexit Shifts Global Risks Further to Downside. Federal Reserve Governor Jerome Powell said global risks have shifted further to the downside after Britain’s vote to exit the European Union, introducing new uncertainties that may merit reassessing monetary policy. “The Brexit vote has the potential to create new headwinds for economies around the world, including our own,” Powell said Tuesday in remarks prepared for delivery to the Chicago Council on Global Affairs. “As the global outlook evolves, it will be important to assess the implications for the U.S. economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability.”
• Oil Is Still Heading to $10 a Barrel.
• Hedge Funds Brace for Redemptions in Wake of Brexit. (video)

Wall Street Journal:

• Donald Trump Lays Out Protectionist Views in Trade Speech. Candidate rejects longstanding GOP orthodoxy by saying he would scrap NAFTA, U.S. involvement in TPP.

Fox News:

• At least 36 dead, 147 injured in suspected ISIS attack at Istanbul airport. (video) At least 36 people were killed and 147 more were injured when three suspected ISIS suicide bombers attacked Istanbul's main international airport Tuesday night, Turkish officials said. Prime Minister Binali Yildirim confirmed the death toll from the blasts at Istanbul Ataturk Airport. Earlier, Justice Minister Bekir Bozdag confirmed that 147 people had been wounded in the attacks. The Associated Press initially quoted a senior Turkish official as saying that close to 50 people had already died. However, the news agency later said that the official told them the figure was expected to rise to close to 50. A Turkish official told Reuters that the "vast majority" of victims were Turkish, but some foreigners were also affected.

CNBC:

• Investor group calls for Tesla(TSLA) board governance fixes in wake of SolarCity(SCTY) bid.

Zero Hedge:

• The Accusations Begin: David Cameron Blames Brexit On Merkel And EU "Immigration Failure".
• Nigel Farage Batters Obama: "He Came To Britain And Behaved Disgracefully".
• Nike(NKE) Tumbles To August 2015 Levels After Missing On Revenue, Future Orders, Margin Decline.
• Bernie Sanders: The World Is Rejecting Globalization.
• Chart Of The Day: When Central Planning Fails. (graph)
• CCTV Camera Captures Moment Of Istanbul Airport Explosion As Suicide Attacker Blows Himself Up. (video)
• Kuroda Is Trapped As The BOJ Can't Ease Any Further: Here's Why. (graph)
• Why All The Post-Brexit Hysteria?
• Brexit Hedge Unwind Sparks Volumeless Dead Cat Brounce. (graph)

Business Insider:

• Hong Kong's downturn will be a harbinger of things to come.
• America's shrinking middle class is killing the economy.
• People who witnessed the Istanbul suicide bombings share terrifying details from the attack.
• Photos show the aftermath of the Istanbul airport bombing.
• Any 'veneer of confidence' in the markets is gone.

Night Trading 

• Asian equity indices are +.5% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 145.75 -4.5 basis points.
• Asia Pacific Sovereign CDS Index 53.50 -2.5 basis points.
• Bloomberg Emerging Markets Currency Index 71.77 +.02%. 
• S&P 500 futures +.10%. 
• NASDAQ 100 futures +.11%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (AYI)/2.03
• (GIS)/.60
• (MON)/2.40
• (WOR)/.62
• (APOL)/.27
• (MRVL)/.09
• (PIR)/-.05
• (PRGS)/.29

Economic Releases  
8:30 am EST

• Personal Income for May is estimated to rise +.3% versus a +.4% gain in April.
• Personal Spending for May is estimated to rise +.4% versus a +1.0% gain in April.
• The PCE Core MoM for May is estimated to rise +.2% versus a +.2% gain in April.   

10:00 am EST

• Pending Home Sales MoM for May are estimated to fall -1.1% versus a +5.1% gain in April.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,344,440 barrels versus a -917,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -444,440 barrels versus a +627,000 barrel gain the prior week. Distillate inventories are estimated to rise by +238,890 barrels versus a +151,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.65% versus a +1.1% gain prior.
  

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Fed Stress Test results, Japan Industrial Production report, weekly MBA Mortgae Applications report, (MCK) investor day, (NX) analyst day and the (SSP) investor day could also impact trading today.

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