Stocks Reversing Lower into Final Hour on Fed Rate-Hike Worries, Oil Reveral Lower, Yen Strength, Energy/Defense Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: About Even
  

• Sector Performance: Mixed
  

• Volume: Light

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 14.87 +13.34%

• Euro/Yen Carry Return Index 128.53 +.65%

• Emerging Markets Currency Volatility(VXY) 10.36 -1.33%

• S&P 500 Implied Correlation 54.95 +5.23%

• ISE Sentiment Index 88.0 -3.30%

• Total Put/Call .95 +5.56%

• NYSE Arms 1.04 +2.87% 

Credit Investor Angst:

• North American Investment Grade CDS Index 77.58 +1.35%
  

• America Energy Sector High-Yield CDS Index 891.0 -.08%

• European Financial Sector CDS Index 89.82 +.04%

• Western Europe Sovereign Debt CDS Index 24.97 -2.33%

• Asia Pacific Sovereign Debt CDS Index 52.72 +.07%

• Emerging Market CDS Index 303.76 +1.76%
  

• iBoxx Offshore RMB China Corporate High Yield Index 128.88 +.09%

• 2-Year Swap Spread 15.0 +1.25 basis points
  

• TED Spread 37.25 -.5 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -29.5 unch.
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 70.48 -.25%
• 3-Month T-Bill Yield .29% -1.0 basis point

• Yield Curve 96.0 +2.0 basis points
  

• China Import Iron Ore Spot $51.15/Metric Tonne -.24%

• Citi US Economic Surprise Index -18.60 +4.2 points

• Citi Eurozone Economic Surprise Index 4.80 -.5 point

• Citi Emerging Markets Economic Surprise Index 2.5 +2.5 points

• 10-Year TIPS Spread 1.58% -4.0 basis points
  
• 51.4% chance of Fed rate hike at July 27 meeting, 58.2% chance at September 21 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +179 open in Japan 
• China A50 Futures: Indicating -152 open in China

• DAX Futures: Indicating -21 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:      

• Perfect Storm Brews in China as Fed Worry Meets June Cash Crunch. (video) A perfect storm may be brewing in Shanghai’s money market as a credit-fueled economic recovery coincides with the prospect of higher U.S. interest rates in June, a month that has historically seen funding crunches in China. The overnight interbank lending rate averaged 1.99 percent in May, up from 1.18 percent a year ago, as Federal Reserve tightening weakened the yuan, spurring capital outflow pressures. That borrowing cost has climbed every June since 2011, as lenders hoard deposits ahead of quarter-end regulatory checks. The cost of fixing rates in the swap market is surging as data showed property leading a rebound in investment in the world’s second-biggest economy. “The internal and external factors combined will certainly add pressure to the money market in June, driving interest rates higher,” said Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank Co., the nation’s sixth-largest lender. “We’re not optimistic about the bond market in the short term.” Any cash crunch would aggravate a rout in bonds that led to 190.6 billion yuan ($28.9 billion) in canceled sales this quarter, making it harder for issuers to refinance a record amount of maturing debt.
• Chinese Bonds Complete Worst Month in Year as Yuan Extends Loss. Chinese sovereign bonds posted their the steepest monthly loss in a year amid speculation authorities will refrain from easing monetary policy after the U.S. signaled higher borrowing costs as early as next month. The yuan fell by the most this month since the August devaluation. The yield on 10-year government bonds climbed nine basis points since the end of April to 2.98 percent in Shanghai, the highest level since December, ChinaBond data show. The yuan fell 1.6 percent this month to 6.5846 per dollar as of 4:50 p.m. in Shanghai, bringing losses in the second quarter to 2.1 percent.
• One-Minute Plunge Sends Chinese Stock Futures Down by 10% Limit. (video) Chinese stock-index futures plunged by the daily limit before snapping back in less than a minute, the second sudden swing to rattle traders this month. Contracts on the CSI 300 Index dropped as much as 10 percent at 10:42 a.m. local time, recovering almost all of their losses in the same minute. More than 1,500 June contracts changed hands in that period, the most all day, according to data compiled by Bloomberg. The China Financial Futures Exchange said in a statement that a client using block trades for market hedging triggered a technical selloff. The slump follows a similar drop in Hang Seng China Enterprises Index futures on May 16 in Hong Kong, a move that heightened anxiety among investors facing slower Chinese economic growth and a weakening yuan.
• China Futures Exchange Says Client’s Hedging Caused Flash Crash. (video)
• Pound Drops as New Brexit Poll Shows ‘Leave’ Camp Taking Lead. (video) The pound dropped after a new poll showed a jump in support for the campaign to take Britain out of the European Union, spooking some investors who had thought that the result was a foregone conclusion. Sterling fell against all of its 16 major peers as ICM opinion polls released Tuesday by the Guardian showed a lead for the ‘Leave’ camp. A phone survey showed 45 percent of respondents supported leaving, 42 percent for ‘Remain’ and 13 percent were undecided, in contrast to a previous survey which put the pro-EU camp ahead. An online poll also put the Brexit camp ahead.
• Europe Stocks Trim Their Best Monthly Gain in Six as Banks Fall. (video) European stocks fell, halting their longest advancing streak in almost seven weeks, as banks declined. Lenders posted the worst performance among Stoxx Europe 600 Index groups, with Banco Popolare SC and Banca Popolare di Milano Scarl down more than 5.4 percent. Volkswagen AG lost 2.6 percent after the company mired in an emissions-cheating scandal reported an 86 percent slide in quarterly profit at its namesake brand. The Stoxx 600 closed 0.8 percent lower, extending declines in the final hour of trading.
• From Awesome in April to Gutted in May, Iron Ore Sinks Back Down. For iron ore, if April was a party then May’s been the aftermath. Benchmark prices are headed for the biggest monthly loss since August 2012 as a rally driven by a speculative frenzy in China segued straight into a back-to-reality slump when the fervor faded. Ore with 62 percent content has lost 24 percent in May to unwind April’s 23 percent rally, when prices posted a third monthly gain, according to data from Metal Bulletin Ltd. The raw material has collapsed 29 percent since peaking at more than $70 on April 21, and last week dipped below the $50 level. The commodity’s boom turned to a bust as regulators in China moved to prevent the frenzy from getting out of hand and signs emerged of increased supply, including higher port stockpiles. Steel-product prices that soared in April, lifting mills’ margins and encouraging output, have since retraced, denting iron ore demand. Goldman Sachs Group Inc. warned last week iron ore will probably extend its drop in the second half amid a rising global surplus.
• Risky Reprise of Debt Binge Stars U.S. Companies Not Consumers. Consumers were the Achilles’ heel of the U.S. economy in the run-up to the last recession. This time, companies may play that role. Among the warning signs: rising debt, lagging profits and mounting defaults.  “Companies have been adding to their debt and their debt has been growing more rapidly than their profits,” said John Lonski, chief economist of Moody’s Capital Markets Research Group in New York. “That imbalance in the past has usually led to problems” in the economy as companies cut back on spending and hiring. Case in point: Last week’s news that so-called core capital goods bookings fell for the third straight month in April. The seasonally-adjusted total of $62.4 billion for non-defense orders excluding aircraft was the lowest in five years, prompting Neil Dutta of Renaissance Macro Research to label business investment “pathetic.” The similarities between the pre-recession debt binge by consumers and today’s burst of borrowing by companies are striking. Like households, corporations are using the money for short-term purposes rather to prepare themselves for the future. They’re basing their bets on rosy expectations that may not pan out. And it’s the bottom 99 percent that are most at risk should credit conditions tighten.
• Jazz Pharmaceuticals(JAZZ) Agrees to Buy Celator for $1.5 Billion. Jazz Pharmaceuticals Plc agreed to buy Celator Pharmaceuticals Inc. for about $1.5 billion to gain an experimental medicine for a rare blood cancer. Jazz, based in Dublin, offered $30.25 per share in cash for Ewing, New Jersey-based Celator, the companies said in a joint statement on Tuesday. Celator’s board endorsed the transaction. Investors with 18.4 percent of Celator’s stock, including managers and board members, agreed to tender their shares.
• Inside Uber’s Auto-Lease Machine, Where Almost Anyone Can Get a Car. In a deal led by Goldman Sachs, Xchange received a $1 billion credit facility to fund new car leases, according to a person familiar with the matter. The deal will help Uber grow its U.S. subprime auto leasing business and it will give many of the world's biggest financial institutions exposure to the company's auto leases.  The credit facility is basically a line of credit that Xchange can use to lease out cars to Uber drivers. Xchange caters to people who have been rejected by other lenders.

Wall Street Journal:

• Pension Funds Pile on Risk Just to Get a Reasonable Return. An investor used to get a 7.5% return by holding safe bonds. To earn that now, research finds, takes a more volatile mix. What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.

CNBC:

• These 'black swan' events may threaten world economy, says Societe Generale. (video)
• Expert: June gloom ahead as volatility remains low. (video)

Zero Hedge: 

• Huffington Post Removes Article Claiming Hillary Will Be Indicted On Federal Racketeering Charges.
• Peak Insanity: This "Trophy Apartment" In Manhattan Is Going For A Cool $250 Million.
• A New Problem Emerges For Hillary: Obamacare.
• The Five Stages Of Central Bankers' Failure.
• The "Crazy Growth In Corporate Debt" Is Finally Noticed: Bloomberg Issues Stark Warning. (graph)
• $50 Oil Doesn't Work.
• US State Department Issues European Travel Alert - Warns Of Terrorist Attacks.
• The Obamacare Cliff: Redistribution & The Disincentive To Work.
• US Government "Finds" Americans Had $70 Billion More In Disposable Income. (graph)
• Dallas Fed Tumbles (Again) - 17th Consecutive Month Of Contraction. (graph)
• Consumer Confidence Plunges To 10-Month Lows As Job 'Hope' Fades. (graph)
• Chicago PMI Slumps Back Into Contraction; Election Blamed. (graph)
• Apple(AAPL) Back Under $100 On News It Will Extend iPhone Lifecycle To 3 Years, Cites Slowing Demand.
• Case-Shiller Home Price Rise Beats Expectations By Most In 2 Years. (graph)
• Personal Spending Spikes Most Since Aug 2009 As Fuel Costs Surge

Nikkei:

• Apple Likely to Take 3 Yrs Between iPhone Model Changes. Apple will likely take three years between full-model changes of its iPhone devices. New cycle to be year longer than current 2-year cycle. Changes to model to be introduced this autumn will be minor. Functions like camera, water resistance and battery capacity will likely be improved; headphone jack will be removed.

Bear Radar

Style Underperformer:

• Large-Cap Value -.2%

Sector Underperformers:

• 1) Restaurants -.8% 2) Medical Equipment -.6% 3) Defense -.4%

Stocks Falling on Unusual Volume:

• GXP, FGL, CCE, LFVN, SRI, ROP, TARO, XRS, BIDU, SYT, OLLI, SHPG, MZOR, LE, BP, BR, INGR, MED, WSFS, EAT, CEM, PCLN, JKS, MOV and STZ

Stocks With Unusual Put Option Activity:

• 1) EWT 2) WDAY 3) ASHR 4) NBR 5) LYB

Stocks With Most Negative News Mentions:

• 1) OSIR 2) MOS 3) SRI 4) NDSN 5) STEM

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth +.4%

Sector Outperformers:

• 1) Gold & Silver +2.8% 2) Biotech +1.4% 3) Road & Rail +1.0%

Stocks Rising on Unusual Volume:

• SQI, CPXX, MKTO, WR, TISI, RRMS, SODA, TTM, NERV, SEMG and NBIX

Stocks With Unusual Call Option Activity:

• 1) MKTO 2) OLN 3) TLRD 4) ARIA 5) GGP

Stocks With Most Positive News Mentions:

• 1) VRTX 2) MU 3) DE 4) BIIB 5) HOG

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -15.6% Below 100-Day Average
• 4 Sectors Rising, 6 Sectors Declining
• 55.9% of Issues Advancing, 41.1% Declining
• 84 New 52-Week Highs, 2 New Lows
• 57.0% of Issues Above 200-day Moving Average
• Average 14-Day RSI 44.3%
• Vix 14.0 +6.9%
• Total Put/Call .91 +1.1%
• TRIN/Arms .73 -28.2%

Tuesday Watch

Today's Headlines

Bloomberg: 

• China's Slowdown Hits Nearby Economies Hardest. Hong Kong and Mongolia alike are feeling the pinch. Those nearest to China are among the hardest hit as growth in the world's second-largest economy grinds to the slowest pace in a quarter century. Hong Kong, Macau, and Taiwan all saw their economies shrink in the first quarter, while Mongolia's commodities-fueled boom has faltered. And the bad news doesn't stop there. "The ripples are likely to spread further out," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "As China's economy continues to cool, it will provide an ongoing drag on global output, curtailing inflation pressures in the process and anchoring interest rates in the process. The economic malaise currently experienced by China's immediate neighbors, therefore, is only a portend of a milder version to afflict economies elsewhere as China comes off the boil." That's already the reality facing Hong Kong.
• The Big Short Is Back in Chinese Stocks. Chinese equities are once again in the cross hairs of short sellers. Short interest in one of the largest Hong Kong exchange-traded funds tracking domestic Chinese stocks has surged fivefold this month to its highest level in a year, according to data compiled by Markit and Bloomberg. The last time bearish bets were so elevated, such pessimism proved well-founded as China’s bull market turned into a $5 trillion rout.
• Factory Output in South Korea Drops Further Amid Weak Exports. South Korea’s industrial production fell more than economists expected as weak exports and corporate restructuring of shipbuilders continue to hurt demand and business sentiment. Factory output dropped 2.8 percent from a year earlier in April, Statistics Korea said Tuesday, compared with a 1.3 percent decline estimated by economists in a Bloomberg survey. Production fell 1.3 percent from a month earlier. "The negative factory output data trend shows that the foundations of growth are weak," said Suh Dae Il, an economist at Mirae Asset Daewoo Co. "The government’s push to restructure shipbuilders and shipping companies will further hurt domestic demand." 
• European Stocks Little Changed as Investors Mull U.S. Rate Hike. European stocks were little changed in thin trading as investors considered the implications of a possible increase in U.S. interest rates after Federal Reserve Chair Janet Yellen said a hike is likely in the coming months. The Stoxx Europe 600 Index added 0.1 percent to 350.14 at the close of trading, after briefly rising as much as 0.2 percent, with automakers rising the most.
• Asian Stocks Little Changed as Investors Weigh Data, Rate Hike. Asian stocks were little changed, poised for the biggest monthly drop since January, as investors assessed economic data and the prospects for higher U.S. interest rates. The MSCI Asia Pacific Index rose less than 0.1 percent to 128.28 as of 9:16 a.m. in Tokyo. The gauge is down 2.2 percent this month, the worst showing since an 8 percent plunge in January, amid investors’ anxiety over the U.S. central bank’s plan to raise interest rates.
• Fed Outlook Hits Bonds to Emerging-Market Currencies; Oil Climbs. Anxiety over the prospect of a U.S. interest-rate hike as soon as June dominated global trading, battering government debt and most developing-nation currencies. Emerging-market currencies extended losses from Friday, on track for their worst month since August against the dollar after Federal Reserve Chair Janet Yellen signaled Friday that a rate increase is likely some time in the coming months. Gold fell for a ninth day in its longest slump in a year, while Mexican bonds sank with German bunds amid a tumble in 10-year treasury futures. A gauge of global stocks held near a four-week high with trading volumes in the Americas and Europe more than 50 percent below their daily average amid market closures in the U.S. and the U.K. The yen slumped a second day.

Wall Street Journal:

• Iraqi Forces Begin Ground Assault on Fallujah. The city is one of Islamic State’s most significant remaining strongholds in Iraq. Iraqi special forces advanced to the edge of Fallujah on Monday but struggled to enter the city, where Iraqi and U.S. officials said Islamic State extremists were amassing civilians to serve as human shields.
• Business Makes Senate Push. U.S. Chamber of Commerce hopes to keep the GOP from losing control of the Senate in November. The country’s biggest business lobby will launch an initiative Tuesday to deploy influential Republicans to raise funds for tight Senate races, hoping to keep the GOP from losing control of the chamber in November.

Fox News: 

• Former State Dept. watchdog debunks central Clinton email claim. (video) The State Department’s former top watchdog, in an interview with Fox News, rejected Hillary Clinton’s repeated claims that her personal email use was in line with her predecessors’ – while saying he would have immediately opened an investigation if he caught wind of a secretary of state using such an account.

CNBC:

• Fed's Bullard says global markets seem well-prepared for summer rate hike.

MarketWatch:

• These 7 data points reveal the sorry state of Americans’ finances.

Zero Hedge: 

• Beyond The Minsky Moment: China's Ponzi Schemes Are Now Investing In Other Ponzi Schemes.
• Trickle-Down Crash? Trophy Assets Suddenly Tanking.
• Here We Go Again: Wells Fargo Is Trying To Give Mortgages To Low-Income, Debt-Heavy Millennials Living At Home. (graph)
• Brits "Appalled, Disgusted" At Brexit Postal Ballot 'Fraud'.
• "An Unusual Number Of Known Unknowns" - These Are The Key Event Risks In June.
• Trump And Hillary Don't Know How To Fix The Economy.
• The Limits Of Oil's Rebound.
• Why Management Is Incentivized To Fabricate Earnings: It's All About non-GAAP Bonuses.
• Grant Williams Warns Of Looming 'Wealth Tax', Says "Own Physical Gold, Not ETFs".
• What The Charts Say: Fatally Attracted To New Highs. (graph)
• Never Forget.
• ECB Policy-Failure On Display: European Businesses Aren't Planning To Invest.
• China Sends Yellen Another Warning, Fixes Yuan At Lowest In Over Five years. (graph)
• Global Stocks Unchanged; US Futures Rise Above 2,100 As Traders Celebrate Memorial Day. (graph)

Business Insider:

• Consumers' mindsets are shifting dramatically — and it's killing brands like Tiffany.
• Putin has turned Russia into a ticking time-bomb only he can defuse.
• The antidote to China's debt addiction could make things worse.
• Former CEO of HSBC: Brexit would make London a 'prosperous global financial centre'.

Financial Times:

• Iata warns of slowdown in air travel. Global demand for air travel may be “shifting down a gear”, according to Iata, the aviation industry’s main trade body, sounding a warning that will send jitters through the sector.

Night Trading

• Asian indices are -.25% to +1.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 140.5 -.5 basis point.
• Asia Pacific Sovereign CDS Index 52.75 -.25 basis point.
• Bloomberg Emerging Markets Currency Index 70.73 -.1%.
• S&P 500 futures +.26%.
• NASDAQ 100 futures +.37%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (MDT)/1.26
• (SCOR)/.26
• (ITRI)/.34
• (NX)/.09
• (WDAY)/.02
• (ZOES)/.04

Economic Releases

8:30 am EST

• Personal Income for April is estimated to rise +.4% versus a +.4% gain in March.
• Personal Spending for April is estimated to rise +.7% versus a +.1% gain in March.
• PCE Core MoM for April is estimated to rise +.2% versus a +.1% gain in March. 

9:00 am EST

• The S&P/CS 20 City MoM SA for March is estimated to rise +.7% versus a +.66% gain in February.

9:45 am EST

• Chicago Purchasing Manager for May is estimated to rise to 51.0 versus 50.4 in April.

10:00 am EST

• Consumer Confidence for May is estimated to rise to 96.0 versus 94.2 in April. 

10:30 am EST

• Dallas Fed Manufacturing Activity for May is estimated to rise to -8.0 versus -13.9 in April.

Upcoming Splits

• None of note

Other Potential Market Movers

• The China PMI report, German retail sales report, Australia GDP report, weekly US retail sales reports and the Deutsche Bank Financial Services could also impact trading today.

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