Wednesday Watch

Evening Headlines

Bloomberg:

• China Manufacturing Gauge Exceeds Estimates as Growth Holds Up. China’s official factory gauge held up and exceeded estimates, adding to signs the world’s second-largest economy has maintained some of its first-quarter momentum. The manufacturing purchasing managers index remained at 51.2 for a second straight month in May, compared with a median estimate of 51 in a Bloomberg survey of economists. The non-manufacturing PMI rose to 54.5 after matching a six-month low of 54 a month earlier. Numbers higher than 50 indicate improving conditions.
• Zhou Says China's Investment Growth Likely to Moderate. (video)
• Japan's Industrial Production Hits Highest Level Since 2008. Japan’s industrial output rebounded in April, hitting the highest level since 2008, as overseas demand continued to support the nation’s economic recovery.
• Asian Stocks Retreat; Pound Drops After U.K. Poll. Asian equities slipped as investors assessed the strength of global economic growth and the path for U.S. monetary policy. The British pound dropped amid election concerns. Stocks in Japan led declines in Asia as energy shares retreated with oil prices. The British pound dropped for the first time this week as a poll showed Theresa May’s Conservative Party may miss a majority. The yen was steady after three days of gains. The yield on 10-year Treasuries edged higher after Tuesday’s declines. Japan’s Topix fell 0.3 percent, after two days of gains. Australia’s S&P/ASX 200 was little changed, while South Korea’s Kospi swung between gains and losses.
• Once Costly Deep-Sea Oil Turns Cheap, to OPEC's Dismay. Reports of deep-sea drilling’s demise in a world of sub-$100 oil may have been greatly exaggerated, much to OPEC’s dismay. Pumping crude from seabeds thousands of feet below water is turning cheaper as producers streamline operations and prioritize drilling in core wells, according to Wood Mackenzie Ltd. That means oil at $50 a barrel could sustain some of these projects by next year, down from an average break-even price of about $62 in the first quarter and $75 in 2014, the energy consultancy estimates.
• Another Warning Sign Flashes for Subprime Auto Loans. Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers.

Wall Street Journal:

• Donald Trump Confronts New, Harsher Realities at Home. Russia probe expands to president’s inner circle, a staffer exits, and decisions loom on a new FBI director and Paris climate accord.
• Doubts Cloud Fed’s Rate Increase Plans Beyond June. A potential political fight over the U.S. budget could cause the Fed to rethink its plans for later in the year.

Fox News:

• US conducts successful missile intercept test, Pentagon says. (video)
• Kathy Griffin holds bloodied Trump mask in photo shoot with Tyler Shields.

CNBC: 

• Wilbur Ross says he's 'open to resuming' talks on mega-trade deal with Europe.

Zero Hedge:

• "An Incredible Accomplishment": Pentagon Successfully Shoots Down Simulated ICBM Attack.
• The Internet Helped Kill Inflation In America, Says Credit Suisse.
• How Debt-Asset Bubbles Implode: The Supernova Model Of Financial Collapse.
• Is This Saudi Arabia's Newest Strategy To Boost Oil Prices? (graph)
• Cable Tumbles After New Poll Shows Tories Falling Short Of Majority By 16 Seats.
• In Watershed Event, Europe Unveils Plan To Securitize Sovereign Debt.
• The Next Stock Market Crash Will Be Blamed On Trump But It's The Fed's Fault.
• VIX Jumps As Yield Curve Dumps To 7-Month Lows. (graph)

Business Insider: 

• Manhattan retail rents are falling and it's not a good sign.
• A Wall Street bank just issued the most dire prediction yet about US shopping malls.

Night Trading 

• Asian equity indices are unch. to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 90.75 +.25 basis point. 
• Asia Pacific Sovereign CDS Index 19.25 unch.
• Bloomberg Emerging Markets Currency Index 72.93 unch.
• S&P 500 futures +.03%.
• NASDAQ 100 futures +.09%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ADI)/.84
• (KORS)/.70
• (VRA)/-.13
• (PANW)/.55
• (SMTC)/.41

Economic Releases 
9:45 am 

• The Chicago Purchasing Manager for May is estimated to fall to 57.0 versus 58.3 in April.

10:00 am EST

• Pending Home Sales MoM for April are estimated to rise +.5% versus a -.8% decline in March.
  

2:00 pm EST

• US Fed Beige Book Report.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The Fed's Williams speaking, China Manufacturing PMI report, German Unemployment Rate, weekly MBA mortgage applications report, weekly US retail sales reports, Bernstein Strategic Decisions Conference, RBC Consumer/Retail Conference, Cowen Tech/Media/Telecom Conference, (HTZ) annual meeting, (MRO) annual meeting and the (CVX) annual meeting could also impact trading today.

BOTTOM LINE:  Asian indices are mostly higher, weighed down by commodity and industrial shares in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher.  The Portfolio is 100% net long heading into the day.

Stocks Slightly Lower into Final Hour on European Debt Angst, Yen Strength, Profit-Taking, Energy/Biotech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 10.23 +4.28%

• Euro/Yen Carry Return Index 129.35 -.24%

• Emerging Markets Currency Volatility(VXY) 8.10 -.98%

• S&P 500 Implied Correlation 39.62 -1.86%

• ISE Sentiment Index 77.0 -43.4%
  

• Total Put/Call .95 +5.6%

• NYSE Arms 1.06 -9.38%

Credit Investor Angst:

• North American Investment Grade CDS Index 62.31 -1.03%
  

• America Energy Sector High-Yield CDS Index 365.0 -1.44%

• European Financial Sector CDS Index 68.74 +3.09%

• Western Europe Sovereign Debt CDS Index 8.95 +2.9%

• Asia Pacific Sovereign Debt CDS Index 19.29 +.44%

• Emerging Market CDS Index 194.20 +.82%
  

• iBoxx Offshore RMB China Corporate High Yield Index 138.65 +.02%

• 2-Year Swap Spread 23.0 -.5 basis point

• TED Spread 27.25 -.25 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -36.50 -1.5 basis points

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 72.93 -.07%
• 3-Month T-Bill Yield .92% unch.
  

• Yield Curve 93.0 -2.0 basis points
  

• China Import Iron Ore Spot $58.50/Metric Tonne unch.

• Citi US Economic Surprise Index -37.50 -1.3 points

• Citi Eurozone Economic Surprise Index 48.90 -7.1 points

• Citi Emerging Markets Economic Surprise Index 15.60 -4.1 points

• 10-Year TIPS Spread 1.84 +1.0 basis point
  
• 90.5% chance of Fed rate hike at July 26 meeting, 95.5% chance at Sept. 20 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -33 open in Japan 
• China A50 Futures: Indicating +8 open in China

• DAX Futures: Indicating -9 open in Germany

Portfolio: 

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

• Disclosed Trades: None

• Market Exposure: 100% Net Long

Today's Headlines

Bloomberg:

• Trump Blasts Germany Again as Merkel Talks Up India Ties. (video) President Donald Trump blasted Germany anew over trade and defense, ratcheting up a dispute with Chancellor Angela Merkel that risks getting personal and undermining a trans-Atlantic bond that is the bedrock of U.S.-European relations. Trump’s comments came in an early-morning tweet on Tuesday issued just as Merkel hosted Indian Prime Minister Narendra Modi in Berlin, where they held a joint cabinet meeting and signed cooperation agreements. Modi suggested that India will adhere to the Paris climate accords, while Trump makes up his mind.

• Fed's Brainard Says Soft Inflation May Warrant Rate Rethink. (video) Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound. “If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” Brainard said in prepared remarks Tuesday. She said her baseline expectation is that “it likely will be appropriate soon to adjust the federal funds rate” and start shrinking the balance sheet.

• The End of Cheap Chocolate? Cocoa Futures Surge Most on Record. Cocoa prices soared amid signs of tighter supplies in Ivory Coast, the world’s top grower, raising prospects that chocolate costs will climb. July futures jumped as much as 6.8 percent, the most ever for the contract. Farmers in West Africa are already locking in more forward sales for next year’s crop than traders were expecting, a sign that supplies from the current harvest are beginning to ebb.

Wall Street Journal:

• Fed Officials Likely to Raise Rates in June, Finalize Plans to Reduce Portfolio. A potential political fight over the U.S. budget could cause the Fed to rethink its plans for later in the year.

Fox News:

• North Korea eyed as US readies missile defense test. (video)

CNBC:

• The S&P 500 just did something that has meant gains 100 percent of the time. (video)

• Trump is threatening Europe...with the truth. (video)

• Electric vehicle demand to skyrocket, but won't kill gasoline just yet, says analyst.

• Breakout or head fake? Here’s what the bulls need to watch for.

Zero Hedge:

• Texas Democrat Threatens To Kill Republican On Legislative Floor After He Called ICE On Protesting Illegal Immigrants.

• Dallas Fed President: "A Stock Market Correction Could Actually Be A Healthy Thing".

• Is This The "Mystery" Massive Long Supporting The Oil Market? (graph)

• Trump Calls For Senate 'Nuclear Option' To Avoid Shutdown, Claims "Dems Would Do It".

• Time To Add Housing To The Bubble List?

• "Precarious" Debt Crisis "Could Reverberate Around The World".

• Consumer Confidence Drops To Weakest Since Feb As 'Soft' Data Slump Continues. (graph)

• Amazon(AMZN) Tops $1000 For First Time Ever, Bezos Up Over $19 Billion Year-To-Date.

• US Home Prices Rise At Fastest Pace In 3 Years To Record Highs. (graph)

• Personal Spending Growth Tumbles To 7-Month Lows After Dramatic Revisions. (graph)

• Trump Blasts Germany In First Tweet Of The Day.

• Deutsche Bank(DB) Downgrades European Banks To Underweight.

Business Insider:

• Steve Cohen reportedly is prepping the biggest hedge-fund launch ever.

• 17 remain in 'critical care' after Manchester terror attack.

• Ariana Grande, Coldplay, Justin Bieber, and Katy Perry to play benefit concert in Manchester on Sunday.

• Red-hot tech stocks are getting a boost from an unexpected source.

Bear Radar

Style Underperformer:

• Small-Cap Value -.7%

Sector Underperformers:

• 1) Oil Service -1.6% 2) Biotech -1.3% 3) Airlines -1.2%

Stocks Falling on Unusual Volume: 

• NTNX, AMBA, EDIT, HRTX, MOMO, BITA, VEEV and WB

Stocks With Unusual Put Option Activity:

• 1) EWW 2) WLL 3) NOW 4) S 5) WMB

Stocks With Most Negative News Mentions:

• 1) AMBA 2) WLL 3) CALM 4) BWLD 5) WTW

Charts:

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

Bull Radar

Style Outperformer:

• Large-Cap Growth +.1%

Sector Outperformers:

• 1) Steel +1.9% 2) Computer Hardware +1.7% 3) Disk Drives +1.3%

Stocks Rising on Unusual Volume:

• XTLY, APPN, ATW, TRUP, BFR, RYAM, LABL, LPL, COOL, SBRA, ICHR, TIVO, HNP, MTCH, MRAM, HUBG, ADI, MMC, NVDA, AMRI, GSK, PLUS, NSC, SBAC and UHAL

Stocks With Unusual Call Option Activity:

• 1) CYTR 2) ADI 3) CMCSA 4) FOLD 5) PVH

Stocks With Most Positive News Mentions:

• 1) MU 2) MNKD 3) ZNGA 4) TEX 5) SYMC

Charts:

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

Morning Market Internals

NYSE Composite Index:

• Volume Running -11.6% Below 100-Day Average
• 5 Sectors Rising, 5 Sectors Declining
• 27.9% of Issues Advancing, 68.5% Declining
• 63 New 52-Week Highs, 36 New Lows
• 45.6% of Issues Above 200-day Moving Average
• Average 14-Day RSI 36.2%
• Vix 10.4 +6.3%
• Total Put/Call .90 unch.
• TRIN/Arms .78 -33.5%