Broad Market Tone:
- Advance/Decline Line: Substantially Lower
- Sector Performance: Every Sector Declining
- Market Leading Stocks: Underperforming
Equity Investor Angst:
- ISE Sentiment Index 68.0 -19.05%
- Total Put/Call 1.18 +4.42%
Credit Investor Angst:
- North American Investment Grade CDS Index 84.89 +3.68%
- European Financial Sector CDS Index 156.58 +5.01%
- Western Europe Sovereign Debt CDS Index 83.50 +3.0%
- Emerging Market CDS Index 299.25 +4.5%
- 2-Year Swap Spread 17.0 +.5 bp
- 3-Month EUR/USD Cross-Currency Basis Swap -13.25 +.25 bp
Economic Gauges:
- 3-Month T-Bill Yield .05% +2 bps
- China Import Iron Ore Spot $116.60/Metric Tonne unch.
- Citi US Economic Surprise Index -29.0 -7.2 points
- 10-Year TIPS Spread 2.16 -3 bps
Overseas Futures:
- Nikkei Futures: Indicating -45 open in Japan
- DAX Futures: Indicating -18 open in Germany
Portfolio:
- Slightly Higher: On gains in my index hedges and emerging markets shorts
- Market Exposure: 25% Net Long
Bloomberg:
- Anti-EU Sentiment Increases as Britons Demand Exit, Poll Shows. Rising anti-European Union sentiment
and the threat that Britain will quit the bloc may boost
nationalist candidates in next year’s European Parliament
elections, a poll showed. Pluralities in six countries said things are going in the
“wrong direction” in the EU, with a majority in the U.K.
favoring a pullout from the bloc if a referendum were held now, Gallup Europe said.
EU Parliament balloting in May 2014 risks “the strong mobilization of
voters in favor of radical nationalist and anti-EU parties, which could
result in a drastic change in the
landscape of European democracy,” Gallup Europe said in a
statement in Brussels today. Economic ills and a sense of “disconnect” between the
people and EU politicians are likely to depress turnout, making
it easier for well-organized anti-EU forces to make inroads in
the election, the pollsters said.
- Finnish Economy Enters Recession as Euro Slump Saps Output.
Finland’s economy shrank in the first quarter, entering a recession as
its fellow euro-area countries struggle with austerity and surging
unemployment. Gross domestic product, adjusted for seasonal swings,
contracted 0.1 percent from the prior three months, when it shrank a
revised 0.7 percent, Statistics Finland in Helsinki said today on its website. The slump matched the median estimate
of three economists in a Bloomberg survey. The economy also
stalled in the third quarter, after being revised from 0.1
percent growth, data showed.
- Lira Weakens as Turkish Yields Climb on Sixth Day of Protests. The lira weakened and bond yields
rose as anti-government demonstrations in Turkey continued for a
sixthday. Shares slid, with Akbank TAS among the decliners as Bank of America Merrill Lynch cut the lender to underperform.
Markets swung to negative after a record rally in two-year bonds
yesterday followed the biggest plunge a day earlier. Protesters accusing
Prime Minister Recep Tayyip Erdogan of autocratic governance and citing
grievances, including alleged
police brutality and curbs on alcohol sales, clashed overnight
with police, who responded with tear gas and water cannons in
about 10 cities.
- European Stocks Drop to Their Lowest Level in Six Weeks. European
stocks retreated to their lowest level in six weeks as investors
weighed comments by Federal Reserve policy makers on when to scale back
the central bank’s bond-buying program. Tesco Plc slid the most in
16 months after the U.K.’s largest retailer reported same-store sales
that fell short of analysts’ estimates. Carrefour SA lost 4.1 percent
after HSBC Holdings Plc recommended that investors sell the French
retailer’s shares. Man Group Plc plunged 17 percent after reporting a
decline in the net assets of its flagship fund. The Stoxx Europe 600 Index dropped 1.5 percent to 295.12 at
the close of trading, its lowest level since April 24.
- Obama Team Bullying Cited by Critics in Drive for Uninsured. Anne Filipic, who helped Barack Obama secure a turning-point victory in the 2008 Iowa caucuses, plans to send thousands of volunteers door-to-door this year on a new campaign: to help the president sell his health-care law to the nation’s 50 million uninsured. First, though, her organization, Enroll America, must deal with the
fallout from congressional Republicans who say the Obama administration
is pressuring companies such as drugmaker Johnson & Johnson to
support an outreach effort that could cost as much as $100 million.
Wall Street Journal:
Dow Jones:
- IMF
to Publish Paper Admitting Lapses in Greece Bailout. IMF says own
projections on Greece too optimistic. Says EU commission weak in crisis
management.
Fox News:
CNBC:
- China's Strength Could Become Its Weakness. Who's afraid of China? Everyone apparently.
As China's economic might grows, trading partners from Europe to Asia
to the U.S. are crying foul, some louder than others. But growing domestic tensions and internal economic imbalances are
forcing Chinese leaders to overhaul the very economic model that has
served them so well for the past decade.
Zero Hedge:
Business Insider:
IndexUniverse:
- Credit Default Swap ETFs Coming To Market. Unlike other products now on the U.S. market, a new family of
proposed ETFs from ProShares that is focused on credit default swaps
(CDSs) will allow U.S. investors a "pure play" to weigh in on credit
quality for the first time.
Bond issuers, especially low-credit issuers, have benefited immensely
from the Federal Reserve’s low-rate policy as yield-starved investors
have crept down the credit spectrum in search of real return. It’s not
just U.S. companies that have loaded up on debt either, “global bond
issuance is up a stunning 53 percent from the same period in 2012,”
according to CNBC. But after a long sustained upward move in bond prices, some are
nervous this beast might turn around to bite them. ProShares’ filing
seems to capitalize on investor anxiety and be an attempt to placate it.
DrHousingBubble:
Reuters:
- Mortgage applications drop as rates surge: MBA. Interest rates on
U.S. mortgages continued to surge last week, rising above 4 percent for
the first time in a year and driving down demand from homeowners to
refinance, data from an industry group showed on Wednesday.Fixed 30-year mortgage rates
climbed 17 basis points to average 4.07 percent in the week ended May
31, the Mortgage Bankers Association said. Rates have risen by 48 basis
points in the last four weeks, with the most recent upswing driven by
nervousness that the Federal Reserve could slow its economic stimulus
efforts sooner than had been anticipated. Last
week's interest rate was the highest since April 2012 and the first
time rates have been above 4 percent since early May of last year. MBA's seasonally adjusted index of mortgage
application activity, which includes both refinancing and home purchase
demand, tumbled 11.5 percent last week. Demand
for refinancing was hit hardest by the acceleration in rates, with
applications slumping 15.0 percent. The refinance share of total
mortgage activity fell to its lowest level since July 2011 at 68 percent
of applications from 71 percent the week before. The
gauge of loan requests for home purchases - a leading indicator of home
sales - held up relatively better, falling just 1.6 percent.
- Senator says Smithfield(SFD) deal has food safety implications. The head of the
Senate Agriculture Committee on Wednesday said she was concerned about
the food safety implications posed by the proposed purchase of pork
producer Smithfield Foods by Shuanghui International, a Chinese meat
products company.
The federal agencies
considering the merger "must take China's and Shuanghui's troubling
track record on food safety into account, and do everything in their
power to ensure our national security and the health of our families is
not jeopardized," Senator Debbie Stabenow, a Michigan Democrat, said in a
statement.
Financial Times:
- Quant hedge funds hit by US bonds sell-off. Some
of the world’s biggest quant hedge funds have suffered steep losses in
the past two weeks following the sell-off in global bond markets.
So-called “CTAs”, which use computer models to automatically spot and
ride market trends, were caught out as investors anticipated an end to
the Federal Reserve’s measures to stimulate the US economy, triggering a
global rout in fixed income investments.
Telegraph:
Handelsblatt:
- ECB
Acting Outside Mandate, ZEW's Fuest Says. ECB has signaled to financial
markets that it will guarantee govt debt without limits, and that's not
within the bank's mandate, Clemens Fuest, head of Germany's ZEW Center
for European Economic Research, says in an interview. ECB is operating
in "grey zone", he said. Reasoning of ECB is faulted, while bank hasn't
proven wrong the assertion that all it does is ensure cheap credit for
countries in crisis. The ECB should step aside and let governments
prevent a potential collapse of the euro zone, he said.
Style Underperformer:
Sector Underperformers:
- 1) Homebuilders -2.71% 2) Airlines -2.70% 3) I-Banking -2.42%
Stocks Falling on Unusual Volume:
- LNG, NXST, LBAI, MBT, BSBR, ANV, FNFG, UBNT, FLO, TTF, THR,
GIII, IBB, CG, ACHC, CLVS, GSK, RHP, CLD, LAMR, AMWD, CSTE, NGLS, RESI, INFI, CLNY BCE, CP, GEL, MMLP, HSII, RYL, FAST, THR, CQP, SKYW, AYR and TSRO
Stocks With Unusual Put Option Activity:
- 1) LYV 2) UA 3) HYG 4) SCHW 5) IYT
Stocks With Most Negative News Mentions:
- 1) JOY 2) BBY 3) DOW 4) RH 5) MS
Charts:
Style Outperformer:
Sector Outperformers:
- Gold & Silver +.73% 2) Oil Service +.04% 3) Drugs -.54%
Stocks Rising on Unusual Volume:
Stocks With Unusual Call Option Activity:
- 1) TWC 2) DG 3) DOLE 4) K 5) CIT
Stocks With Most Positive News Mentions:
- 1) UNH 2) FAST 3) WAG 4) T 5) CTXS
Charts:
Evening Headlines
Bloomberg:
- Australia Economy Grows Less Than Forecast in First Quarter. Australia’s economy expanded less than economists forecast last quarter as machinery and equipment investment declined, sending the currency lower as traders increased bets on further interest rate cuts. First-quarter
gross domestic product advanced 0.6 percent from the previous three
months, when it expanded at the same pace, a Bureau of Statistics report
released in Sydney today showed. The result compared with the median of
25 estimates in a Bloomberg News survey for a 0.7 percent gain.
- Cash Outflows Turn World’s Best Stocks to Worst: Southeast Asia.
Stock markets in Indonesia, the Philippines and Thailand have gone from
being the world’s best to among the worst as the threat of reduced bond
purchases by the U.S. Federal Reserve sends foreign investors to the
exit. Equity indexes in the three markets have declined more than
3.5 percent since May 22, when Fed Chairman Ben S. Bernanke said
policy makers could consider reducing stimulus if the U.S. labor
market improves. International money managers pulled a combined
$1.6 billion from the Southeast Asian countries in that period,
the most since August 2011, data compiled by Bloomberg show.
- Asian Stocks Fall, Led by Banks, on U.S. Stimulus Concern.
Asian stocks fell, led by financial shares, on prospects the Federal
Reserve will scale back stimulus efforts as the U.S. economy improves.
Japanese shares swung between gains and losses before Prime Minister
Shinzo Abe gives a speech on his economic-growth strategy. Westpac
Banking Corp. (WBC), Australia’s No. 2 lender by market value, fell 1.9
percent, pacing declines among financial shares after the nation’s
economy grew less than expected. Mitsui Fudosan Co. (8801), Japan’s
largest property company by sales, added 0.6 percent after the Nikkei
newspaper reported Abe will promote high-rise condominium developments
in the growth plan. Hokkaido Electric Power Co. and Shikoku Electric
Power Co. both dropped at least 3.9 percent to lead losses among
Japanese utilities. The MSCI Asia Pacific Index slid 0.5 percent to 133.98 as of 11:25 a.m. in Tokyo. About two stocks dropped for each that
rose as seven of the 10 industry groups on the gauge fell.
- Rubber Futures Fall in Tokyo on Concern Supply May Increase.
Rubber futures declined in Tokyo trading on expectations that supply
will increase from Thailand, the world’s largest exporter. The contract for delivery in November fell 0.4 percent to 260.3 yen ($2,600 a metric ton) on the Tokyo Commodity Exchange
at 11:33 a.m. after moving between 258.5 yen and 262.3 yen.
Futures have lost 14 percent this year.
- Subprime
Interrupted as Fed Concern Tapers Gain: Credit Markets. US mortgage
bonds that returned as much as 59% over 18 months while recovering from
the credit crisis they ignited are producing losses as speculation grows
the Federal Reserve will cut unprecedented stimulus. Subprime-mortgage
securities issued before the property bubble burst in 2007 lost .33% in
May, the first decline since October 2011, Barclays Plc index data show.
Prices on a Markit Group Ltd. index linked to commercial-mortgage bonds
that have largely been cut to junk after being given top ratings during
the boom have slumped to 71.7 cents on the dollar from 78.6 on May 8,
after soaring from as low as 54 a year ago.
- Obama Failed to Tell Truth About IRS in Poll With 47% Skeptical. Almost half of Americans say
President Barack Obama isn’t telling the truth when he says he
didn’t know the Internal Revenue Service was giving extra
scrutiny to the applications of small government groups seeking
tax-exempt status. Forty-seven percent of Americans say they don’t believe
Obama compared with 40 percent who say he is being truthful,
according to a Bloomberg National Poll of 1,002 adults conducted
May 31 through June 3. More than half of political independents -- 53 percent --
say Obama’s explanation that he learned it from media reports is
untrue, while 34 percent say they believe him. “How could he not know?” said poll respondent June
Wilshusen, 50, of Yuma, Colorado, a political independent and a
stay-at-home wife married to a machinist. “I think any
president has to know what’s going on with our government. I
think they’re very aware of the IRS.”
- Turkey’s Urban Protesters Blame Erdogan for Narrowing Freedoms. Asked why they’re joining the crowds that have gathered in
Istanbul and Ankara every day since May 31, many cite what they
say is a threat to their freedoms from an Islamist-rooted
government increasingly unwilling to countenance dissent.
Erdogan, who has blamed “extremists” for the spread of
protests, has introduced curbs on alcohol, objected to popular
television programs and said he hopes to preside over a “pious
generation” of young people.
- France Says ‘No Doubt’ Syrian Regime Used Chemical Arms. French
Foreign Minister Laurent Fabius said there is no question that Syrian
President Bashar al-Assad’s forces used sarin gas against rebels in an
escalating civil war that’s entered its third year. French tests
detected the nerve agent in samples sent from Syria, and France is
“certain that sarin gas has been used in Syria on several occasions and
in a localized manner,” Fabius said yesterday in an e-mailed statement.
Wall Street Journal:
- One of Wall Street’s Riskiest Bets Returns. In
a sign of how hard Wall Street is trying to satisfy investor demand for
higher returns, J.P. Morgan Chase and Morgan Stanley bankers are moving
to assemble synthetic collateralized debt obligations, or CDOs. Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO. In a sign of how hard Wall Street is trying to satisfy voracious
demand for higher returns amid rock-bottom interest rates, J.P. Morgan
Chase & Co. and Morgan Stanley bankers in London are moving to
assemble so-called synthetic collateralized debt obligations. CDOs give investors a chance to bet on the creditworthiness of a
basket of companies. Basic CDOs pool bonds and offer investors a slice
of the pool. Synthetic CDOs pool, instead of the bonds themselves,
insurance-like derivative contracts on the bonds. Like their crisis-era predecessors, the new CDOs would be sliced up
into different levels of risk and returns. Investors who want a chance
at the highest returns would have to buy the riskiest slice. While
spreading risk in some ways, synthetic CDOs also can multiply
the financial damage if companies fall behind on their debt payments.
During the financial crisis, CDOs pegged to soured mortgage loans caused
losses to careen around the world. Their catastrophic impact was denounced by many lawmakers and
investors, and the market for all kinds of highly engineered financial
instruments evaporated.
- The Wonk With the Ear of Chinese President Xi Jinping. Even in China, few people would recognize Wang Huning, head of the
Communist Party's secretive Central Policy Research Office. And small
wonder: The former university professor almost never talks in public,
barely speaks to old acquaintances and makes a point of not associating
with foreigners.
Yet party insiders and experts on
Chinese politics consider him one of the most influential figures in
China today, a key architect of its domestic and foreign policy over the
past decade, and now of Mr. Xi's signature "China Dream" campaign that
evokes a militarily and economically strong nation reclaiming its place
of prominence in the world.
- SAC Flap Is Liable to Hit Wall Street.
The fate of SAC Capital Advisors LP is a $1 billion question on Wall
Street. That figure is an estimate of how much the hedge-fund giant
generates
annually in trading commissions, financing fees and an array of other
payouts to banks and other financial firms, according to more than a
dozen representatives of Wall Street banks, brokerage firms and others
that do business with SAC or are familiar with details of its
operations. The firm is by far the biggest hedge-fund customer on Wall Street, said people at multiple firms.
Fox News:
- EPA accused of singling out conservative groups, amid IRS scandal.
It's not just the IRS. A second federal agency is facing a probe and
accusations of political bias over its alleged targeting of conservative
groups. The allegations concern the Environmental Protection Agency, which is
being accused of trying to charge conservative groups fees while
largely exempting liberal groups. The fees applied to Freedom of
Information Act requests -- allegedly, the EPA waived them for liberal
groups far more often than it did for conservative ones. The allegations are under investigation by the House Energy and
Commerce Committee and the House Oversight and Government Reform
Committee, which is also holding hearings on the Internal Revenue
Service targeting of conservative groups.
CNBC:
- Amazon(AMZN) Plans Major Move Into Grocery Business. Amazon.com
is planning a major roll-out of an online grocery business that it has
been developing for years, targeting one of the largest retail sectors
yet to be upended by e-commerce, according to two people familiar with
the situation.
- Consumers Still to Buy Into Abe's Economic Experiment. Skepticism is setting in among consumers in the world's third largest
economy over Abe's radical policies and whether he will be able to
successfully deliver on his promise to end two decades of economic
stagnation and ignite inflation.
- The Aussie Dollar Just Can’t Catch a Break. Just
as the Australian dollar attempted to make a concerted rebound against
the U.S. dollar this week, the prospect of further monetary easing in
Australia has provided
traders with another reason to dump the currency.
Zero Hedge:
Business Insider:
Washington Post:
New York Times:
- Trade Nominee Holds $500,000 in Cayman Islands. Michael Froman, a longtime White House economic aide nominated to be
President Obama’s trade representative, holds close to $500,000 in the
Cayman Islands and received millions of dollars to divest himself from
Wall Street accounts that rely on a tax loophole the administration has
sought to close.
Reuters:
- Fed poised to evaluate bond buys, 'fine tune' tactics -Fisher. The U.S. Federal Reserve is
poised to evaluate and potentially make changes to its massive
monetary stimulus, a top Fed official who is critical of the Fed's bond-buying program said on Tuesday.
Financial markets have been increasingly on edge on expectations that
the Fed is ready to start scrolling back on its stimulus. "The plot now
thickens," Richard Fisher, president of the Dallas Federal Reserve Bank,
said. He likened developments in the Fed's monetary policy to a
Shakespearean play starring a "daring captain," Fed Chairman Ben
Bernanke, steering the ship of the U.S. economy. "Act IV, just beginning, will involve the drama of
introspection, with the FOMC evaluating the utility of its
navigational tactics, and, perhaps, fine-tuning them, if not
altering the course," Fisher said, referring to the Fed's
policy-setting Federal Open Market Committee, in remarks
prepared for delivery to the C.D. Howe Institute Directors'
Dinner in Toronto. Fisher is not a voting member of the
committee this year. "Only time will reveal the efficacy of current policy and
whether the risks that I and more experienced observers like
Paul Volcker fret over are as substantial as we surmise, or
whether we have made much ado about nothing," he added. He told the Toronto audience there was a "practical limit"
to the size of the Fed's balance sheet and investors should not
expect "QE infinity." He later told journalists he had advocated for the Fed to
begin slowing the rate of purchases of mortgage-backed
securities, but not stop them. Asked
if he was concerned about the impact of rising bond yields on the
economy, he said it should be monitored but that policymakers could not
let markets dictate policy. "We cannot live in fear that gee whiz, the
market is going to be unhappy that we are not giving them more monetary
cocaine," he said. While chances are "extremely low" that monetary policies
will help push inflation above the Fed's 2 percent target this
year, the bond-buying program is, "at best, pushing on a string
and, at worst, building up kindling for speculation and,
eventually, a massive shipboard fire of inflation," he said.
- Brazil reduces foreign capital controls as currency tanks.
Brazil will scrap a tax on foreign investments in local debt, a
surprise move that could help stop a sharp depreciation of the country's
currency that threatens to stoke already high inflation in Latin
America's largest economy.
- Japan's Abe to target income gains in growth strategy. Prime Minister
Shinzo Abe will pledge to boost incomes by 3 percent annually and allow
tax cuts and reduce red tape in special economic zones when he unveils
the government's latest polices aimed at revitalizing the world's
third-biggest economy, Japanese media said.
Telegraph:
Evening Recommendations
Night Trading
- Asian equity indices are -1.0% to +.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 121.0 +1.0 basis point.
- Asia Pacific Sovereign CDS Index 99.50 -4.5 basis points.
- NASDAQ 100 futures -.04%.
Morning Preview Links
Earnings of Note
Company/Estimate
Economic Releases
8:15 am EST
- The ADP Employment Change for May is estimated to rise to 165K versus 119K in April.
8:30 am EST
- Final 1Q Non-farm Productivity is estimated to rise +.6% versus a prior estimate of a +.7% gain.
- Final 1Q Unit Labor Costs are estimated to rise +.5% versus a prior estimate of a +.5% gain.
10:00 am EST
- Factory Orders for April are estimated to rise +1.5% versus a -4.0% decline in March.
- ISM Non-Manufacturing for May is estimated to rise to 53.5 versus 53.1 in April.
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -800,000 barrels versus a +3,000,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +1,000,000 barrels versus a -1,514,000 barrel decline the prior week. Distillate supplies are estimated to rise by +1,400,000 barrels versus a +1,851,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to rise by +.6% versus a -.9% decline the prior week.
2:00 pm EST
Upcoming Splits
Other Potential Market Movers
- The Japan 30Y bond auction, Eurozone Services PMI, weekly MBA mortgage applications report, (UA) investor day, (SWK) investor day and the (STZ) investor meeting could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open mixed and weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.
Today's Market Take:
Broad Market Tone:
- Advance/Decline Line: Lower
- Sector Performance: Most Sectors Declining
- Market Leading Stocks: Underperforming
Equity Investor Angst:
- ISE Sentiment Index 84.0 +16.67%
- Total Put/Call 1.13 +24.18%
Credit Investor Angst:
- North American Investment Grade CDS Index 81.91 +4.22%
- European Financial Sector CDS Index 149.10 -4.2%
- Western Europe Sovereign Debt CDS Index 81.09 -2.78%
- Emerging Market CDS Index 199.75 +1.53%
- 2-Year Swap Spread 16.5 -.25 bp
- 3-Month EUR/USD Cross-Currency Basis Swap -13.5 +.25 bp
Economic Gauges:
- 3-Month T-Bill Yield .03% unch.
- China Import Iron Ore Spot $116.60/Metric Tonne +4.2%
- Citi US Economic Surprise Index -21.80 +.8 point
- 10-Year TIPS Spread 2.19 unch.
Overseas Futures:
- Nikkei Futures: Indicating +49 open in Japan
- DAX Futures: Indicating -26 open in Germany
Portfolio:
- Slightly Lower: On losses in my biotech/tech/medical sector longs
- Disclosed Trades: Added to my (IWM)/(QQQ) hedges
- Market Exposure: Moved to 25% Net Long
