Morning Market Internals

NYSE Composite Index:

• Volume Running +11.3% Above 100-Day Average
• 4 Sectors Rising, 6 Sectors Declining
• 36.6% of Issues Advancing, 60.7% Declining
• 778 New 52-Week Highs, 11 New Lows
• 62.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 42.1%
• Vix 12.6 +2.0%
• Total Put/Call .85 -7.6%
• TRIN/Arms .70 +7.9%

Thursday Watch

Evening Headlines

Bloomberg:

• China Fund Exodus Accelerates as Further Yuan Weakness Expected. China’s capital outflow through cross-border sales of funds is accelerating amid expectations the yuan will weaken further. Mainland investors’ accumulative net buying of Hong Kong-registered public funds under the mutual recognition of fund program more than doubled to 7.8 billion yuan ($1.2 billion) as of Aug. 31 from a month earlier, according to data released by the State Administration of Foreign Exchange on Wednesday. That’s almost 96 times the sales of mainland funds in Hong Kong. 
• Experts Warn of China Property Bubble. (video)
• China’s Big Ball of Money Isn’t Going Anywhere Near Stock Market. This year is seen going down as the worst since 2011 for China’s stock investors as the memory of last summer’s rout lingers and speculative buying switches to the housing market. The Shanghai Composite Index will end the year at 3,075, according to the median forecast in a Bloomberg poll of 10 strategists and fund managers. That implies a 13 percent drop over the 12-month period, the steepest in five years, and a gain of 2.9 percent from Wednesday’s close. Fading prospects for monetary easing, a slowing economy and the risk of higher U.S. borrowing costs spurring yuan weakness were among factors weighing on the nation’s shares, the survey showed.
• Japan’s Retail Sales Decline for First Time in Three Months. Japan’s retail sales fell for the first time in three months, signaling that consumer spending is struggling to maintain traction.
• Turkey Risks Kurdish War on Two Fronts as Army Advances in Syria. Mustafa Denktas had twin sons. One of them, a Kurdish militant, was killed fighting the Turkish army in 2012. Denktas was still in mourning when news arrived three weeks later that the other son had met the same fate. Back then Turkey’s war with separatist Kurds, however bloody and protracted, was essentially a domestic issue. Now it’s an international conflict. When President Recep Tayyip Erdogan sent his army into Syria last month, he wasn’t just striking a blow against Islamic State: a second goal was to stop Kurds from creating a de facto state.
• ‘Hard Brexit’ Looms as 28 Red Lines Turn Deeper Shade of Scarlet. European Union governments are refusing to grant the U.K. any leeway on the link between immigration and trade as it prepares to leave the bloc, raising the likelihood of a “hard Brexit.” Almost 100 days since a referendum signaled the end of Britain’s four decades of EU membership, a Bloomberg News analysis has identified a hardening of positions with even the U.K.’s traditional allies such as Ireland insisting it cannot “cherry pick” in the looming divorce talks.
• Asia Stocks Rise With Ringgit as OPEC Deal Boosts Oil; Yen Falls. Asian stocks rose with Malaysia’s ringgit and oil climbed to a three-week high after OPEC agreed to a preliminary deal that will cut crude production for the first time in eight years. Energy shares led gains on the MSCI Asia Pacific Index as benchmarks advanced across regional markets open for trading. The MSCI Asia Pacific Index gained 0.5 percent as of 9:18 a.m. Tokyo time, extending its quarterly advance to about 10 percent. A gauge of energy shares surged 2 percent as Santos Ltd. and Inpex Corp. jumped more than 6 percent.
• U.S. Aluminum Producers Step Up Calls for China Policy Probe. The U.S. aluminum industry’s anti-China drumbeat is gaining volume in Washington this week. A group that represents aluminum companies is calling for a “meaningful dialogue” with Chinese authorities in a bid to end what they say are incentives and subsidies that are fueling a global glut and squeezing U.S. producers out of the market. The Aluminum Association is pressing for a deeper investigation by the U.S. International Trade Commission into Chinese policies to save what’s left of the domestic industry, the group’s chief executive officer Heidi Brock and chairman Garney Scott said in Washington on Wednesday. They are scheduled to give testimony Thursday at a Commission hearing.
• Traders Doubt Yellen’s December Resolve as Credibility Attacked. (video) Traders see barely more than coin-flip odds that the Federal Reserve will raise interest rates by December, even as Chair Janet Yellen reiterated Wednesday that most members of its policy-setting committee expect a hike this year. Treasury yields have fallen across maturities since the central bank left rates unchanged at its Sept. 21 meeting, while signaling that the case to hike had strengthened on brightening U.S. economic data. The bullish comments paired with no policy action left bond traders wondering how good conditions need to be for the Fed to move, particularly as officials pared projections for the future path of tightening.
• Intra-Cellular Therapies Plunges After Schizophrenia Study Fails. Intra-Cellular Therapies Inc. lost more than two-thirds of its value late Wednesday after its lead drug, an experimental pill for treating schizophrenia, failed to help patients in a key late-stage study. Shares plummeted 68 percent to $13.73 in late trading in New York.

Wall Street Journal:

• Trump Tees Up a Necessary Debate on the Fed. Sixty percent of stock gains since the 2008 panic have occurred on days when the Fed makes policy decisions.

MarketWatch:

• Doubts linger over OPEC’s preliminary deal on oil output.

CNBC:

• Oil bankruptcies: 100 down, maybe 100 more to go.

Zero Hedge:

• Madness Swirls At House Judiciary Committee As Comey Attempts To Justify Hillary Innocence.
• Peak Debt Complacency: Carmen "Different This Time" Reinhart Urges Debt Restructuring.
• "It’s A Lot More Negative Than People Think" - China Beige Book Issues Stark Warning About The Economy.
• No Need For Yield Curve Inversion (There Is Already Much Worse Indicated).
• The Bickering Begins: Iraq Disagrees With OPEC's Method Of Oil Production Estimates.
• Who Really Lost This Week's Presidential Debate? America Did!
• OPEC Agrees On First Oil Production Cut Since 2008, But Biggest Question Remains Unanswered.
• What's The Opposite Of "Nailed It"? (graph)
• General Collateral Rate Surges To Highest Level In 7 Years . (graph)
• OilPECalypse Sparks Stock-Buying Panic. (graph)

Business Insider:

• Teenage shooter in custody after 3 injured in shooting at South Carolina elementary school.
• One of China’s richest men is warning about the 'biggest bubble in history'.
• There's far too much complacency in the markets right now.
• FED'S MESTER: 'We could risk a recession' if interest rates don't go up now.

Telegraph:

• The era of robots: thousands of builders to lose jobs as machines take over, says construction boss.

Night Trading 

• Asian equity indices are +.5% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 112.50 -2.75 basis points. 
• Asia Pacific Sovereign CDS Index 31.25 -1.0 basis point.
• Bloomberg Emerging Markets Currency Index 73.12 +.04%. 
• S&P 500 futures +.10%. 
• NASDAQ 100 futures +.13%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (ACN)/1.30
• (CMN)/.45
• (CAG)/.48
• (PEP)/1.32
• (COST)/1.73

Economic Releases
8:30 am EST

• Advance Goods Trade Deficit for August is estimated to widen to -$62.2B versus -$58.8B in July.
• Wholesale Inventories MoM for August are estimated unch. versus unch. in July.
• 2Q GDP is estimated to rise +1.3% versus a prior estimate of a +1.1% gain.
• 2Q Personal Consumption is estimated to rise +4.4% versus a prior estimate of a +4.4% gain.
• 2Q GDP Price Index is estimated to rise +2.3% versus a prior estimate of a +2.3% gain. 
• 2Q Core PCE is estimated to rise +1.8% versus a prior estimate of a +1.8% gain.
• Initial Jobless Claims are estimated to rise to 260K versus 252K the prior week.
• Continuing Claims are estimated to rise to 2129K versus 2113K prior.

10:00 am EST

• Pending Home Sales MoM for August are estimated unch. versus a +1.3% gain in July. 

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Fed's Yellen speaking, Fed's George speaking, Fed's Powell speaking, Fed's Lockhart speaking, Fed's Harker speaking, Germany Employment Change, Japan CPI report, weekly EIA natural gas inventory report, (PM) investor day and the (SLW) analyst day could also impact trading today.

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

Stocks Rising into Final Hour on Less US High-Yield Debt Angst, Oil Bounce, Yen Weakness, Energy/Metals & Mining Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Modestly Higher
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 12.37 -5.57%

• Euro/Yen Carry Return Index 117.90 +.22%

• Emerging Markets Currency Volatility(VXY) 10.11 -.39%

• S&P 500 Implied Correlation 43.07 -6.17%

• ISE Sentiment Index 80.0 +19.4%
  

• Total Put/Call .87 -11.22%

• NYSE Arms .70 -36.23% 

Credit Investor Angst:

• North American Investment Grade CDS Index 75.50 -2.46%
  

• America Energy Sector High-Yield CDS Index 676.0 -1.66%

• European Financial Sector CDS Index 101.50 -.55%

• Western Europe Sovereign Debt CDS Index 24.65 +.43%

• Asia Pacific Sovereign Debt CDS Index 31.65 -1.85%

• Emerging Market CDS Index 234.81 +.04%
  

• iBoxx Offshore RMB China Corporate High Yield Index 132.15 +.05%

• 2-Year Swap Spread 24.0 -1.5 basis points

• TED Spread 59.5 -2.0 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -41.75 +.25 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 73.06 -.07%
• 3-Month T-Bill Yield .27% +2.0 basis points

• Yield Curve 81.0 unch.
  

• China Import Iron Ore Spot $56.48/Metric Tonne -.25%

• Citi US Economic Surprise Index -5.10 +.1 point

• Citi Eurozone Economic Surprise Index -10.40 +.3 point

• Citi Emerging Markets Economic Surprise Index -10.8 +.9 point

• 10-Year TIPS Spread 1.58% +4.0 basis points
• 54.3% chance of Fed rate hike at Dec. 14 meeting, 57.2% chance at Feb. 1 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +90 open in Japan 
• China A50 Futures: Indicating +31 open in China

• DAX Futures: Indicating +53 open in Germany

Portfolio: 

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

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

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg: 

• Why People Have Been Worrying About Deutsche Bank, in 12 Charts.
• Draghi Lays Blame for European Banks’ Woes on Industry Behavior. Mario Draghi said the financial industry must stop blaming the actions of central banks for their problems and focus on fixing internal management and risk failings. “Many banks have problems that don’t have primarily to do with the low level of interest rates but possibly with other reasons,” the European Central Bank president said after a meeting with German lawmakers in Berlin on Wednesday. He cited business models and risk management and said this was “generally acknowledged” by those at the talks. Draghi’s appearance follows criticism by some politicians that the ECB’s policies are hurting savers and weakening banks. The talks also come amid increasing concern about Frankfurt-based Deutsche Bank AG, which had its share price fall to a record low this week as investors questioned the lender’s ability to weather rising legal charges.
• China's Red-Hot Property Market Risks Missing Lessons From Japan's Crash. China is turning Japanese. That’s the increasingly held view of observers comparing China’s frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals. While the two scenarios aren’t a carbon copy, similarities between China’s record credit boom in recent years and Japan’s bubble era have been made at various times by a number of economists and investors. Now, those voices are being heard more often -- even within China. Huang Yiping, a Peking University professor who advises China’s central bank, warned Saturday about leverage that continues to climb, saying that the top risk is more and more investment generates less growth. “That’s exactly the story that unfolded in Japan.” 
• China Said to Mull Bigger Cut in Solar Prices in Some Regions. China may cut the amount of money that solar power generators receive for electricity by more than previously planned, according to two people familiar with the matter. The National Development and Reform Commission may reduce tariffs for solar farms in regions that receive the least amount of sunlight by about 13 percent in 2017 from the 2016 level of 0.98 yuan (15 cents) a kilowatt-hour, said the people, who asked not to be identified because the information isn’t public. The cut compares with a 2 percent reduction the agency had planned for 2017. The move hasn’t been finalized and may be adjusted later, said the people.
• U.S. Warns Russia It’s Poised to Stop Syria War Cooperation. Secretary of State John Kerry warned that the U.S. will suspend contacts with Russia over Syria unless President Vladimir Putin’s government stops a bombing campaign by Russian and Syrian forces in the besieged city of Aleppo. “The Secretary made clear the United States and its partners hold Russia responsible for this situation, including the use of incendiary and bunker-buster bombs in an urban environment, a drastic escalation that puts civilians at great risk,” State Department spokesman John Kirby said Wednesday in a statement after a call between Kerry and Russian Foreign Minister Sergei Lavrov.
• How Actual Nuts and Bolts Are Bringing Down Oil Prices. Last spring, Statoil ASA announced it had used the same oil well design and components to drill three reservoirs for the price of one. While the specs for Norwegian Sea drilling might provoke reactions akin to the oil field’s name—the Snorre—such standardized pipes and casings could hold the key to a pervasive mystery about today’s energy market: Why is everyone still drilling when prices are in the basement?
• Yellen Cornered by Lawmaker in Heated Exchange Over Fed Politics. (video) Federal Reserve Chair Janet Yellen’s defense of the central bank as non-partisan came under attack on Wednesday, as a Republican congressman cornered her on whether a key policy maker would have a conflict of interest in discussing a post in the next U.S. president’s administration. Fed Governor Lael Brainard has donated to Clinton’s campaign and is widely viewed as a potential Clinton pick for Treasury secretary. Yellen hesitated and then demurred when Representative Scott Garrett of New Jersey asked whether Brainard would have a conflict of interest if she were indeed in talks with Democratic nominee Hillary Clinton’s campaign about a position. The election takes place Nov. 8. “I would have to consult my counsel, I’m not aware that that’s a conflict,” Yellen said in testimony to the House Financial Services Committee in Washington, while rejecting Garrett’s suggestion that the U.S. central bank has a political bias.

CNBC:

• 'Four horsemen' analyst: Ad blockers are hurting Alphabet(GOOG). (video)
• Avoid Tesla(TSLA) due to aggressive discounting: Analyst.
• Deutsche Bank(DB) crisis: How we got here, and where we are. (video)

Zero Hedge:

• Oil Spikes After OPEC Announces It Has "Reached A Deal To Limit Oil Production"; Execution To Take Place In November. (graph)
• Obama Humiliated: Senate Overrides President's Veto Of "Sept 11" Bill In Crushing 97-1 Vote.
• California Sanctions Wells Fargo - Suspends Up To $2 Trillion Banking Relationship For Next 12 Months.
• Sucker Punch On Main Street - Disturbing Facts About The Fed's Phony Housing "Recovery".
• Deutsche Denial Tsunami Begins: Draghi "Not ECB Fault", IMF "Solid Base".
• The Banquet Of Consequences Is Being Served (By The Central Banking Cartel).
• Julian Robertson: "Janet Yellen Has Created A Serious Bubble And Pain Is Coming".
• "Russian Roulette" - Credit Suisse CEO Admits "EU Banks Not Really Investable".
• All This Market Calm Feels Like Mayhem.
• Oil Oscillates As Production Drops; RBOB Plunges After Biggest Gasoline Build In 4 Months.
• FBI Director Comey Takes Stand Again To Answer For "Handing Out Immunity Agreements Like Candy".
• "There's A Real Problem Here" - Did Fed's Plosser Just Admit Trump Is Right About Yellen?
• Core Durable Goods Orders Contract For 20th Straight Month - Longest Non-Recessionary Streak In US History. (graph)
• Not Even An OPEC Deal Will Stop Oil Going Lower, Goldman Warns.