Stocks Surging into Final Hour on Diminished Fed Rate-Hike Odds, Less Emerging Markets/US High-Yield Debt Angst, Short-Covering, Tech/Biotech Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Higher
  

• Sector Performance: Every Sector Rising
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 15.9 -12.35%

• Euro/Yen Carry Return Index 120.02 -.27%

• Emerging Markets Currency Volatility(VXY) 10.96 +.74%

• S&P 500 Implied Correlation 51.23 -10.27%

• ISE Sentiment Index 127.0 +25.74%
  

• Total Put/Call .82 -24.1%

• NYSE Arms .53 -68.21% 

Credit Investor Angst:

• North American Investment Grade CDS Index 74.55 -3.98%
  

• America Energy Sector High-Yield CDS Index 680.0 +.53%

• European Financial Sector CDS Index 92.16 +1.07%

• Western Europe Sovereign Debt CDS Index 25.31 +1.36%

• Asia Pacific Sovereign Debt CDS Index 37.95 -1.89%

• Emerging Market CDS Index 256.31 -1.92%
  

• iBoxx Offshore RMB China Corporate High Yield Index 131.64 +.02%

• 2-Year Swap Spread 25.5 unch.

• TED Spread 53.0 +2.5 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -29.0 -.25 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.37 +.25%
• 3-Month T-Bill Yield .28% -5.0 basis points

• Yield Curve 97.0 +4.0 basis points
  

• China Import Iron Ore Spot $55.97/Metric Tonne unch.

• Citi US Economic Surprise Index -9.5 -3.5 points

• Citi Eurozone Economic Surprise Index -21.0 -.5 point

• Citi Emerging Markets Economic Surprise Index -14.3 +1.1 points

• 10-Year TIPS Spread 1.51% +1.0 basis point
• 26.8% chance of Fed rate hike at Nov. 2 meeting, 49.7% chance at Dec. 14 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating +60 open in Japan 
• China A50 Futures: Indicating n/a open in China

• DAX Futures: Indicating +27 open in Germany

Portfolio: 

• Slightly Higher: On gains in my biotech/tech/retail/medical sector longs

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges, then added them back

• Market Exposure: Moved to 50% Net Long

Today's Headlines

Bloomberg:

• Hollande Sees EU in Danger Amid Talks With Merkel to Plot Future. French President Francois Hollande and German Chancellor Angela Merkel urged fellow European Union leaders to agree on a post-Brexit road map as economists warn that a weak response risks holding back growth and plunging the EU into extended malaise. “This isn’t one more crisis, this could very well be the crisis threatening its very existence,” Hollande told reporters in Paris on Thursday alongside Merkel on the eve of a post-Brexit summit of EU leaders in Bratislava. “Europe finds itself at a very decisive point in time,” the German leader said. All EU leaders except Britain’s will meet in the Slovak capital on Friday to focus on a common agenda after the U.K. voted in June to leave the 28-member bloc. As Prime Minister Theresa May’s government struggles to work out how to manage Britain’s departure, the remaining 27 are seeking common approaches on items such as defense, economic growth and border security.
• Eight Years After Lehman, Europe Banks Far From Recovery: Chart.
• Europe Stocks Rebound as Gains Accelerate in Final Trading Hour. (video) European stocks rebounded from a selloff that sent equities to an almost six-week low, with gains accelerating in the final hour of trading. A weakening pound following the Bank of England’s update boosted U.K. exporters, while European equities also took their cue from rising U.S. shares. The Stoxx Europe 600 Index rose 0.6 percent at the close, the most in almost two weeks, halting its longest stretch of losses since June.
• Apple(AAPL) Rally Masks Latest Weakness in U.S. Stock Indexes: Chart.
• Warren: Next Administration Should Probe, Maybe Jail Wall Street Bankers. (video) In trying to reopen the investigation, she’s telegraphing her new Senate tactics—and sending a message to Hillary Clinton.

CNBC:

• Wells Fargo(WFC) fallout: More pressure to break up the banks? (video) Among the potential outcomes: Pressure for clawbacks and an emboldened CFPB.
• Bridgewater to lay off employees in 'renovation'.
• Trump: The Fed is political 'beyond anything I would have ever thought possible'. (video)

Zero Hedge:

• Late Stage Lying: Pneumonia Theory vs. Parkinson’s Disease Theory; Doctors Chime In.
• Violent Clashes Break Out Between Locals And Refugees In German Town. (video)
• YouTube Has Quietly Begun "Censoring" Journalists Who Criticize Government.
• 5 Core Economic 'Facts'.
• This Could Be A Problem... (graph)
• Deconstructing The "Median Income Bullshit". (graph)
• CLSA: "One Major Japanese Bank Is Borrowing $60 Billion From Money Market Funds". (graph)
• Business Inventories, Sales Disappoint; Leave Ratio Deep In Recession. (graph)
• What "Obama Rebound"? Average Weekly Wages Declined In Most US Counties.
• A Chart Which Peddles Fiction. (graph)
• Empire Fed Mysteriously Rises Even As All Components Deteriorate. (graph)
• Retail Sales Growth Tumbles To 6 Month Lows, Stuck In Recession Territory. (graph)
• Initial Jobless Claims Confirm Hillbama's "Everything Is Awesome" Meme; But... (graph)

Business Insider:

• Here's everything Donald Trump just promised in his major speech on the economy.
• Here's everything Donald Trump just promised in his major speech on the economy.
• The largest public university system in the US banned a type of question from its application that could affect thousands of prospective students. The State University of New York system voted Wednesday to remove questions about criminal history from applications to its schools, Syracuse.com reported.
• After riding in Uber's self-driving car, I think Tesla will have some serious competition.

The Telegraph:

• Bond yields are surging despite deflation, and that is dangerous.

Bear Radar

Style Underperformer:

• Large-Cap Value +.6%

Sector Underperformers:

• 1) Agriculture -.1% 2) REITs +.1% 3) Banks +.3%

Stocks Falling on Unusual Volume: 

• APOG, CRF, CLM, MCK, ITGR, VFC, WFC, FGP, MON, SRPT, DPLO, NTLA, SNY, ATRA, ULTA, PII, ZEUS, INGR, SGEN, VIAB, TWX, EVA, AMCX and VGLT

Stocks With Unusual Put Option Activity:

• 1) DXJ 2) OII 3) MGM 4) WFC 5) HPQ

Stocks With Most Negative News Mentions:

• 1) ATRA 2) VFC 3) RT 4) EGY 5) AMCX

Charts:

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

Bull Radar

Style Outperformer:

• Small-Cap Growth +.8%

Sector Outperformers:

• 1) Semis +1.9% 2) I-Banks +1.5% 3) Energy +1.3%

Stocks Rising on Unusual Volume:

• AERI, BLUE, CLCD, GKOS, CRUS, SWKS, GT, XRS, ERII and HFC

Stocks With Unusual Call Option Activity:

• 1) RAD 2) AERI 3) LC 4) COTY 5) RRC

Stocks With Most Positive News Mentions:

• 1) DKS 2) GT 3) GPN 4) EXTR 5) SWKS

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -6.7% Below 100-Day Average
• 10 Sectors Rising, 0 Sectors Declining
• 68.3% of Issues Advancing, 28.4% Declining
• 20 New 52-Week Highs, 15 New Lows
• 57.4% of Issues Above 200-day Moving Average
• Average 14-Day RSI 34.8%
• Vix 17.1 -5.6%
• Total Put/Call .87 -19.4%
• TRIN/Arms .76 -56.8%

Thursday Watch

Evening Headlines

Bloomberg:

• China’s Credit Surge Shows Growth Imperative Trumping Debt Risks. China’s surging credit in August boosted property sales while barely moving the dial on private investment, underscoring the challenge for policy makers striving to support growth while reining in debt risks. Aggregate financing jumped to 1.47 trillion yuan in August ($220 billion), helping fuel a 39 percent jump in property sales by value in the first eight months. Medium and long-term new loans, mostly mortgages, climbed 528.6 billion yuan. Private investment in fixed assets, meanwhile, stalled at 2.1 percent for a second straight month in the January through August period, matching a record low. Months after an unidentified “authoritative person” told the Communist Party’s People’s Daily newspaper that China must face up to risks associated with soaring debt levels, policy makers are grappling with how to do that without growth slipping below a target of at least 6.5 percent. At the same time, there’s scant evidence of progress on pledges to rein in excess capacity in industries from steel to cement that are at the center of President Xi Jinping’s efforts to restructure the economy. “It’s clear that reform of the state sector is taking a back seat to increasing monetary stimulus into the economy,” said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. "Xi Jinping’s supply-side reform has encountered significant opposition from provincial governors. The answer seems to be to continue to throw money at the problem until the music stops.”
• Japanese Shares Drop for Seventh Day as Crude Trades Below $44. The global equities selloff continued in Asian trading with Japanese shares falling for a seventh day, their longest losing streak in more than two years. The yen weakened and crude oil traded near a two-week low. The Topix index led losses in the region, while about twice as many shares fell as rose on Australia’s S&P/ASX 200 Index. Futures on Hong Kong’s Hang Seng Index were little changed while those on the S&P 500 Index gained after the U.S. benchmark closed at a two-month low.
• Goldman’s Currie Sees Oil Staying Below $50 as Surplus Lingers. Don’t count on a big rally in crude oil, said Jeff Currie, head of commodities research at Goldman Sachs Group Inc. Or any rally, for that matter. Two years into an oil rout that saw West Texas Intermediate oil fall to about $26 a barrel in February, the risk is “to the downside” because there aren’t any clear catalysts to push up prices, Currie said in an interview in Lake Louise, Alberta. For the next 12 months, he said, oil is likely to trade in the $45-$50 range. In May, Goldman cut its 2017 forecast for oil prices to $53 a barrel from $58 as producers became more efficient and Saudi Arabia, Russia and Iran boosted output more than expected. A “modest” supply deficit in the market is forecast to turn to a surplus early next year, Currie said Wednesday. “It really looks similar to the period of the early 1990s, when we were at $20 oil,” he said.

Wall Street Journal:

• Behind the Monsanto Deal, Doubts About the GMO Revolution. Farmers are reconsidering the use of biotech seeds as it becomes hard to justify their high prices amid the measly returns of the current farm economy.
• Uber’s Self-Driving Cars Debut in Pittsburgh. Up to 1,000 Uber customers will be part of the first real-world test in the U.S. for regular people.
• Average Cost of Employer Health Coverage Tops $18,000 for Family in 2016. Pace of cost increase slowed by accelerating shift into high-deductible plans, new survey shows.

Fox News:

• Clinton campaign releases additional health details on candidate. (video) The Hillary Clinton campaign on Wednesday released what it called a “comprehensive update” on the candidate’s medical information, describing the illness that took her off the trail this week as a mild and non-contagious bacterial pneumonia. “She is recovering well with antibiotics and rest,” said Dr. Lisa Bardack, Clinton’s physician, who provided the information to the campaign.

CNBC:

• JPMorgan sees the S&P 500 sliding 6% — here's how it happens. (video) Increased market volatility and rising long-term bond yields are raising risks for the S&P 500's leading sectors and the broader market, Dubravko Lakos-Bujas, JPMorgan head of U.S. equity strategy, said Wednesday. JPMorgan expects the S&P 500 to end the year at 2,000, representing a roughly 6 percent decline from its current level, making it the most bearish of its peers on the Street. In this scenario, the market leaders are poised for the biggest fall, while some sector laggards will do relatively better, Lakos-Bujas said.

Zero Hedge:

• Hillary's Doctor Releases Her Latest "Medical Records".
• Hillbama Administration Plans To Admit At Least 110,000 Refugees In 2017.
• As Vancouver Luxury Home Sales Plunge 65%, Chinese Buyers Move To Toronto. (graph)
• Americans' Trust In Mass Media Plunges To Record Low.
• Ford(F) Warns That EBIT Will "Decline In 2017" As Sales Have "Reached A Plateau".
• Wells Fargo(WFC) Probed By Feds Over Sales Tactics.
• Stocks Slump To 'Rosengren Lows' As Crude Carnage & China Credit Crunch Continues. (graph)

Business Insider:

• A bombshell report is raising questions about Trump’s business ties to Russia and Iran.
• Chicago hit a two-decade high for having 3,000 shootings this year.
• The oil industry has a lot of problems.
• Warren Buffett has been getting smoked by the S&P 500 since 2008.

Night Trading 

• Asian equity indices are -.50% to -.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 112.5 unch.
• Asia Pacific Sovereign CDS Index 38.75 -1.0 basis point.
• Bloomberg Emerging Markets Currency Index 72.17 -.02%. 
• S&P 500 futures +.17%. 
• NASDAQ 100 futures +.15%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (ORCL)/.58 

Economic Releases
8:30 am EST

• Empire Manufacturing for September is estimated to rise to -1.0 versus -4.21 in August.
• The 2Q Current Account Balance is estimated at -$121.0B versus -$124.7B in 1Q.
• Advance Retail Sales MoM for August are estimated to fall -.1% versus unch. in July.
• Retail Sales Ex Autos MoM for August are estimated to rise +.2% versus a -.3% decline in July.
• Retail Sales Ex Autos and Gas for August are estimated to rise +.3% versus a -.1% decline in July.
• Initial Jobless Claims are estimated to rise to 265K versus 259K the prior week.
• Continuing Claims are estimated to rise to 2151K versus 2144K prior.
• PPI Final Demand MoM for August is estimated to rise +.1% versus a -.4% decline in July.
• PPI Ex Food and Energy MoM for August is estimated to rise +.1% versus a -.3% decline in July.        
• Philly Fed Business Outlook for September is estimated to fall to 1.0 versus 2.0 in August.
  

9:15 am EST

• Industrial Production MoM for August is estimated to fall -.2% versus a +.7% gain in July.
• Capacity Utilization for August is estimated to fall to 75.7% versus 75.9% in July.
• Manufacturing Production for August is estimated to fall -.3% versus a +.5% gain in July.  

10:00 am EST

• Business Inventories for July are estimated to rise +.1% versus a +.2% gain in June.

Upcoming Splits 

• (BMI) 2-for-1
• (TTC) 2-for-1

Other Potential Market Movers

• The Bank of England decision, UK retail sales report, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report, BofA Gaming/Lodging conference, (JCI) analyst day, (USB) investor day and the (GT) investor day could also impact trading today.

BOTTOM LINE:  Asian indices are lower, weighed down by technology and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.