Thursday Watch

Evening Headlines 

Bloomberg:  

• A Marriage on the Rocks? Saudis Look Beyond U.S. After Iran Deal. Former Saudi Foreign Minister Prince Saud al-Faisal once compared the bond with the U.S. to a “Muslim marriage,” or one that wasn’t necessarily monogamous. The kingdom’s recent overtures to other partners suggest the relationship is going through another reappraisal because of the landmark accord with regional rival Iran. After visiting Russia and France last month, Deputy Crown Prince Mohammed bin Salman returned home with $23 billion of aircraft and energy contracts. “Trust between Saudi Arabia and the U.S. has been damaged by the Iran nuclear deal,” said Paul Sullivan, a Middle East specialist at Georgetown University in Washington. “Many in Saudi Arabia feel abandoned by the U.S.”

• Japan’s Growth to 2020 Seen by IMF Worse Than in Deflation Years. Despite progress made under Abenomics, Japan’s medium-term economic outlook is for growth that’s actually weaker than during the nation’s period of deflation, according to the International Monetary Fund. The assessment reflects disappointing levels of business investment and slower-than-expected progress in reforming the labor market, said Giovanni Ganelli, a Tokyo-based economist at the IMF who helped compile the fund’s annual review of Japan. Policies in place now point to expansion stuck around 0.65 percent from 2018 to 2020, versus an average 0.9 percent from 2000 to 2012, when Japan was locked in a deflationary funk. The economy’s growth potential rate would be more like 1.5 percent if Prime Minister Shinzo Abe’s government delivered on a full package of structural reforms, Ganelli said in an interview on Wednesday.  

• Brazil Boosts Rate by Half-Point Saying Level Is High Enough. Brazil raised its benchmark interest rate by 50 basis points and signaled that borrowing costs are high enough to slow inflation toward its target next year. The bank’s board, led by President Alexandre Tombini, boosted the Selic rate to 14.25 percent as forecast by 50 of 58 economists surveyed by Bloomberg. It changed language in the communique for the first time this year, adding that “holding that interest rate level for a sufficiently prolonged period is necessary for the convergence of inflation toward the target at the end of 2016.”

• Russia Blocks Creation of Tribunal on Downed Malaysian Plane. Russia vetoed a United Nations Security Council resolution that would have set up an international tribunal to prosecute those suspected of downing a Malaysian Airlines plane over Ukraine last year. China, Angola and Venezuela abstained in support of Russia while the council’s remaining 11 members voted in favor. President Vladimir Putin called Dutch Prime Minister Mark Rutte earlier on Wednesday to say that the Russian government will not support the creation of an international court due to the “many questions” it has about the evidence in the case.

• Korea Ratings Deteriorate Most in Decade as Export Engine Stalls. The creditworthiness of South Korean companies is worsening at the fastest pace in at least a decade as the export-led economy falters. Korea Ratings Corp., the local affiliate of Fitch Ratings Ltd., cut the credit scores of 40 local borrowers in the first half and raised the ratings of 5, the worst ratio since 1999. Similar scores at Nice Investors Service and Korea Investors Service were the weakest since 1998 and data going back to 2004 respectively.

• Won Falls Most in a Week as Fed Outlook Adds to Capital Outflows. South Korea’s won declined the most in a week on speculation a U.S. interest-rate increase will exacerbate capital flight just as Asia’s fourth-largest economy is slowing. Global funds extended sales of Korean stocks this week, taking net outflows so far in July to $1.9 billion and teeing up the Kospi index of shares for its worst monthly slide of 2015. The Bloomberg U.S. Dollar Spot Index was trading 0.4 percent shy of a four-month high after the Federal Reserve showed no sign it will refrain from tightening monetary policy this year, only saying the decision will be data dependent. The won fell 0.6 percent, the most since July 23, to 1,165.07 a dollar as of 10:20 a.m. in Seoul, according to data compiled by Bloomberg. The currency is down 4.3 percent this month, while the Kospi has lost 2 percent.

• Asian Stocks Track Global Gains as Investors Weigh Earnings, Fed. Asian stocks rose, following gains in global shares, as profits topped estimates and the Federal Reserve said the U.S. economy was progressing toward an interest-rate increase. The MSCI Asia Pacific Index climbed 0.2 percent to 141.04 as of 9:01 a.m. in Tokyo.  

• MH370 Hunters Probe Aircraft Part Found on Reunion Island. Investigators leading the search for Malaysia Airlines Flight 370, missing for more than a year, are trying to determine whether debris that washed up on Reunion island off Madagascar belongs to the missing aircraft. French officials have forwarded photographs of what looks like part of an aircraft wing, Joe Hattley, a spokesman for the Australian Transport Safety Bureau, said by telephone Thursday. Based on photos, the wreckage appears to have come from a Boeing 777, the same model as the missing aircraft, although it isn’t yet clear if it’s from the plane, a person familiar with the investigation said.

• These Economic Reports Will Determine When the Fed Will Raise Rates. These are the data points to watch most closely between now and September.

Wall Street Journal: 

• Fed Preps Careful Path for Rate Hike. September move remains on table, but inflation remains a concern. Federal Reserve officials face a conflict as they plan to start raising interest rates later this year: There has been a lot of progress in their goal for U.S. job growth, but little in their objective of modestly rising consumer prices.

• Rising Rents Outpace Wages in Wide Swaths of the U.S. Question of supply and demand as recent net increase in household formation entirely due to renters, not owners; problem hitting cities like Denver, Atlanta and Nashville.

• Donald Trump Says His Past Politics Were Transactional. He once praised Hillary Clinton and donated to Democrats, something he says as a businessman, he had to do.

• Planned Parenthood’s Harvest. Abortion is legal, but taxpayers shouldn’t have to pay for it. Democrats have been picking fight after fight in the culture wars, believing they have the upper hand with socially liberal younger votes. But that assumption is now being tested in the wake of videos of Planned Parenthood doctors blithely discussing the harvesting of fetal body parts.

Fox News:

• Court bars anti-abortion group from releasing new videos. (video) A temporary restraining order has been issued preventing an anti-abortion group from releasing any video of leaders of a California company that provides fetal tissue to researchers. The group is the same one that previously shot viral covert video of a Planned Parenthood leader discussing the sale of aborted fetuses for research.

CNBC:

• Leidos team wins $4.34 bln contract for U.S. military health records. The U.S. Defense Department on Wednesday awarded a team led by Leidos Holdings Inc a contract valued at up to $4.34 billion to build a new electronic health record system for 9.6 million current and retired military service members. The Defense Healthcare Management System Modernization contract, included in the Pentagon's daily digest of major contract awards, runs for 10 years, including several options to extend the contract.

• Global financial markets a shell game: Bill Gross. (video) The global financial markets are a "shell game" thanks to government interventions like quantitative easing, and once the manipulation stops, the markets may drop, bond legend Bill Gross said Wednesday. 

• China stock crash will hit economy: Credit Suisse. A major investment firm has knocked down the theory that China's parabolic bear market won't affect the country's economy.

• China’s weakened property market could hit banks: S&P. The slump that hit China's property market this year could hit the country's banks according to ratings agency Standard & Poor's, in the latest warning to the world's second largest economy. While the housing market in China has started to see some recovery of late, with data released at the start of the month showing house prices rose at their fastest pace in 18 months, weakness seen earlier in the year could have "negative knock-on effects" for domestic Chinese lenders, S&P warned.

• Alan Greenspan: This is 'extremely dangerous'. (video) While markets hone in on the Federal Reserve's monetary policy hints, former Fed Chairman Alan Greenspan sees a bigger economic irritant—government spending. On Wednesday, Greenspan decried a rise in entitlement costs, which he contended have pressured the U.S. economy.

Zero Hedge:

• 1 In 5 US Stocks Now In Bear Market. (graph)

• Hillary Saves Capitalism!

• In Latest Market-Rigging Scandal, ITG Busted For Frontrunning Clients In Its Dark Pool.

• Meanwhile In Venezuela... The Socialist Paradise Has Arrived. (video)

• Congress Proposes Fraudulent New Law To "Fix" Social Security.

• China Rescue, VIX Crash, & Fed Pump Squeeze Shorts Most In 6 Months, Trannies Bounce Most Since 2011. (graph)

Business Insider:

• Whole Foods(WFM) shares are getting wrecked. Whole Foods reported third-quarter results after the market close on Wednesday, missing expectations on earnings and lowering guidance for future sales growth. Shares plunged 11% in after-hours trading.

• Americans' economic confidence is getting mauled.

• Donald Trump just took his most commanding lead yet. Reuters/Ipsos polling also shows that should Trump mount an independent bid next year and run in a three-way race, he will likely drain support from the Republican nominee and allow the Democrat to cruise to victory.

Reuters:

• Facebook(FB) profit falls 9 pct as costs soar. Facebook Inc reported quarterly revenue that beat forecasts but its profit fell 9 percent as the social media company sharply increased spending to boost mobile revenue and future growth. Expenses will grow 55 to 60 percent in 2015 from last year, including an 82 percent jump in the second quarter to $2.77 billion, it added. Facebook shares fell more than 3 percent in after-hours trading.

Telegraph:

• European 'alliance of national liberation fronts' emerges to avenge Greek defeat. For the pony-tailed leader of Spain's Podemos movement, the Leninist lesson of Greece is that revolutionary forces must show an iron fist.

China Securities Journal:

• Some Chinese Banks Examine Their Stock Exposure. Some Chinese banks started to examine their total stock exposure from end-June, citing a person familiar with the matter, without naming any banks. Exposure includes wealth-management products invested in equities through structured products and stock-pledged loans.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are unch. to +1.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 108.75 +.5 basis point.

• Asia Pacific Sovereign CDS Index 61.25 -.5 basis point.

• S&P 500 futures -.14%.

• NASDAQ 100 futures -.04%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (APD)/1.58

• (ALXN)/1.39

• (BUD)/1.25

• (ACI)-.57

• (ADP)/.59

• (AVP)/.08

• (BG)/1.36

• (CAH)/.99

• (CI)/2.31

• (CME)/.92

• (CL)/.70

• (COP)/.04

• (DBD)/.39

• (IDXX)/.57

• (ESI)/.10

• (LLL)/1.70

• (MDLZ)/.39

• (MWW)/.08

• (OXY)/.22

• (PBI)/.44

• (POT)/.52

• (PG)/.95

• (RDS/A)/.56

• (RYL)/.73

• (SNE)/40.90

• (SWK)/1.45

• (HOT)/.74

• (SSYS)/.16

• (TWC)/1.80

• (VLO)/2.37

• (ZBH)/1.56

• (BRCM)/.75

• (DECK)/-1.5

• (EA)/.02

• (EXPE)/.84

• (FLR)/1.05

• (KLAC)/.91

• (LSCC)/-.17

• (LNKD)/.29

• (SKYW)/.26

• (SPF)/.18

• (WBMD)/.33

• (YRCW)/.24

Economic Releases

8:30 am EST

• 2Q GDP is estimated to rise +2.5% versus a -.2% decline in 1Q.

• 2Q Personal Consumption is estimated to rise +2.7% versus a +2.1% rise in 1Q.

• 2Q GDP Price Index is estimated to rise +1.5% versus unch. in 1Q.

• 2Q Core PCE is estimated to rise +1.6% versus a +.8% rise in 1Q.

• Initial Jobless Claims are estimated to rise to 270K versus 255K the prior week.

• Continuing Claims are estimated to fall to 2205K versus 2207K prior. 
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The German Unemployment report, Japan CPI report, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, $29B 7Y T-Note auction and the (KORS) general meeting 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 lower and to rally into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.