Stocks Surging into Final Hour on Commodity Bounce, Central Bank Hopes, Short-Covering, Transport/Commodity Sector Strength

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Every Sector Rising
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 13.42 -13.97%

• Euro/Yen Carry Return Index 142.67 -.09%

• Emerging Markets Currency Volatility(VXY) 9.23 -.22%

• S&P 500 Implied Correlation 58.98 -3.89%

• ISE Sentiment Index 75.0 -9.64%

• Total Put/Call .98 -19.01%

• NYSE Arms .49 -59.82% 

Credit Investor Angst:

• North American Investment Grade CDS Index 71.02 -3.01%

• America Energy Sector High-Yield CDS Index 1,642.0 +.74%

• European Financial Sector CDS Index 74.18 -1.40%

• Western Europe Sovereign Debt CDS Index 22.87 +1.28%

• Asia Pacific Sovereign Debt CDS Index 62.03 -2.08%

• Emerging Market CDS Index 318.72 -2.45%
  

• iBoxx Offshore RMB China Corporates High Yield Index 120.76 +.03%

• 2-Year Swap Spread 24.75 -.5 basis point

• TED Spread 25.25 -1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -18.75 +.25 basis point

Economic Gauges:

• 3-Month T-Bill Yield .05% +2.0 basis points

• Yield Curve 158.0 unch.

• China Import Iron Ore Spot $53.45/Metric Tonne +2.1%

• Citi US Economic Surprise Index -15.8 -5.3 points

• Citi Eurozone Economic Surprise Index -3.4 +.3 point

• Citi Emerging Markets Economic Surprise Index -13.9 -.3 point

• 10-Year TIPS Spread 1.75 +2.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 5.46 +.23

Overseas Futures:

• Nikkei 225 Futures: Indicating +60 open in Japan 
• China A50 Futures: Indicating -48 open in China

• DAX Futures: Indicating +36 open in Germany

Portfolio: 

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

• Disclosed Trades: Covered some of my (IWM)/(QQQ) hedges

• Market Exposure: Moved to 75% Net Long

Today's Headlines

Bloomberg: 

• Brazil’s Rating Outlook Revised to Negative From Stable by S&P. Standard & Poor’s said it may cut Brazil’s credit rating to junk, citing the country’s political and economic challenges amid an ongoing corruption probe. The ratings company said in a statement Tuesday it revised the outlook on Brazil’s rating to negative from stable. The country’s rating from S&P is already at BBB-, the lowest investment grade.
• Chinese Developer Bonds Face New Risk as Buybacks Boost Leverage. As Chinese developers use more money to buy back shares amid an equity rout, concern is increasing that the trend will leave less cash to pay back bondholders. Evergrande Real Estate Group Ltd., China’s most indebted developer, on Monday bought back 167.4 million Hong Kong-listed shares for HK$863 million ($111 million), bringing total repurchases to HK$3.64 billion since July 8. China Vanke Co., the nation’s largest homebuilder, this month approved a plan to repurchase as much as 10 billion yuan ($1.6 billion) of its onshore shares.
• Wal-Mart Rebound Imperiled by Mexico’s Worst Poverty in 14 Years. Just as Mexico’s consumer sector begins to emerge from the doldrums of the 2009 recession, a new government report suggests the recovery’s foundation is on shaky ground. An additional 2 million Mexicans have become poor since 2012, pushing one poverty gauge to a 14-year high, Mexico’s social policy evaluation council said. The data show the challenges faced by President Enrique Pena Nieto to meet campaign promises to lift millions out of poverty and expand the middle class.
• GM(GM) Makes $5 Billion Chevrolet Bet to Expand in Emerging Markets. General Motors Co. is investing $5 billion to expand its Chevrolet lineup to gain market share and boost profits in emerging markets including Brazil, China, India and Mexico. The project involves developing cars with Chinese partner SAIC and replacing many of GM’s existing subcompacts and compacts that are sold in emerging markets starting in 2019, President Dan Ammann said. The two companies expect to sell as many as 2 million vehicles a year through 2030, GM said. GM’s strategy reflects a bet on global growth patterns and a new approach to the Chevrolet brand. 
• European Stocks Rebound as Melrose, Hikma Rally Amid Takeovers. (video) European stocks rebounded from 2015’s worst five-day decline as deal activity increased and some corporate earnings topped projections. Melrose Industries Plc surged 9.6 percent after agreeing to sell its Elster business to Honeywell International Inc. Hikma Pharmaceuticals Plc jumped 12 percent after saying it will buy Boehringer Ingelheim GmbH’s Roxane unit. RSA Insurance Group Plc soared 18 percent as Zurich Insurance Group said it’s evaluating a potential offer for it. Kering SA and Drax Group Plc rose 5.6 percent or more after first-half profits beat projections. The Stoxx Europe 600 Index added 1.1 percent to 390.02 at the close of trading.
• These Small Cap Energy Stocks That Hedge Funds Love Have Been Getting Crushed. Losses are again ballooning in a corner of the U.S. stock market where professional speculators roam. Small-cap shares tracked by the Russell 2000 Energy Index have plunged 34 percent in three months, including a 24 percent skid since June 26 in which the group posted four straight weekly losses averaging 6 percent each. Rex Energy Corp. and Penn Virginia Corp. fell more than 50 percent in July alone.

CNBC: 

• UPS(UPS) posts earnings of $1.35 a share vs. $1.26 expected. United Parcel Service delivered quarterly earnings that surpassed analysts' expectations on Tuesday, as improved margins offset a slight drop in revenue. 
• Analysts see 'new era' for Google(GOOG) shareholders. Analysts were so impressed by the earnings report, they not only raised their forecasts, but began throwing around big talk like "dawn of a new era" for the company.

ZeroHedge: 

• Nervous Nasdaq - Too Many Highs & Lows. (graph)
• Toys'R'Us Bonds Crash As Suppliers Set To Tighten Credit Lines. (graph)
• Greek Economy Faces Total Collapse As Doctors Flee, Retail Sales Plunge 70%.
• Wall Street Still Didn't Get The Memo - China's Done, Top's In!
• US Middle Class Stays Dead: Homeownership Drops To 48 Year Low; Median Asking Rent Soars To All Time High. (graph)
• US Economic & Consumer Confidence Plunges To 10-Month Lows As "Hope" Crashes. (graph)
• How A Chinese Farmer Lost More Than Everything Trading Stocks.
• German Economic Council Backs Exit For "Uncooperative" Eurozone Members.

Business Insider: 

• Macau's troubles have hit Las Vegas hard.
• GOLDMAN: 5 reasons Chinese stocks are getting smoked.

Telegraph:

• The UK is living off borrowed time - and money. The UK is far from the reformed, more balanced economy that policymakers hoped would rise phoenix-like from the ashes of the financial crisis. 
• Four charts that show why the euro isn't working for Germany or Greece. The IMF has released its latest healthcheck on the state of the eurozone economy - it makes for grim reading. 

Vedomosti:

• Russian Economy Minister Sees June GDP Drop 4.2% Y/Y. Decline in June slows from 4.8% drop in May, citing Economy Ministry's monthly monitoring.

Folha:

• Brazil Govt Said Worried S&P May Lower Outlook to Negative.

Bear Radar

Style Underperformer:

• Small-Cap Value +.69%

Sector Underperformers:

• 1) Agriculture +.02% 2) REITs +.22% 3) Banks +.34%

Stocks Falling on Unusual Volume:

• CVLT, BIDU, CKEC, RDWR, IR, POL, TACO, SRNE, MYL, AMC, AHL, ZSPH, COUP and CYNO

Stocks With Unusual Put Option Activity:

• 1) ACM 2) NLY 3) GRUB 4) RAX 5) AVP
  

Stocks With Most Negative News Mentions:

• 1) BIDU 2) WYNN 3) POL 4) YELP 5) UNFI
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value +.91%

Sector Outperformers:

• 1) Oil Service +3.60% 2) Steel +3.24% 3) Road & Rail +3.18%
  

Stocks Rising on Unusual Volume:

• GRUB, MPWR, IPGP, ITEK, CNX, ICLR, EMN, CDNS, MAS, AEGR, FCX, SWFT, CPHD, GPN, CNX, SWN, WCN, EMN, STLD, UPS, BEAT, EOG, AXE, COMM, CLR, MRD, CMP, BLCM, ECL and ALLY

Stocks With Unusual Call Option Activity:

• 1) LYB 2) WM 3) DD 4) AMGN 5) UPS
  

Stocks With Most Positive News Mentions:

• 1) BBRY 2) RAI 3) CMI 4) UPS 5) REGN
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 24.7% Above 100-day average
• 9 Sectors Rising, 1 Sector Declining
• 61.4% of Issues Advancing, 36.0% Declining
• 18 New 52-Week Highs, 170 New Lows
• 34.2% of Issues Above 200-day Moving Average
• Average 14-Day RSI 34.4
• Vix 14.67
• Total Put/Call .97
• TRIN/Arms .48

Tuesday Watch

Evening Headlines 

Bloomberg:  

• China Stocks Extend Rout as Traders Lose Faith in State Support. Chinese stocks fell, extending the biggest one-day loss since 2007, as concern grew unprecedented government intervention will fail to shore up equities. The Shanghai Composite Index slid 4.8 percent to 3,548.65 at 10:01 a.m. local time, dragged down by technology and industrial companies. More than 30 shares dropped for every one that climbed in the gauge, which plunged 8.5 percent on Monday. Chinese traders reduced leveraged stock bets on Monday by the most in two weeks as the stock plunge erased $613 billion in value. The securities regulator assured investors in a statement late Monday the government hasn’t withdrawn support for equities. “An absence of late-night measures after such a big crash is unnerving retail investors,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “The government’s current intervention was not able to stop the market’s slide and only delayed the decline.” Chinese stocks traded in Hong Kong fell past the low reached in the depths of this month’s rout. The Hang Seng China Enterprises Index dropped 1.6 percent, putting the measure on course for the lowest close since December.

• Analyst Who Predicted Bottom for Shanghai Stocks Sees Further 14% Plunge. (graph) Chinese stocks will decline by an additional 14 percent over the next three weeks as the market demonstrates a trading pattern that mimics that of the U.S. crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite Index in 2013.  

• End of the Affair? China’s Love of Stock Leverage Is Waning. “Let women fall in love with managing wealth, let men borrow to invest in stocks,” says the recorded message at an online lending company in Shanghai. “For stock loans, press two.” It’s a message that customers won’t hear for much longer after the firm pledged to fall into line with Chinese government efforts to limit online funding for stock purchases. Taming debt could be a double-edged sword, aiding the government’s efforts to curb market volatility while also limiting the potential for stocks to bounce back.

• Treasuries Are Stars of the Markets as Traders See Deflation. Treasuries are becoming the stars of the financial markets as tumbling commodities and stocks raise concern inflation will turn to deflation. U.S. government securities have returned 1 percent in July, headed for their biggest gain since January, based on Bloomberg World Bond Indexes. With the Bloomberg Commodity Index down 10 percent this month, Treasuries are beating the gauge by the most in three years. 

• Asian Stocks Fall as China Rout Triggers Drop in Global Equities. Asian stocks dropped after a rout in Chinese equities drove global shares lower. The MSCI Asia Pacific Index declined 0.7 percent to 139.94 as of 9:04 a.m. in Tokyo, extending its five-day fall to 3.7 percent.

• Oil Extends Decline in Bear Market Amid Signs Glut Will Persist. Oil extended declines in a bear market amid signs producers from the Middle East to the U.S. will continue adding supplies to a global glut. Futures slid as much as 1 percent in New York, dropping for a fifth day. Oil exports from southern Iraq rose to a record this month, while a Bloomberg survey forecasts U.S. crude stockpiles expanded for a second week through July 24. Brent in London closed Monday more than 20 percent lower than its peak reached in May, meeting the common definition of a bear market. Oil’s rebound from a six-year low has faltered on signs the global surplus will persist as the U.S. produces near the fastest rate in three decades and leading OPEC members pump at a record. The Bloomberg Commodity Index dropped for a fourth straight session Monday, extending its plunge to a 13-year low.

• Credit Suisse Sees ‘Extraordinary’ Steel Exports From China. Steel exports from China have increased to extraordinary levels as demand in the world’s largest producer slows and the surge in shipments threatens to spark a rise in trade disputes, according to Credit Suisse Group AG. Overseas sales from China rose to 52.4 million metric tons in the first half of the year, in line with Japan’s total crude-steel production of 52.6 million tons for the period, Tokyo-based analyst Shinya Yamada said in a report. As export growth continues, trade frictions could escalate, Yamada wrote.

• Iron Ore Bargain-Hunting by China Wins Reprieve for Shipping. The bear market in iron ore is sending Chinese steel mills on a bargain hunt and giving shipping companies their best rates this year. Analysts and brokers are already warning the good times won’t last. The acceleration in bookings of Capesizes, 960-foot-long vessels that dominate the ore trade, pushed daily rates to the most since November this month. They are mainly headed to China, which added 3 million metric tons of imported ore to stockpiles at ports in July, the biggest expansion since May 2014. That replenishment may be short-lived. China’s steel production, the driver of demand for iron ore, will remain flat before declining by the mid-2020s, according to the World Steel Association. Consumption is being eroded by slowing economic growth and a shift toward services from manufacturing.

Wall Street Journal: 

• China Stocks Tumble 8.5%, Calling Into Question Beijing’s Market-Rescue Effort. Chinese shares suffer their biggest one-day percentage drop in more than eight years. The Chinese government is struggling to contain the collapse of a stock-market rally it helped engineer, announcing late Monday that it will step up its purchases of shares to prop up sagging indexes. Chinese shares suffered their biggest one-day percentage drop in over eight years Monday, wiping out hundreds of billions of dollars of market value and putting an end to...

• Pell Grants to Be Restored for Prisoners. Obama administration plans a 3- to 5-year test to see if college classes help reduce prison recidivism. The Obama administration plans to restore federal funding for prison inmates to take college courses, a potentially controversial move that comes amid a broader push to overhaul the criminal justice system. The plan, set to be unveiled Friday by the secretary of education and the attorney general, would allow potentially thousands of inmates in the U.S. to gain access to Pell grants, the...

• The Syria Sham and the Iran Deal. Syria cheated on its chemical commitments. Iran will cheat on its nuclear ones. Obama provides cover for both.

Fox News:

• DOJ facing bipartisan criticism for move to 'undermine' gov't watchdogs. The Justice Department is facing bipartisan criticism for clamping down on government watchdogs' access to documents, in a decision lawmakers say defies Congress and undermines those tasked with rooting out government misconduct.

• Planned Parenthood ‘sponsors’ deny funding organization amid hidden camera controversy. (video) Planned Parenthood once boasted a list of sponsors that read like a who's who of the Fortune 100, but now some of the biggest companies say they never gave money to the embattled organization.

CNBC:

• Why this China stock market plunge could be different. (video) "The real worry is that this undermines Chinese people's confidence in the real economy and the government's ability to make policy," says an analyst.

Zero Hedge:

• The Most Important Market Trendline Since 2009 Was Just Broken. (graph)

• China Carnage Continues; Investors "Lost & Concerned" Despite PBOC Reassurance. (graph)

• When Will We Ever Learn? 

• Why China Will End Up Like Japan. (graph)

• When Scary Headlines Don't Scare - Climbing The Wall Of Complacency.

• "The Bucks Stop Here": Why Keynesian Economics Will Get Blamed For The Crash.

• Elon Musk Is Preparing For The Killer Robot Wars Of Tomorrow.

• Chess Vs Checkers - John Kerry Edition.

• Why Greece May Want To Reconsider Reopening Its Stock Market. (graph)

• A Disaffected Democrat Deplores His Potemkin Party Of Populism.

• UBS Exposes The "Scary Reality" Of High Yield Energy. (graph)

• "Uncontained" Shanghai Shafting Slams Global Stocks & Commodities Silly. (graph)

Business Insider:

• A rude awakening in the energy market. (graph)

• The oil price rout is going to inflict real pain on Russia.

• Baidu(BIDU) shares nosedive after earnings whiff.

• The drop in commodity prices is destroying Canada's economy.

• Why US shale names are about to get crushed.

• Obama paid a high price to get Turkey to fight ISIS.

• China is rolling out the verbal intervention in another desperate attempt to underpin the nation's stock market.

• Hillary Clinton is promising that all homes will run on renewable energy in 12 years.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.0% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 110.25 -.75 basis point.

• Asia Pacific Sovereign CDS Index 63.25 +1.75 basis points.

• S&P 500 futures +.28%.

• NASDAQ 100 futures +.28%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (AMG)/3.01

• (AGCO)/1.01

• (ARG)/1.15

• (AKS)/-.39

• (AUO)/.55

• (BP)/.09

• (CPLA)/.81

• (CIT)/.66

• (CNX)/-.05

• (GLW)/.37

• (CMI)/2.56

• (DHI)/.50

• (DD)/1.22

• (FSS)/.27

• (F)/.37

• (IR)/1.23

• (IPI)/.01

• (JBLU)/.44

• (LH)/2.03

• (LYB)/2.73

• (MRK)/.81

• (NOV)/.64

• (PCAR)/1.15

• (PFE)/.52

• (PCP)/3.01

• (UPS)/1.27

• (WYN)/1.26

• (AFL)/1.52

• (AKAM)/.58

• (APC)/-.52

• (BWLD)/1.28

• (CHRW)/.86

• (ESRX)/1.40

• (GILD)/2.71

• (IACI)/.59

• (PNRA)/1.63

• (RGR)/.78

• (TWTR)/.04

• (X)/-.60

• (YELP)/.16

Economic Releases

9:00 am EST

• The S&P/CS 20 City MoM SA for May is estimated to rise +.3% versus a +.3% gain in April.

• The S&P CaseShiller US HPI MoM for May is estimated to rise +.1% versus a -.02% decline in April.
  

9:45 am EST

• The Preliminary Markit US Services PMI for July is estimated to rise to 55.0 versus 54.8 in June.

10:00 am EST

• Consumer Confidence for July is estimated to fall to 100.0 versus 101.4 in June.

• Richmond Fed Manufacturing Index for July is estimated to rise to 7.0 versus 6.0 in June.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The UK GDP report, $26B 2Y T-Note auction, weekly US retail sales reports, Keefe Bruyette Community Bank conference, (INTC)/(MU) joint press conference and the (PII) analyst meeting 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 higher and to weaken into the afternoon, finishing mixed. The Portfolio is 25% net long heading into the day.