Wednesday Watch

Evening Headlines 
Bloomberg:

• China Exports Unexpectedly Drop With Imports in Drag on Economy. China’s exports and imports both unexpectedly declined in June in a sign that weakness in global and domestic demand will intensify the slowdown in the world’s second-biggest economy. Overseas shipments fell 3.1 percent from a year earlier, the General Administration of Customs said in Beijing today, compared with the median estimate of a 3.7 percent gain in a Bloomberg News survey of 39 economists. Imports declined 0.7 percent after a 0.3 percent drop in May. The report follows May’s collapse in export gains after a crackdown on fake invoices that inflated data in the first four months of the year. “The story of China economic growth this year has changed -- it’s no longer a story about modest recovery but about where the government’s bottom line is,” Xu Gao, Beijing-based chief economist with Everbright Securities Co. who previously worked for the World Bank, said before the release. “Without government support, China’s growth will continue to slide.”

• Global GDP Weighted Manufacturing Index Points To More Weakness. (graph)

• Ruble to Real Roiled With No Brick in BRICs’ $13.9 Billion Lost. Capital flight from the BRICs, Brazil, Russia, India and China, is sending their stocks, bonds and currencies down in tandem for the first time since 2006 as the 10-year love affair with the largest emerging markets ends. “Every decade, there’s a theme that captures investors’ imagination -- the 1970s was about gold, 1980s was all about Japan and 1990s was about technology companies,” Ruchir Sharma, the New York-based head of emerging markets at Morgan Stanley Investment Management, which oversees $341 billion, said in a phone interview on July 8. “Last decade it was about the BRICs. That theme has basically run its course.” Investors withdrew $13.9 billion from equity mutual funds invested in the four countries this year, or 27 percent of the inflows since 2005, according to EPFR Global. The MSCI BRIC Index fell 12 percent last quarter while the nations’ currencies sank 4.1 percent against the dollar and government bonds lost an average 0.6 percent, the only such correlation in data compiled by Bloomberg going back seven years. 

• BOJ Easing Forecasts Cut as Japan Gains on Kuroda Salvo: Economy. Economists are ditching forecasts for the Bank of Japan to further expand its record easing this year amid signs that a recovering economy may spur inflation.

• Asian Stocks Pare Gains as Aussie Declines With Metals. Asian stocks trimmed gains, and commodity currencies declined with metals as China’s imports and exports unexpectedly fell. The Dollar Index rose after touching a three-year high as investors awaited minutes from the U.S. Federal Reserve’s meeting last month. The MSCI Asia Pacific Index increased 0.5 percent by 12:41 p.m. in Tokyo, paring a 0.8 percent gain.

• Rebar Falls on Higher Output, Unexpected Drop in China’s Exports. Steel reinforcement-bar futures in Shanghai fell for the third day amid increased output from mills and after an unexpected drop in China’s exports. Rebar for delivery in January on the Shanghai Futures Exchange fell as much as 0.5 percent to 3,579 yuan ($584) a metric ton before trading at 3,588 yuan at 10:45 a.m. local time. 

• Rubber Declines as China’s Cash Crunch Spreads to Auto Dealers. Rubber declined to a one-week low as a cash crunch in China, the biggest consumer, is spreading to the nation’s auto dealerships. Rubber for delivery in December on the Tokyo Commodity Exchange fell as much as 3 percent to 234.3 yen a kilogram ($2,316 a metric ton), the lowest level for a most-active contract since July 1. Futures traded at 236.8 yen at 10:37 a.m. local time and have lost 22 percent this year.

• Copper Triangle Break Means Further 10% Drop: Technical Analysis. Copper futures, down 16 percent this year, may fall by next month to the lowest since mid-2010, based on technical analysis by Matt Zeman at Kingsview Financial LLC. The attached chart of monthly prices shows that copper on the Comex in New York broke out of a triangle pattern formed by a high in February 2011 of $4.6575 a pound and a low of $2.994 in October that year. Declines beneath the lower line of the triangle in the past three months signal a 10 percent drop to $2.75 by early August, Zeman said in a telephone interview. “The charts look bearish,” said Zeman, a strategist at Kingsview in Chicago. “The inability to maintain any meaningful rally is also a bearish factor. We could see a pretty quick slide lower.”   

• EU Unveils Bank-Failure Plan in Face of German Opposition. The European Union’s executive arm is heading for a showdown with Germany over its blueprint for shuttering or restructuring failing banks, a plan intended to complement the European Central Bank’s oversight of lenders. Michel Barnier, the EU’s financial-services chief, will unveil the European Commission’s proposal for a single bank resolution mechanism today in Brussels, a day after German Finance Minister Wolfgang Schaeuble urged restraint if the bloc is to avoid conflicts with its basic laws. “I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty,” Schaeuble said yesterday. “We have to stick to the given legal basis, as otherwise we risk major turbulence.”  

• Lloyd’s Says Taxes, Regulation Burden European Firms. High taxation and new regulation are among the most pressing concerns for senior European company executives, according to a survey by Lloyd’s of London. The Lloyd’s Risk Index survey also found executives were worried about losing customers and the availability of credit, the world’s oldest insurance market said in a statement today. “With business tax in the spotlight and rising up the political agenda, executives are understandably concerned,” Lloyd’s Chief Executive Officer Richard Ward said in the statement. “The danger is that an emphasis on near-term, operational issues comes at the expense of significant, strategic decisions.”

• SEC Set to Lift 80-Year-Old Ban on Advertising by Hedge Funds. Hedge funds and other companies seeking private investments would be freed to advertise publicly for funding under a rule set for a vote tomorrow by the U.S. Securities and Exchange Commission. The rule is the first of those required by last year’s Jumpstart Our Business Startups Act to be approved by the SEC, the vote coming more than a year after a deadline set by Congress. The rule would lift an 80-year-old regulatory practice that has restricted advertising outside of a public offering in an effort to protect small investors from inappropriate risks. Under the new rule, startups and other small companies would also be able to use advertising to raise unlimited amounts of money. 

• Six Inconvenient Truths About Obamacare. The White House’s decision last week to delay part of its health-care overhaul illustrates six truths about the law that its supporters can’t easily acknowledge. First, important parts of it are badly designed.

Wall Street Journal: 

• Plan Reins In Biggest Banks. Proposal Requiring Extra Capital Would Force Firms to Be More Conservative or Shrink. U.S. regulators took their first big swing at addressing fears that Wall Street's largest firms remain too risky five years after the financial crisis, unveiling plans to require them to set aside far more capital as protection against future disaster. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are effectively trying to force big banks to become more conservative or to shrink. The first step, proposed Tuesday, would require banks to double the amount of capital they hold as protection against every loan, investment, building, security and other asset on their books—not just the risky ones.

• U.S. Struggles to Meet Health-Law Deadline. Delay in Big-Employer Requirement Raises Questions About Administration's Ability to Implement Overall Policy. The delay in the requirement that big employers offer health insurance to workers has raised questions about the administration's ability to implement the biggest domestic policy initiative in a generation.

• Egypt Names New Premier Amid Disarray. Ex-Finance Minister Is Chosen to Lead Interim Government as Arab Nations Pledge Billions, While Divisions Widen. A former finance minister was chosen as Egypt's interim premier under a six-month timetable for elections, as the country's emerging post-coup government drew pledges of $8 billion in assistance from Arab supporters, in new attempts to bolster a democratic transition marked so far by divisions and violence.

• Emerging Markets Hit by IMF Forecast. Lower Growth Prospects Further Rattle Developing Nations. Investor fears that the end of easy money is at hand are ricocheting around the globe. In the latest fallout, the International Monetary Fund on Tuesday trimmed its global-growth forecast.

• Slowdown in China Dents Nickel. Metal's Price Reaches Four-Year Low as Demand Wanes and Output Increases. Nickel prices fell to a four-year low, in the latest fallout from slowing economic growth in China, the metal's biggest user. China's growing pains have translated into less demand for nickel, which is mixed with iron ore to give stainless steel its rustproof property in everything from table forks to kitchen sinks to skyscrapers.

• Alaska Unveils New Plan to Explore for Oil in Wilderness Area. Alaska officials unveiled a new oil exploration proposal Tuesday for the Alaska National Wildlife Refuge, an area estimated to hold significant oil reserves that is also home to polar bears, caribou and other wildlife. Alaska officials and some federal lawmakers have periodically pursued federal approval to explore and drill for oil and natural gas in the wildlife area, arguing that if the area has rich oil reserves, the nation should consider producing hydrocarbons there. Democratic lawmakers and environmental groups have opposed such efforts, arguing that the area is a crucial habitat for wildlife that could be harmed if oil drilling were allowed. Now, the state of Alaska is proposing to pay for underground seismic surveys that would provide a clearer picture of how much oil is underneath the ground in the wildlife refuge. 

• Fukushima Watch: Tritium Levels Soar on Coast at Fukushima Plant. More than two years after the devastating accident at Japan’s Fukushima Daiichi nuclear plant, operator Tokyo Electric Power Co. 9501.TO -0.45% is seeing levels soar of a radioactive element called tritium. The problem spot is on the coastal side of the plant’s heavily damaged No. 2 reactor, one of the areas where Tepco regularly monitors groundwater to check for radioactive elements that may have leeched from the plant’s partly melted fuel cores and into the environment. In May, Tepco found that tritium levels in the groundwater there had suddenly risen to 17 times their December levels. Since then, Tepco has drilled more monitoring holes and stepped up measurements. They’ve found tritium levels are continuing to rise, with the latest readings, taken on July 5, some 20% higher than they were in May.

• Phil Gramm: A GOP Game Plan for Tax Reform. If the special deals that create crony capitalism are allowed to survive, Republican efforts will have failed.

Fox News:

• FOIAed again: ‘Gun map’ newspaper seeks more info on firearms owners. The suburban New York newspaper that created a firestorm earlier this year when it published the names and addresses of gun permit holders has requested more data regarding legal owners of firearms, apparently to determine if handgun ownership patterns have changed in the last six months.

• House Republicans push to slash IRS budget by 24 percent, cite abuses and sequestration. House Republicans want the IRS to pay for targeting political groups and are pushing legislation that would cut the tax collecting agency’s budget by $3 billion -- nearly a quarter of what it received last fiscal year. The House Appropriations Committee is scheduled to start “marking up” the spending bill Wednesday.

MarketWatch.com: 

• Oil prices top $104 on sharp inventory decline. U.S. benchmark crude-oil futures leapt above $104 a barrel on Wednesday after weekly U.S. crude-oil supplies fell by more than twice the amount anticipated by analysts. Crude oil for August delivery CLQ3 +0.74%   rose 85 cents, or 0.8%, to $104.38 a barrel in electronic trade.

CNBC:

• How the Mortgage Interest Deduction Could Change. Congressional action on the U.S. tax code could dramatically alter one of its sacred cows: the mortgage interest deduction. And the change could come in 2013.

Zero Hedge:

• Chinese Exports Slump Most Since 2009. (graphs)

• The Dead Weight Of Sluggish Global Growth.

• DoubleLine Webcast On "The End Of QE As We Know It" With Bond Rout Update.

• Three Funny Charts. (graphs)

• Charles Gave: So Here We Are...

• The NSA Has Inserted Its Code Into Android OS, Or Three Quarters Of All Smartphones.

Business Insider: 

• The Chart That Has Everyone Freaked Out About A Chinese Credit Crisis.

• An Oil Well Is Leaking Into The Gulf Of Mexico.

• The 10-Year Yield Is A Whopping 4 Standard Deviations From Its Long-Average. (graph)

• Air Pollution In Northern China Steals 5 Years Of Life From The Average Person.

• MITCH MCCONNELL: The Obama Administration Is Indifferent To The Rule Of Law.

Federal Reserve Bank of San Francisco:

• A Defense of Moderation in Monetary Policy by John C. Williams.

Reuters: 

• Dismal China trade data points to weaker Q2 GDP growth. China's exports to the United States - the country's biggest export market, fell 5.4 percent in June from a year earlier, while export to the European Unison dropped 8.3 percent, according to the customs. "The surprisingly weak June exports show China's economy is facing increasing downward pressure on lacklustre external demand," said Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai. "Exports are facing challenges in the second half of this year. The appreciation of U.S. dollar and the Chinese government's recent crackdown on speculative trade activities also put pressure on exports."

• U.S. Senate to scrutinize Chinese purchase of pork producer Smithfield(SFD). Chinese plans to buy America's Smithfield Foods - the world's biggest pork producer - will face intense scrutiny on Wednesday when U.S. senators question Smithfield's chief executive about food safety and foreign ownership. The proposed $4.7 billion purchase by Shuanghui International would be the largest acquisition ever of a U.S. company by a Chinese concern. Experts on the U.S. review process expect the deal to be approved despite opposition from farmers, food-safety groups and rural communities.

• U.S. risk council designates AIG, GE Capital for tougher oversight. The U.S. financial risk council on Tuesday said it has designated American International Group and GE Capital as systemically risky, bringing them under stricter regulatory oversight. The Financial Stability Oversight Council's decision to name its first set of "systemically important" non-bank firms had been long expected by the financial services industry.

Financial Times: 

• Quantitative easing and the curious case of the leaky bucket. The one certain outcome of QE is that those with assets benefit relative to those without. 

• How credit derivatives desensitised the banking industry to risk. The CDS tail was vigorously wagging the funded credit market dog.

Telegraph:

• Europe’s rich 'could face uprising similar to Peasants' Revolt'. Europe’s rich Baby Boomers are behaving like the nobility in the Peasants’ Revolt, and could face an uprising by the younger generation if the situation doesn’t change, HSBC’s chief economist has warned. 

• Minority Report moves step closer as Lord Sugar launches face recognition adverts. Minority Report-style adverts have moved a step closer to reality after Lord Sugar's Amscreen launched an innovative face detection system in thousands of its advertising screens that can tell how many people are looking at an advert, as well as their age and sex.  

• France bans new Mercedes cars over 'greenhouse gases'. The latest models of Mercedes cars cannot be sold in France as they still use an air conditioning refrigerant the EU says emits excessive greenhouse gases and should be replaced, the German auto company said. 

Liquidity crunch a catalyst for big China slowdown – analysts The mini liquidity crunch is the early warning sign of a substantial economic correction long overdue, amid rising leverage and a broken growth model, say bearish analysts.


While we want you to share, we ask you use the functions on-site rather than copy/paste. See T's & C's for details. http://www.euromoney.com/Article/3222433/Liquidity-crunch-a-catalyst-for-big-China-slowdownanalysts.html?copyrightInfo=true

AsianInvestor: 

• EM Hedgies, Asian Quants Struggle Through June. The Eurkeahedge Greater China Hedge Fund Index is down -5.19% for June, based on strategies that reported last month's returns as of early this week, while the data provider's emerging markets index was down -2.94%.

Jiji:

• OECD Chief Says Japan Should Raise Consumption Tax to 10%. Japan should immediately raise consumption tax to 10% to achieve early fiscal reconstruction, Angel Gurria, Secretary-General of OECD, says in an interview.

China Securities Journal:

• China Can't Rule Out Inflation Risks. China can't rule out inflation risks in the coming half-year period or longer because increasing home prices may push up consumer prices, according to a front-page commentary written by reporters Wang Donglin and Ni Mingya. Actual inflation level is higher than reported CPI data because property prices are not included when calculating CPI, the commentary said. Prices for furniture, building materials, home appliances and rent will rise as a result of increasing property prices, according to the commentary. China should regulate shadow banking and take differentiated policies to curb some overheated industries and overcapacity, the commentary says.

Securities Daily:

• China Cash Crunch Hitting Auto Loan Approvals. Banks have become more stringent in approving car loans after the cash crunch, citing interviews with auto dealers. Loan approvals are now taking twice as long, citing dealers. Mid-priced car sales hit the hardest, according to the report.

Evening Recommendations 
Citigroup:

• Rated (GOOG) Buy, target $1,100.

• Rated (AMZN) Buy, target $340.

• Rated (YHOO) Buy, target $30.

• Rated (EBAY) Buy, target $65.

• Rated (AOL) Buy, target $43.

Night Trading

• Asian equity indices are unch. to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 152.50 -5.5 basis points.

• Asia Pacific Sovereign CDS Index 114.0 -3.25 basis points.

• FTSE-100 futures -.28%.

• S&P 500 futures -.09%.

• NASDAQ 100 futures unch.

Morning Preview Links

Earnings of Note
Company/Estimate

• (FAST)/.40

• (FDO)/1.03

• (TXI)/.20

• (PSMT)/.64

• (YUM)/.54

• (ADTN)/.19

Economic Releases
10:00 am EST

• Wholesale Inventories for May are estimated to rise +.3% versus a +.2% gain in April.

• Wholesale Sales for May are estimated to rise +.3% versus a +.5% gain in April.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory decline of -3,200,000 barrels versus a -10,347,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +1,000,000 barrels versus a -1,719,000 barrel decline the prior week. Distillate inventories are estimated to rise by +1,000,0000 barrels versus a -2,418,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.2% versus a +2.0% gain the prior week.

2:00 pm EST

• Fed releases minutes from June 18-19 FOMC meeting.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Bernanke speaking, Italian 10Y bond auction, China New Loan/Trade data, Germany CPI, Brazil rate decision, 10Y T-Note auction, weekly MBA mortgage applications report and the (CVX) quarterly update could also impact trading today.

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