Stocks Slightly Higher into Final Hour on Falling Fed Rate Hike Odds, Yen Weakness, Earnings Optimism, Biotech/Metals & Mining Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Slightly Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 12.8 -2.0%

• Euro/Yen Carry Return Index 121.76 +1.39%

• Emerging Markets Currency Volatility(VXY) 9.85 -2.18%

• S&P 500 Implied Correlation 49.90 -.18%

• ISE Sentiment Index 94.0 +4.44%
  

• Total Put/Call .84 -7.69%

• NYSE Arms 1.20 +51.99% 

Credit Investor Angst:

• North American Investment Grade CDS Index 73.53 -1.23%
  

• America Energy Sector High-Yield CDS Index 763.0 +.51%

• European Financial Sector CDS Index 94.76 -2.52%

• Western Europe Sovereign Debt CDS Index 25.67 +.08%

• Asia Pacific Sovereign Debt CDS Index 49.09 +.42%

• Emerging Market CDS Index 259.76 -.20%
  

• iBoxx Offshore RMB China Corporate High Yield Index 131.16 -.08%

• 2-Year Swap Spread 22.25 -.25 basis point
  

• TED Spread 43.5 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -50.75 +2.75 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 71.89 +.16%
• 3-Month T-Bill Yield .28% -2.0 basis points

• Yield Curve 79.0 -2.5 basis points

• China Import Iron Ore Spot $58.63/Metric Tonne +.95%

• Citi US Economic Surprise Index 37.20 -5.9 points

• Citi Eurozone Economic Surprise Index 16.1 +5.3 points

• Citi Emerging Markets Economic Surprise Index -7.60 +.9 point

• 10-Year TIPS Spread 1.50% unch.
• 26.4% chance of Fed rate hike at Sept. 21 meeting, 28.0% chance at Nov. 2 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +45 open in Japan 
• China A50 Futures: Indicating -43 open in China

• DAX Futures: Indicating -10 open in Germany

Portfolio: 

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

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges, then covered some of them

• Market Exposure: 50% Net Long

Today's Headlines

Bloomberg:

• FBI Chief Warns ‘Terrorist Diaspora’ Will Come to the West. Hundreds of terrorists will fan out to infiltrate western Europe and the U.S. to carry out attacks on a wider scale as Islamic State is defeated in Syria, FBI Director James Comey warned. “At some point there’s going to be a terrorist diaspora out of Syria like we’ve never seen before,” Comey said Wednesday in New York. “We saw the future of this threat in Brussels and Paris,” said the head of the Federal Bureau of Investigation, adding that future attacks will be on “an order of magnitude greater.” Comey’s blunt warnings echo those of Republican presidential nominee Donald Trump, who has scoffed at Obama administration efforts to defeat Islamic State extremists in Syria and Iraq. Nonetheless, the FBI chief’s comments reflect a consensus among U.S. intelligence officials that the group inevitably will strike out abroad as it continues to lose ground militarily under attack from a U.S.-led coalition.
• Merkel Refugee Policies Face Renewed Criticism After Attacks. Chancellor Angela Merkel faced renewed criticism of her handling of the refugee crisis in the wake of four attacks in Germany in the span of a week that have unsettled the public. Lawmakers from her governing coalition, as well as politicians from parties on the political fringe, argued the assaults show her refugee policies aren’t working and have made the country less safe, breaking with the relative unity shown by the political and media establishment in the immediate aftermath. They pushed for speedy government action to step up security. "The refugee debate will take on a new dimension because of these recent attacks,” Mark Hauptmann, a lawmaker from Merkel’s Christian Democratic Union, said in an interview. “If you look at the suspects, you will see that most of them radicalized themselves over the past two years. Now just imagine what will happen with those 1.3 million refugees who entered Germany last year. This will not end well."
• Syria Cuts Off Rebel-Run East Aleppo as 275,000 People Trapped. Syrian government forces seized control of the last rebel supply routes into eastern Aleppo city on Wednesday, in what a monitoring group said was their most significant advance in the province since 2013. The siege of eastern districts of Aleppo, Syria’s former commercial capital, has prompted the United Nations humanitarian chief to call for a weekly 48-hour humanitarian pause as an estimated 275,000 civilians remain trapped. Food supplies could be exhausted by mid-August, he said. The city has been divided between government and opposition forces since 2012, with clashes intensifying in recent weeks. The surge in fighting has cast a pall over efforts to revive a broader cease-fire and resume talks on a political solution to the five-year conflict. Officials from the U.S. and Russia, which support opposing sides in Syria’s war, met in Geneva on Tuesday.
• China Stocks Tumble on Report of Wealth Management Product Curbs. (video) Chinese stocks slumped the most in six weeks as a report about possible curbs on wealth management products added to concern that regulatory efforts to reduce risks in the financial system will limit flows into equities. The ChiNext Index of small-company shares sank 5.5 percent, the most since June 13, while the Shanghai Composite Index fell 1.9 percent. The Shenzhen Composite Index lost 4.5 percent. China’s banking regulator is considering tightening curbs on the nation’s $3.6 trillion market for WMPs, the 21st Century Business Herald reported, citing people it didn’t identify. Authorities may set a limit on how much WMPs can invest in equities and “non-standard assets” such as loans, the report said. “There’s an obvious trend that the regulators want to strengthen market monitoring and lower the use of leverage in financial markets to control risks,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. “Under such circumstances, ChiNext is especially vulnerable, given its high valuations and the recent gains.”
• Morgan Stanley(MS) Says China Remains as Key Risk to India Investors. India has overtaken China as the world’s fastest-growing major economy, but its northeastern neighbor remains the biggest risk for investors in rupee assets, says Morgan Stanley Investment Management. A case in point: the local market’s reaction to Brexit. The rupee dropped more than 1 percent to 67.97 per dollar on June 24 when it was announced the U.K. had voted to quit the European Union. It has since rebounded to trade slightly stronger than where it was before the referendum, though it remains down almost 5 percent since China devalued the yuan on Aug. 11. “The risks to India are from the East and not from the West,’’ according to Ruchir Sharma, head of emerging markets and chief global strategist at the firm. “Look at what’s happening post the Brexit. The panic has subsided very quickly and markets are back to where they were before the Brexit. In contrast, see what happened to sentiment and the economy when China had problems in August last year and again in January and February this year.’’ China’s slowdown could impact India as Asia’s biggest economy has been the largest contributor to global growth this decade, said Sharma, who made the Bloomberg Markets 50 Most Influential list last year. Any further yuan depreciation risks exporting China’s deflation to developing-nation currencies, he said. The country is also India’s biggest trading partner.
• Air France Braced for Slump as Terror Spree Weighs on Travel. (video) Air France-KLM Group warned that political and economic uncertainties are weighing on travel demand, with the carrier especially worried about France’s standing as a tourist hotspot after a succession of terrorist attacks that have spanned Paris to the Riviera. Europe’s largest airline said Wednesday there is “special concern about France as a destination” amid the Islamic State-inspired killings, with inbound flows on long-haul routes set to fall at least 10 percent this summer. Fuel savings that helped lift operating profit 77 percent in the second quarter are also about to be eaten up by a fare decline as passenger numbers slide. “If the question is do we see a deteriorating environment, the answer is yes,” Chief Financial Officer Pierre-Francois Riolacci said in a phone briefing. “As the months have gone by we’ve seen a significant drop in demand for inbound travel to Europe, especially France. This pressure is happening in the context of capacity growth that is very high for the summer season.”
• Canada Housing Agency Sees Strong Vancouver Risks for First Time. Vancouver’s market is showing “strong” signs of problematic conditions, Canada’s housing agency said Wednesday, weighing in after curbs on the market imposed by the British Columbia and federal governments to avoid a crash. Canada Mortgage & Housing Corp. raised Vancouver’s risk rating to its highest level, from “moderate” in April and “weak” in January. The west coast city is at risk from overvaluation, price acceleration and demand that’s outstripping supply, the Ottawa-based agency said. Rapidly rising prices in Canada’s largest cities may soon drag the entire national market into the strongly problematic category, the housing officials said.
• Europe Stocks Hit One-Month High After LVMH, Santander Earnings. European stocks broke out of their torpor after ending little changed for four straight days. Earnings announcements from companies including LVMH Moet Hennessy Louis Vuitton SE, Telecom Italia SpA and and Banco Santander SA helped push the Stoxx Europe 600 Index up as much as 0.8 percent before it pared its gain to 0.4 percent amid a slide in oil.
• Fed Says Risks Have Diminished as It Leaves Main Rate Unchanged. The Federal Reserve left interest rates unchanged while saying risks to the U.S. economy have subsided and the labor market is getting tighter, suggesting conditions are getting more favorable for an increase in borrowing costs. “Near-term risks to the economic outlook have diminished,” the Federal Open Market Committee said in its statement Wednesday after a two-day meeting in Washington, before repeating language from June that the panel “continues to closely monitor” inflation and global developments. Job gains were “strong” in June and indicators “point to some increase in labor utilization in recent months,” the Fed said.
• Democrats Ignored Cybersecurity Warnings Before Theft. The Democratic National Committee was warned last fall that its computer network was susceptible to attacks but didn’t follow the security advice it was given, according to three people familiar with the matter. The missed opportunity is another blow to party officials already embarrassed by the theft and public disclosure of e-mails that have disrupted their presidential nominating convention in Philadelphia and led their chairwoman to resign. Computer security consultants hired by the DNC made dozens of recommendations after a two-month review, the people said. Following the advice, which would typically include having specialists hunt for intruders on the network, might have alerted party officials that hackers had been lurking in their network for weeks -- hackers who would stay for nearly a year. Instead, officials didn’t discover the breach until April. The theft ultimately led to the release of almost 20,000 internal e-mails through WikiLeaks last week on the eve of the convention.
• Apple’s(AAPL) Earnings Point to Technology Lag Behind Rivals: Chart. 
• C. H. Robinson(CHRW) Tumbles Most in 18 Months as Trucking Rates Sag. C.H. Robinson Worldwide Inc. fell the most in 18 months after the arranger of freight shipments said a decline in revenue that weighed on second-quarter results continued into July. Sales dropped 6.9 percent to $3.3 billion in the quarter, compared with analysts’ average estimate of $3.44 billion. Intermodal revenue plunged 22 percent as volumes decreased 13 percent, the company said Wednesday on a conference call.

Wall Street Journal:

• Fed Leaves Door Open to Move as Soon as September. Nine of 10 members of the policy-making committee voted to leave the federal-funds rate at 0.25% to 0.5%.

Fox News:

• All charges dropped in Freddie Gray case; no convictions. (video) Prosecutors dropped the remaining charges Wednesday against three Baltimore police officers awaiting trial in the death of Freddie Gray, ending the case without any convictions. Gray was a 25-year-old black man whose neck was broken while he was handcuffed and shackled but left unrestrained in the back of a police van in April 2015. His death added fuel to the growing Black Lives Matter movement, set off massive protests in the city and led to the worst riots the city had seen in decades.
• Trump accuses convention-going Dems of ignoring ISIS, border security. (video)
• DNC Convention: Live Coverage. 

CNBC:

• Here's what changed in the new Fed statement.

Zero Hedge:

• Trump: "I Hope Russia Has All 33,000 Emails That Hillary Deleted". (video)
• In Latest Political "Coup", Catalan Parliament Votes To Secede From Spain.
• Deutsche Bank(DB) Profit Plunges 98% And The Worst Is Yet To Come. (graph)
• Oil Stocks Still Treading 30-Year "Line In The Sand". (graph)
• Erdogan Files Criminal Charges Against Head Of Research At Turkish Bank For Writing Displeasing Report.
• Bridgewater's Culture Of "Probing" - Sex Scandal Strikes World's Largest Hedge Fund.
• IRS Launches Investigation Of Clinton Foundation.
• Oil Crashes To $41 Handle After Surprise Inventory Build, Production Rise. (graph)
• Reagan Shooter John Hinckley Jr Released, Will Live With His Mother.
• Pending Home Sales Disappoint, Realtors Fear Unhealthy Price Appreciation. (graph)
• Chinese Stocks Sink Over Fears Regulators Will Curb Wealth Management Schemes. (graph)
• Durable Goods Orders Crash Most In 2 Years - Longest Non-Recessionary Streak Of Declines In US History. (graph)

Business Insider:

• It looks like the biggest takeover in years is in trouble.
• Senior US lawmakers want the Whitehouse to declassify info on the DNC hack.

AP:

• IS says it's behind attack that killed 44 in northern Syria. A twin bombing struck a crowd in a predominantly Kurdish town in northern Syria on Wednesday, killing 44 people and wounding dozens more, Syria's state-run news agency and Kurdish media reported. The Islamic State group claimed responsibility for the attack.

@pzf:

• SHUT DOWN IN TURKEY TODAY: -18 TV channels -3 news wires -23 radio channels -45 newspapers -15 magazines -30 journalists arrested

Bear Radar

Style Underperformer:

• Mid-Cap Value -1.0%

Sector Underperformers:

• 1) Hospitals -2.7% 2) Disk Drives -2.3% 3) Road & Rail -2.2%

Stocks Falling on Unusual Volume:

• TAP, AKAM, GMED, LLTC, CRI, SIX, NANO, UHS, TYPE, RHI, LVLT, TWTR, BJRI, EQR, ULTI, UFI, OC, CNXC, TSS, WYN, MTCH, ASH, CHRW, CTXS, KO, HUN, CVA, KO, NYCB, RRC, BCR. ROL, HES, ULTI, CHRW, ACHC, SLGN, R, TSS, LL and KN

Stocks With Unusual Put Option Activity:

• 1) LNKD 2) BWLD 3) MRO 4) USO 5) UPS

Stocks With Most Negative News Mentions:

• 1) TERP 2) MTCH 3) OAS 4) JWN 5) DO

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth -.1%

Sector Outperformers:

• 1) Biotech +1.4% 2) Gold & Silver +1.3% 3) Steel +.5%

Stocks Rising on Unusual Volume:

• EPIQ, LOGM, UIS, N, ENTG, GRMN, MHLD, BWLD, FRGI, CAVM, WIX, ILMN, EW, AAPL, X, STT and OLED

Stocks With Unusual Call Option Activity:

• 1) TAP 2) CLR 3) AKAM 4) EW 5) KO

Stocks With Most Positive News Mentions:

• 1) EW 2) AKS 3) MBLY 4) ZION 5) PNRA

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running +9.6% Above 100-Day Average
• 4 Sectors Rising, 6 Sectors Declining
• 46.4% of Issues Advancing, 50.4% Declining
• 163 New 52-Week Highs, 5 New Lows
• 61.8% of Issues Above 200-day Moving Average
• Average 14-Day RSI 45.4%
• Vix 13.3 +2.0%
• Total Put/Call .79 -13.2%
• TRIN/Arms 1.09 +38.9%

Wednesday Watch

Evening Headlines
Bloomberg: 

• Turkey-Risk Model Shows Nation’s Markets Going From Bad to Worse. Turkey’s failed coup and President Recep Tayyip Erdogan’s crackdown could hardly have come at a worse time for investors worried about the riskiness of the country’s bonds. Now they may get even dicier. Even before rogue generals tried to seize control on July 15, the country had a relatively high default probability. It was greater than about 80 percent of nations, according to Bloomberg’s sovereign risk model, which uses debt, currency reserves and political instability metrics to calculate such odds. “There’s nothing in these factors that will not get worse,” said Salman Ahmed, the London-based chief strategist at Lombard Odier Asset Management, which uses similar gauges to assess government bonds and is staying underweight on Turkey’s debt. “Political risk is going to go up, growth will go down and external debt will go up as a percent of GDP.”
• Yen Traders Signal Risk Kuroda Falls Short as Volatility Jumps. (video) Bank of Japan Governor Haruhiko Kuroda has never been one to be swayed by market expectation. But this week, investors are leaving him very little room for maneuver. Four in five economists predict additional stimulus Friday -- the most since Kuroda presided over his first policy meeting in April 2013 -- with an increase in purchases of exchange-traded funds the most likely option, followed by a deeper cut in the negative deposit rate. After inaction at the previous two policy meetings sparked yen rallies, Citigroup Inc. warns the currency could surge about 5 percent toward the 2 1/2-year high of 99.02 per dollar it hit after the U.K. voted to leave the European Union.
• End of an Era as China’s Love Affair With U.S. Real Estate Fades. (video) For David Wong, the business of selling homes isn’t as good this year as it was in 2015, and he’s blaming that on a decline in customers from China. “The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight,” said the New York City-based Keller Williams Realty Landmark broker. “You need to cut the price, or it may take a real long time.” Wong is not the only one who has felt the cooling in the U.S. real estate market for foreign buyers. Total sales to Chinese buyers in the 12 months through March fell for the first time since 2011, to $27.3 billion from $28.6 billion a year earlier, according to an annual research report released by the National Association of Realtors. The number of properties purchased by Chinese also declined to 29,195 units from 34,327 units.
• Asia Stocks Rise Amid Japan Rebound as Yen Pulls Back; Oil Sinks. Shares in Tokyo snapped a three-day slide, driving gains in Asia as the yen retreated amid speculation over the outlook for Japanese stimulus. Gold fell ahead of the Federal Reserve’s interest-rate review, while crude oil extended its slump. The MSCI Asia Pacific Index added 0.2 percent as of 10:01 a.m. Tokyo time, headed for its highest close since Nov. 5 as the Topix gained 0.7 percent.
• Oil Majors Lost One Engine; Now the Second One Is Sputtering. If Big Oil was a two-engine airplane, you could say it’s been flying on a single engine since energy prices crashed in 2014. Now, the second motor is sputtering. The major integrated oil companies, including Exxon Mobil Corp., Total SA and BP Plc, have relied on their so-called downstream businesses, which include refining crude into gasoline, oil trading and gas stations, to cushion the losses on their upstream units, which pump crude and natural gas.

Wall Street Journal: 

• At Democratic Convention, Economic Messages Reveal Tensions. As Hillary Clinton trumpets gains and policy proposals, progressives emphasize shortcomings.
• Akamai(AKAM) Stumbles as Silicon Valley Giants Wean Themselves Off Network. Company still counts on traditional media outlets to shore up its video business.
• Treasury Yield Curve Near Flattest Since 2007. Traders and investors await the Fed’s message following this week’s policy meeting. The yield premium investors charged to hold the benchmark 10-year Treasury note relative to the two-year note fell to near a nine-year low ahead of the latest interest-rate decision by the Federal Reserve.
• Apple’s(AAPL) Earnings in Five Charts. (graph)
• Europe’s Terror Storm. François Hollande declares war on Islamic State. Does he mean it? Two terrorists entered a village church in Normandy at morning Mass on Tuesday, slit the throat of an elderly priest and critically wounded another person before police shot the pair dead. Islamic State claimed credit, adding to a list of recent atrocities that includes a suicide bombing and knife attack in Germany and the Bastille Day murder of 84 people in Nice. President François Hollande says France is at “war” with Islamic State, and we’d like to believe he means it.

Fox News:

• DNC Convention: Live Blog.

MarketWatch: 

• The villain of both conventions: Goldman Sachs(GS).

CNBC:

• This chart spells trouble for stocks: Technical analyst. (video)
• Oil market disaster: This is a glut without end in sight, expert says. (video) The oil industry is still "a disaster," with an oversupply issue that doesn't appear to be balancing out anytime soon, John Kidluff, partner at Again Capital, said Tuesday. Kilduff, who has been bearish on crude, pointed out that refiners are soon going to go into their seasonal maintenance.

Zero Hedge:

• Why Hillary Is Nervous: "More Leaks May Be Coming".
• Dead 'Market' Walking: Chinese Stock Volatility Crashes Near Record Lows. (graph)
• What The Sudden Spike In The TED-Spread Really Means. (graph)
• "An Extraordinary Development": Record Swiss Gold Flow Into The United States.
• "I'm (Not) With Her" - Clinton's Image Lowest In 24 Years. (graph)
• Twitter(TWTR) Plummets After Slashing Q3 Outlook.
• Apple(AAPL) Surges After Beating Expectations, Despite Forecasting Third Straight Revenue Decline.
• Peak Hubris.
• Global Central Banks Are All-In: QE Running At Record $180 Billion Per Month (And Rising). (graph)
• Oil Extends Losses After Surprisingly Large Cushing Build. (graph)
• Manic Day Leaves S&P, Bonds, Gold, Crude, Dollar Unchanged. (graph)

Business Insider:

• The worst might be yet to come with the DNC email hack.
• The mayor of New York City is reportedly under federal investigation.
• It's time to take a serious look at Tim Cook's leadership of Apple(AAPL).
• Donald Trump says he wants to raise the federal minimum wage to $10 an hour.
• Trump is doubling down on taxing companies that manufacture overseas.

Financial Times:

• Apple(AAPL) passes ‘low point’ on iPhone sales. Sales for device fall 15% in second quarter as Chinese revenues hit hard. Apple assured investors that demand for the iPhone was getting stronger and the worst of the decline in sales of its flagship device was behind it, as it reported third-quarter results just ahead of Wall Street expectations.

Night Trading 

• Asian equity indices are unch. to +.50% on average.
• Asia Ex-Japan Investment Grade CDS Index 120.75 +.75 basis point.
• Asia Pacific Sovereign CDS Index 48.75 unch.
• Bloomberg Emerging Markets Currency Index 71.80 +.03%. 
• S&P 500 futures +.12%. 
• NASDAQ 100 futures +.62%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (MO)/.80
• (ANTM)/3.23
• (ARMH)/.08
• (BA)/2.27
• (KO)/.58
• (CMCSA)/.81
• (GLW)/.32
• (FCAU)/.47
• (GD)/2.31
• (GT)/1.02
• (HES)/-1.24
• (HLT)/.26
• (IR)/1.30
• (MDLZ)/.40
• (NDAQ)/.88
• (NSC)/1.35
• (NOC)/2.53
• (OC)/.85
• (R)/1.53
• (STRA)/1.06
• (WYN)/1.37
• (AMGN)/2.74
• (ABX)/.15
• (CAKE)/.71
• (ESV)/.51
• (FB)/.82
• (GPRO)/-.58
• (iac)/.51
• (LRCX)/1.64
• (MAR)/.98
• (MCK)/3.34
• (MUR)/-.39
• (ORLY)/2.67
• (OI)/.63
• (WFM)/.37
• (XLNX)/.56 
  

Economic Releases 
8:30 am EST

• Preliminary Durable Goods Orders for June are estimated to fall -1.4% versus a -2.3% decline in May.
• Preliminary Durables Ex Transports for June are estimated to rise +.3% versus a -.3% decline in May.
• Preliminary Cap Goods Orders Non-Defense Ex Air for June are estimated to rise +.2% versus a -.4% decline in May. 

10:00 am EST

• Pending Home Sales MoM for June are estimated to rise +1.2% versus a -3.7% decline in May.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -2,077,780 barrels versus a -2,342,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +5,560 barrels versus a +911,000 barrel gain the prior week. Distillate supplies are estimated to rise by +677,780 barrels versus a -214,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.23% versus a +.9% gain prior.
  

2:00 pm EST

• The FOMC is expected to leave the benchmark Fed Funds rate at .25%-.5%.

Upcoming Splits 

• (EBIX) 3-for-1

Other Potential Market Movers

• The German GFK Consumer Confidence report, $28B 7Y T-Note auction and the weekly MBA mortgage applications report could also impact trading today.

BOTTOM LINE:  Asian indices are mostly higher, boosted by technology and industrial 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.