Stocks Reversing Lower into Afternoon on Emerging Markets Debt Angst, Earnings Outlook Worries, Technical Selling, Road & Rail/Agriculture Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Slightly Higher
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 13.97 +3.02%

• Euro/Yen Carry Return Index 133.87 +.49%

• Emerging Markets Currency Volatility(VXY) 11.49 +.44%

• S&P 500 Implied Correlation 54.93 +.68%

• ISE Sentiment Index 88.0 -2.22%

• Total Put/Call .88 -21.43%

• NYSE Arms 1.26 +57.34% 

Credit Investor Angst:

• North American Investment Grade CDS Index 79.17 +1.15%
  

• America Energy Sector High-Yield CDS Index 1,451.0 -1.67%

• European Financial Sector CDS Index 89.41 -.67%

• Western Europe Sovereign Debt CDS Index 25.72 +1.30%

• Asia Pacific Sovereign Debt CDS Index 58.59 +6.19%

• Emerging Market CDS Index 288.05 +1.62%
  

• iBoxx Offshore RMB China Corporate High Yield Index 126.79 +.16%

• 2-Year Swap Spread 12.0 +1.75 basis points
  

• TED Spread 44.25 +3.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -25.0 -1.75 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.67 +.64%
• 3-Month T-Bill Yield .20% +1.0 basis point
  

• Yield Curve 107.0 unch.
  

• China Import Iron Ore Spot $53.75/Metric Tonne -.79%

• Citi US Economic Surprise Index -5.20 -1.8 points

• Citi Eurozone Economic Surprise Index -22.30 +11.3 points

• Citi Emerging Markets Economic Surprise Index -10.60 +1.8 points

• 10-Year TIPS Spread 1.63% -2.0 basis points
• 20.0% chance of Fed rate hike at June 15 meeting, 32.8% chance at July 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +56 open in Japan 
• China A50 Futures: Indicating +21 open in China

• DAX Futures: Indicating +18 open in Germany

Portfolio: 

• Slightly Higher: On gains in my biotech sector longs
  

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• China Rating Outlook Cut to Negative From Stable by S&P. Standard & Poor’s has cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected. The nation’s credit rating is AA- with a negative outlook, S&P said in a statement, which also affirmed the long-term and A-1+ short-term sovereign credit ratings. “We revised the outlook to reflect our expectation that the economic and financial risks to the Chinese government’s creditworthiness are gradually increasing,” S&P said in the statement. “This follows from our belief that, over the next five years, China will show modest progress in economic rebalancing and credit growth deceleration.” China’s economic expansion will remain at or above 6 percent a year in the next three years, S&P forecast. The investment rate may be “well above” what S&P says are sustainable levels of 30-35 percent of GDP. “In our opinion, these expected trends could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options, and increase the likelihood of a sharper decline in trend growth rate,” it said. A downgrade could follow if S&P sees a higher likelihood that China seeks to stabilize growth at or above 6.5 percent by increasing credit at a “significantly faster rate” than nominal GDP growth. Ratings could stabilize if credit growth is moderated to levels in line with economic expansion, S&P said.
• Hong Kong Retail Sales Plunge the Most in 17 Years. Hong Kong’s retail sales in February have plunged the most since 1999 as fewer Chinese tourists visited the city during the Lunar New Year holiday. Retail sales dropped 21 percent in February to HK$37 billion ($4.8 billion) year on year, according to a statement from Hong Kong’s statistics department. Combining January and February, sales fell 14 percent. The monthly decline is the worst since January 1999 when sales were also down 21 percent. “Apart from the severe drag from the protracted slowdown in inbound tourism, the asset market consolidation might also have weighed on local consumption sentiment,” a government said in a statement on Thursday. “The near-term outlook for retail sales will still be constrained by the weak inbound tourism performance and uncertain economic prospects.” The government will monitor closely its repercussions on the wider economy and job market, it said.
• Singapore Banks' Outlook Lowered by Moody's as Pressures Mount. DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd. had their credit rating outlooks lowered to negative by Moody’s Investors Service, which said it expected a further weakening of conditions for the three largest Singaporean lenders as economic growth slows. “A more challenging operating environment for banks in Singapore in 2016, and possibly beyond, will pressure the banks’ asset quality and profitability,” Moody’s said in a statement, citing a slowdown in economic and trade growth both domestically and in the wider region. Singapore’s economy, among the most vulnerable in Asia to swings in global demand, is facing pressure amid a slowdown in China and a weaker environment for energy and commodities.
• Europe Stocks Lose Lead Over U.S. in Worst Quarter Since '03. The tables have turned on Europe’s stocks. After beating U.S. equities last year by the most in a decade, now they’re trailing by the most since 2003. While the Standard & Poor’s 500 Index has managed to erase its annual drop in a little more than a month, the rebound in the Stoxx Europe 600 Index has done far less. The gauge, down on Thursday, is on track for a quarterly loss of 7.5 percent, with all but one of its industry groups in the red. The European rebound has hit a wall in the past two weeks after the Stoxx 600 recouped about half its 2016 losses. Despite increased European Central Bank stimulus, confidence in the region’s economy is at a 13-month low, and analysts, who projected corporate profit growth at the start of the year, are now calling for declines. “I frankly didn’t understand the preference for Europe,” said Kully Samra, a London-based client manager at Charles Schwab Corp., which has $2.4 trillion in client assets. “The rally was being driven by central-bank action, but you’re not getting fundamental growth. This quarter clearly showed that you can’t just rely on monetary policy. I would expect Europe’s underperformance to continue.” 
• Dollar Falls to Nine-Month Low on Fed's Global Headwinds Concern. A gauge of the dollar fell to a nine-month low after comments from Federal Reserve Chair Janet Yellen reflected concern that global headwinds may restrain the U.S. economy, dimming the prospects for higher interest rates. The U.S. currency was poised for its biggest monthly loss since September 2010 after the Fed chief said Tuesday that the central bank should “proceed cautiously” in raising rates, damping the allure of dollar-denominated assets. The greenback extended losses after a report showed an increase in weekly jobless claims before the government issues its March employment report Friday. 
• Chinese Stock-Index Futures Drop After S&P Cuts Rating Outlook. (video) Chinese stock-index futures fell after Standard & Poor’s cut the outlook for the nation’s credit rating to negative. The FTSE China A50 April futures dropped 0.7 percent at 5:22 p.m. in Singapore, compared with a gain of 0.2 percent before the S&P move. Hang Seng Index futures slipped 0.1 percent. China’s money and equity markets were shut before the announcement, which follows a similar move by Moody’s Investors Service earlier this month.
• Banks Lead Europe Stocks Lower in Worst Start to Year Since 2009. (video) European stocks extended their third quarterly drop in four to wrap up what has been the worst start to a year since the financial crisis. Lenders helped drag the Stoxx Europe 600 Index down 1.1 percent at the close of trading, trimming its monthly gain to 1.1 percent. After rebounding 14 percent in five weeks through March 14, the gauge’s advance has stalled, putting its quarterly drop at 7.7 percent. That’s the worst first-quarter performance since 2009, with all but one of 19 industry groups falling.
• Copper Heads for Worst Run Since January After China Rating Cut. Copper dropped for a fifth day, the longest slump since January, as a cut to the outlook for China’s credit rating added to concerns on global demand. Standard & Poor’s said increasing economic and financial risks prompted it to reduce the outlook for China’s credit rating to negative from stable. Earlier in March, Moody’s Investors Service made a similar revision. In the U.S., the largest user of the metal after China, consumer comfort declined to a three-month low, as Americans’ attitudes about the economy and their financial prospects deteriorated. “Some of the figures that we’re seeing today were not as bullish as expected,” George Gero, a managing director at RBC Wealth Management in New York, said in a telephone interview. “Disappointment leads to some profit-taking.”
• Even Biggest Mine in Cheapest Region Is Victim of Coal Collapse. It’s the country’s biggest coal mine, producing one of every eight tons in the U.S. last year. The coal is dug from seams as high as six-story buildings, buried beneath the rolling Wyoming plains of yellow grass and sagebrush. Now, Peabody Energy Corp. is cutting 235 jobs, or 15 percent of its staff, at its North Antelope Rochelle Mine -- evidence that coal’s collapse has spread beyond Appalachia’s hills to the biggest open pit in America’s cheapest coal-producing region, the Powder River Basin.
• Trump and Clinton See Signs of Trouble in Wisconsin. (video) The respective front-runners both trail in a new poll of Badger State voters. Trump was trailing in the poll, taken March 24-28, to Senator Ted Cruz of Texas, 40 percent to 30 percent. Ohio Governor John Kasich was third, with 21 percent. On the Democratic side, Clinton fell behind Senator Bernie Sanders of Vermont, 49 percent to 45 percent.

CNBC:

• 5 risks that could surprise markets in the second quarter.

Zero Hedge:

• Trump Nomination Odds Tumble As 'Brokered Convention' Bets Soar. (graph)
• Impatient Banks: A Real Red Flag For The Oil Patch.
• "The Buttonwood SPV": The Striking Details Of How China's Central Bank Is Directly Buying Stocks.
• Dear Janet, You Have A Problem - The Fed Policy 'Death Cross'. (graph)
• Chicago Fed's Evans Goes From Hawkish To Dovish And Back To Hawkish Again In Under 2 Weeks.
• Chicago PMI Bounces Back But Remains Below January Highs (Thanks To Warm Weather). (graph)
• Jobless Claims Surge Most In 2 Years As Challenger Warns Of "Significant" Jump In Retail, Computer Layoffs. (graph)
• Europe Remains Stuck In Deflation For Second Month. (graph)

Business Insider:

• We're about to see a mind-blowing demographics shift unprecedented in human history.
• JOHN KASICH: Here are 5 ways Donald Trump proved he shouldn't be president in the past 24 hours.

Politico: 

• Poll: GOP voters skeptical Trump can unify party. Less than four-in-10 registered Republican voters say Donald Trump will be able to solidly unify their party in the general election, according to the results of a Pew Research Center study released Thursday that also largely showed a country divided over prevailing issues and values. Just 38 percent of Republicans said Trump would be able to get the party to "unite solidly" behind him if he becomes the GOP nominee. At the same point in the 2012 cycle, 65 percent said Mitt Romney would be able to bring together a coalition, while 64 percent said the same for John McCain in 2008. Both men, of course, lost to Barack Obama in the general election in November. Supporters of both Ted Cruz and John Kasich have a decidedly grim view of Trump's aptitude. Fifty percent of Cruz backers saying the Manhattan real-estate mogul would be a poor or terrible president and 28 percent saying he would be terrible, while 55 percent of those preferring Kasich said Trump would be poor or terrible and 36 percent calling him terrible. On the other hand, 64 percent of Democratic voters said they believed their party would unify behind Hillary Clinton if she is the nominee, comparable to the 66 percent who in March 2008 said the same about Obama. Only a little more than one-in-four Sanders supporters (28 percent) said they believed Clinton would make a terrible or poor commander in chief.

Nikkei:

• Atlanta Fed's Lockhart Sees Scope for 3 Rate Rises This Year. Report quotes Atlanta Fed's Dennis Lockhart as saying there is scope for 3 rises this year.

Bear Radar

Style Underperformer:

• Large-Cap Value unch.

Sector Underperformers:

• 1) Road & Rail -1.4% 2) Agriculture -1.3% 3) Steel -1.3%

Stocks Falling on Unusual Volume:

• MOV, SLW, PRGS, TEP, WMS, GPI, ENDP, CIVI, HUBS, AIMT, CIT, BIS, JKHY, TGT, PATK, LNN, BA, PLOW, SIMO, NPBC, ONCE, RDUS, AN, SGRY and ANAC

Stocks With Unusual Put Option Activity:

• 1) BHI 2) HP 3) DE 4) TGT 5) MU

Stocks With Most Negative News Mentions:

• 1) TGT 2) ENDP 3) MU 4) BA 5) VRX

Charts:

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

Bull Radar

Style Outperformer: 

• Small-Cap Growth +.4%

Sector Outperformers:

• 1) Biotech +2.5% 2) Computer Services +1.7% 3) Hospitals +.7% 

Stocks Rising on Unusual Volume: 

• SCLN, MDVN, FIT, RH, WBMD and ACAD

Stocks With Unusual Call Option Activity: 

• 1) CCL 2) XRX 3) RAD 4) MDVN 5) CAG

Stocks With Most Positive News Mentions: 

• 1) FIT 2) MCD 3) PAYX 4) GM 5) PH

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -23.2% Below 100-Day Average
• 7 Sectors Rising, 3 Sectors Declining
• 56.5% of Issues Advancing, 40.0% Declining
• 98 New 52-Week Highs, 3 New Lows
• 48.5% of Issues Above 200-day Moving Average
• Average 14-Day RSI 48.9%
• Vix 13.8 +1.8%
• Total Put/Call .85 -24.1%
• TRIN/Arms 1.12 +38.8%

Thursday Watch

Evening Headlines
Bloomberg: 

• MSCI Says China's Trading Halts May Keep It Out of Stock Indexes. MSCI Inc. said China’s inclusion in global benchmark stock indexes will rest on whether authorities are prepared to prevent a repeat of the trading halts that closed down half the market amid last year’s rout. Investors remain concerned about liquidity risks, the index provider said in a statement announcing a fresh round of discussions on whether to add mainland equities to its emerging-markets gauge. A decision is due in June. Since MSCI deferred including A shares last year, a plunge wiped $5 trillion off the value of Chinese stocks and spurred unprecedented intervention from policy makers. In July, half the companies listed on China’s exchanges suspended their shares from trading, while the government also effectively shut down the mainland futures market, banned large shareholders from selling stakes and cracked down on short-selling. MSCI said a decision to include 5 percent of A shares in its index will depend on authorities implementing changes so that widespread trading halts can’t happen again.
• China Shipping Profits Sink on Low Rates, Lingering Overcapacity. China Cosco Holdings Co. posted a 22 percent slump in earnings last year, while China Shipping Container Lines Co. swung to a loss as overcapacity of vessels led to lower rates. Net income for China Cosco fell to 283.4 million yuan ($43.8 million) in 2015, from 362.5 million yuan in 2014, the company said in a statement to the Hong Kong stock exchange Wednesday. China Shipping Container Lines Co. posted a net loss of 2.9 billion yuan last year, compared with profit of 1.04 billion yuan in 2014, the nation’s second-biggest container shipping company said in a separate statement Wednesday. China Shipping in January had forecast a loss of 2.8 billion yuan for 2015.
• Templeton Names Dover to Replace Mobius as Emerging Markets Head. Mark Mobius, who is credited as a pioneer in emerging-market investing, will pass on his responsibilities of overseeing the Templeton Emerging Markets Group to Stephen Dover as he steps down from day-to-day management.
• Asia Stocks Set for Best Monthly Gain Since 2009 on Fed Optimism. Asian stocks rose, with the regional benchmark index heading for biggest monthly gain since May 2009, amid optimism the Federal Reserve is in no hurry to lift interest rates. Material and consumer-discretionary shares led the advance. The MSCI Asia Pacific Index climbed 0.5 percent to 129.48 as of 9:04 a.m. in Tokyo. The gauge is up 8.6 percent for the month and down 1.9 percent this quarter. Japan’s Topix index added 0.5 percent to pare its loss this year to 12 percent.
• Welcome to New `Ice Age' as Top China Mill Warns of Steel Crisis. The crisis engulfing the global steel industry has become so severe that one of China’s top producers has warned of a new Ice Age as mills confront overcapacity and increased competition that threatens their survival. “In 2015, China experienced slowdown in economic growth and excess steel capacity, which caused the domestic and overseas steel industry to enter into an ‘Ice Age’,” Angang Steel Co. said after posting a net loss of 4.59 billion yuan ($710 million) for last year. There are severe challenges, fierce competition and difficult survival conditions, it said.
• Iron Ore's 24% Surge Is Set to Fade as McKinsey Highlights Risks. Iron ore will probably snap back to $45 a metric ton as a nascent real-estate rebound in China won’t bolster construction demand in the world’s biggest user and supplies remain plentiful, according to McKinsey & Co. The commodity will trade between $45 and $50 a ton this year, eroding a first-quarter rally to as high as $63.74 that was spurred by speculation demand growth will rise, Oliver Ramsbottom, a Tokyo-based partner, said in an interview. There’s no real improvement in Chinese steel consumption, said Ramsbottom, who’s covered commodities for almost two decades. “There’s plenty of supply, there’s relatively weak downstream demand and sure, you get some uplift in price, but it’s not really that significant,” said Ramsbottom. “There’s little reason that iron ore is going to go above $45-to-$50 per ton. If anything, there’s probably more downside risks.”

 Wall Street Journal:

• Obama’s Greatest Triumph. He is six months away from destroying both the Republican Party and Reagan’s legacy. By early 2015, when the primary season began, virtually all issues inside the Republican Party had been reframed as proof of betrayal—either of conservative principle or of “the middle class.” Trade is a jobs sellout. Immigration reform is amnesty. With his Cheshire Cat grin, Barack Obama faded into the background and let the conservatives’ civil war rip. For Republicans, every grievance, slight or loss became a scab to be picked, day after day. In time, the attacks on “the establishment” and “donor class” became indiscriminate, ostracizing good people in the party and inside the conservative movement. The anti-establishment offensive created a frenzy faction inside the Republican base. And of course, it produced Donald Trump. 
• Trump’s Abortion Gaffe. His campaign will be a daily political adventure from here to November. Some months ago we wrote that Republicans who nominate Donald Trump for President would be diving off a cliff without knowing what’s at the bottom, and Wednesday was the latest illustration. The first-time candidate showed how little he understands about the politics of abortion by suggesting that “there has to be some kind of punishment” if abortion were made illegal. 

Zero Hedge:

• PBOC Slams Yuan Shorts Again - Strengthens Currency Most Since 2005. (graph)
• Yellen-Driven Short-Squeeze Sends Bonds To Best Quarter In 4 Years.
• "It's A Big, Scary World Out There," BofA Warns, And Only Janet Can Save Us.
• Brazil Posts Largest Budget Deficit Ever As Rousseff Cries "Coup," Olympic Ad Sales Top $1 Billion.
• European Peripheral Corporate Bond Yields Tumble To Record Lows Ahead Of Draghi's Monetization.
• How Many Tech Startups Are Empty Shells?
• Bonds, Bullion, & Black Gold Bidless But Stock-Bounce Sticks. (graph)

Business Insider:

• CITI: The 'Uber moment' for banks is coming — and more than a million people could lose their jobs.
• CHART: The US is awash with crude oil.
• Trump was never going to keep his Republican loyalty pledge.

@FrankLuntz:

• Latest @FoxNews head-to-head poll• Hillary 49% vs. Trump 38%• H 44% vs. Cruz 47%.

Financial Times:

• EM credit binge will exact painful price. Markets are underestimating the danger in corporate credit. The ebb and flow of asset values through this year’s young life has been larger than on previous occasions, but it is very unlikely that we are at a long-term inflection point for emerging markets. In the background of sentiment-motored noise one can pick up the steadily louder hum of increasing EM leverage, the bulk of it in the corporate sector. 
• Investment banks face sharp trading falls in tough climate.

The Standard:

• Hong Kong Luxury Mall rents tipped to drop by up to 25pc. UBS has issued a pessimistic outlook for the local property market, warning rents in shopping malls could drop by up to 25 percent. The investment house said rents in luxury malls will drop by 20 to 25 percent by the end of 2017, while other malls are also likely to see rents fall by 15 percent. This comes after many malls issued rent hikes last year when renewing leases with tenants. But UBS said it believed the drop would come from the heightened supply of retail space in the next three years. "Supply is to triple compared to the historical average," said UBS head of Hong Kong and China real estate research Eva Lee Chi-wing.

Night Trading 

• Asian equity indices are -.50% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 147.0 -2.25 basis points. 
• Asia Pacific Sovereign CDS Index 55.25 -1.75 basis points. 
• Bloomberg Emerging Markets Currency Index 72.15 -.07%. 
• S&P 500 futures -.16%. 
• NASDAQ 100 futures -.25%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (LNN)/.56
• (MOV)/.39
• (FC)/.05 

Economic Releases  
8:30 am EST

• Initial Jobless Claims for last week are estimated at 265K versus 265K the prior week.
• Continuing Claims are estimated to rise to 2200K versus 2179K prior.      

9:00 am EST

• ISM Milwaukee for March. 

9:45 am EST

• Chicago Purchasing Manager for March is estimated to rise to 50.8 versus 47.6 in February.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Fed's Evans speaking, Fed's Dudley speaking, China Manufacturing PMI report, UK GDP report, EIA weekly natural gas inventory report, Challenger Job Cuts report for March, weekly Bloomberg Consumer Comfort Index, Sidoti Emerging Growth Convention, (CX) shareholder's meeting and the (NDAQ) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology 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.