Monday Watch

Weekend Headlines 
Bloomberg:

• China Central Bank Says Financial-System Liquidity ‘Reasonable’. China said there’s a reasonable amount of liquidity in the financial system and urged banks to control risks from credit expansion, signaling no relief for a cash squeeze that risks exacerbating an economic slowdown. “At present, the overall liquidity in China’s banking system is at a reasonable level, but due to many changing factors in the financial markets and also because of the mid-year point, the requirements for commercial banks in liquidity management have become higher,” the People’s Bank of China said in a statement dated June 17 and published on its website today in Beijing. The government’s most explicit comments on this month’s cash squeeze add to signs that Premier Li Keqiang is committed to stamping out speculation funded by cheap money. Slowing growth in the world’s second-largest economy, a crackdown on illegal capital inflows and efforts to rein in shadow banking have contributed to increased borrowing costs. Goldman Sachs Group Inc. economists led by Cui Li in Hong Kong said in a report earlier today that the liquidity tightening is another indication that the government’s priority is to tackle “structural problems” in the economy. Goldman Sachs cut its 2013 expansion forecast to 7.4 percent from 7.8 percent. 

• World’s Worst Real Estate Bonds Targeted in Crunch. China’s builders have been the world’s worst-performing real-estate bonds this quarter as Premier Li Keqiang allowed a record cash crunch to rebalance the economy away from property investment. Dollar-denominated notes sold by Chinese developers have lost 4.1 percent this quarter, the most since the three months ended Sept. 30, 2011 and the worst among peers in major economies in Bank of America Corp.’s Global Corporates Real Estate Index. That marks a reversal after the debt topped 2012 rankings with a 22 percent return. Australian builders lost 0.8 percent since March 31, while Japan’s shed 1.7 percent.

• Chinese Banks’ Bond Risk Rises Most in Asia Amid Moody’s Warning. Bank of China Ltd. (3988), Export-Import Bank of China and China Development Bank Corp. led gains in Asian bond risk last week as Moody’s Investors Service warns credit curbs could threaten small and mid-sized lenders. Prices of swaps tied to Bank of China, the nation’s fourth-largest lender, rose 70.4 basis points last week to 192.4, the biggest increase among members of the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan, according to data provider CMA. The cost of insuring Asian corporate and sovereign bonds from default surged 27.6 basis points last week, the most since November 2011, CMA prices show.

• World’s Biggest Pension Fund Doubts 2% Inflation for Japan. Japan’s central bank probably promised too much when it set a goal of lifting inflation to 2 percent within two years, according to Takahiro Mitani, president of the country’s public pension fund. History is against the Bank of Japan as it undertakes unprecedented asset purchases in pursuit of a pledge to overcome 15 years of deflation, Mitani, the 64-year-old head of the 112 trillion yen ($1.14 trillion) Government Pension Investment Fund, said in a Tokyo interview June 21. The world’s biggest manager of retirement savings, which said on June 7 that it’s cutting local bond holdings to buy more stocks and foreign securities, plans to leave its asset allocations at the new levels until at least March 2015, he said.

• S. Korea to Tighten Monitoring of Banks’ Liquidity: Choo. South Korea’s government plans to tighten monitoring of banks’ liquidity and scale down its bond sales volumes in July as possible reductions in Federal Reserve stimulus roil capital flows from developing countries. South Korea’s fundamentals from budget to foreign reserves are sound, so speculation on a Fed move is unlikely to spur any drastic capital outflows, Vice Finance Minister Choo Kyung Ho said in Seoul.

• Foreign Instiutional Demand for Asian Equities Falling Rapidly. (graph)

• India Funding Strain Grows as Fed Outlook Hurts Rupee. India faces growing strain to fund the widest current-account deficit in major Asian nations after the rupee slid to an all-time low on concern the U.S. will curb monetary stimulus as its economy improves. The deficit narrowed to $21 billion last quarter, from $32.6 billion or a record 6.7 percent of gross domestic product in October to December, the median of nine estimates shows in a Bloomberg News survey before data due June 28. The Reserve Bank of India estimates the sustainable level at 2.5 percent of GDP. 

• China’s Stocks Extend Three-Week Slump as Financial Shares Fall. China’s stocks fell, led by financial and consumer companies, as the nation’s equities extended a three-week slump. China Minsheng Banking Corp. sank 5 percent, leading a gauge of financial shares to the lowest level since December. Gree Electric Appliances Inc. lost 3 percent, pacing declines among consumer shares. Jiangxi Copper Co. declined 1.4 percent after copper inventories gained for a fourth week. The Shanghai Composite Index (SHCOMP) declined 1.3 percent to 2,045.59 as of 9:50 a.m. in Shanghai. It slumped 4.1 percent last week, the most in four months, amid concerns about economic growth and tighter liquidity after interbank lending rates surged.

• Asian Stocks Drop on China Outlook, Extending Decline. Asian stocks declined, with the benchmark regional index heading toward the worst monthly loss in a year, as Goldman Sachs Group Inc. cut its growth forecast for China amid concern a cash crunch at banks in the world’s second-largest economy. Industrial & Commercial Bank of China Ltd., the world’s largest lender, lost 1.7 percent in Hong Kong, having risen just one day in June. BHP Billiton Ltd., the No. 1 mining company, declined 3.1 percent, dragging Australia’s S&P/ASX 200 Index lower. AMP Ltd. tumbled 10 percent, heading for its biggest slide in 4 1/2 years, after Australia’s biggest life insurer and pension manager said it expects profit will fall as much as 16 percent. The MSCI Asia Pacific Index slid 1 percent to 126.45 as of 10:35 a.m. in Hong Kong. About two shares fell for every one that advanced.

• EU Leaders to Stave Off Market Turmoil After Bank Talks Fail. European Union leaders will this week attempt to stave off a resurgence of market tremors after talks on setting up unified banking rules broke down. Negotiations among the 27-member bloc’s finance ministers stalled over the weekend in Luxembourg after they tried to reach agreement on assigning losses at failing banks as part of proposed rules on bank resolution and recovery. They will regroup June 26, before EU leaders gather the next day for a summit meeting in Brussels. “We shouldn’t be lulled by the current calm in the markets,” German Finance Minister Wolfgang Schaeuble said in a statement after the meeting. “Rather we should quickly ensure that we’re prepared for every eventuality.”  

• Hollande No Schroeder as Businesses Work Through Ambiguous Rules. What French President Francois Hollande gives with one hand he takes away with the other. That’s what some of the country’s business leaders say about the Socialist president’s yearlong effort to try and make France more competitive while also appeasing his labor union supporters. Hollande pushed through a law in April making firings easier and labor rules more flexible. Now, he’s threatening to slap companies closing plants in France with multimillion-euro fines. 

• ‘Window-Dressing’ Undermines Bank Risk-Weight Trust: BIS. Global banks have improved their capital ratios in part by understating the riskiness of their assets, not by raising their ability to stem losses, the Bank for International Settlements said. Regulators need to monitor the use of internal risk models in determining the capital lenders hold against losses and complement them with gauges that don’t use risk weightings, the BIS said in its annual report released today. The BIS, based in Basel, Switzerland and owned by 60 central banks, hosts the Basel Committee on Banking Supervision, a group of regulators and central bankers that sets global capital standards.

• Rubber Trades Near Lowest in Nine Months on China Demand Concern. Rubber declined, heading for a fifth monthly loss, amid concern that demand may weaken from China, the world’s largest consumer of the commodity used in tires. The contract for delivery in November on the Tokyo Commodity Exchange fell as much as 1.3 percent to 233.3 yen a kilogram ($2,376 a metric ton), nearing a nine-month low of 228 yen reached on June 21. Futures traded at 234.1 yen at 11:17 a.m., extending losses for this month to 9 percent. 

• Rebar Falls on Lower Iron Ore, Smaller Reduction in Inventory. Steel reinforcement-bar futures in China fell after a decline in iron ore prices and as inventory shrank at the slowest rate in 10 weeks. Rebar for delivery in October on the Shanghai Futures Exchange fell as much as 1.6 percent to 3,457 yuan ($563) a metric ton, before trading at 3,458 yuan at 10:33 a.m. local time.

• Treasury Yields Surge Most Since 2003. Treasury 10-year (USGG10YR) note yields climbed the most since the start of the Iraq war as investors fled U.S. debt after the Federal Reserve predicted economic growth will be strong enough to allow policy makers to stop buying bonds. 

• Obama Said to Announce Emission Curbs on Power Plants Next Week. The initiatives to curb climate change that President Barack Obama plans to unveil will include the first limits of carbon emissions from existing power plants, according to a person familiar with the plans. “I’ll lay out my vision for where I believe we need to go: a national plan to reduce carbon pollution, prepare our country for the impacts of climate change, and lead global efforts to fight it,” Obama said yesterday on the social media outlets YouTube and Twitter. “This is a serious challenge, but it’s one uniquely suited to America’s strengths.”

• Apple(AAPL) Awaits E-Book Decision With More Suits in Wings. Apple Inc. (AAPL) will find out sometime in the coming weeks whether it’s legally responsible for an alleged scheme to fix prices for electronic books, after an unusual three-week civil antitrust trial in Manhattan. U.S. District Judge Denise Cote, who heard the trial without a jury, will rule on U.S. claims that Apple, the world’s biggest technology company, led a conspiracy of five publishers to raise the retail price of e-books and to force Amazon.com Inc. (AMZN), the No. 1 e-book seller, to change its pricing model.

Wall Street Journal:

• Chinese Industrial Subsidies Grow 23%. Chinese companies are under growing financial pressure as the country's economic growth slows. So industries ranging from airlines to steel to consumer appliances increasingly are leaning on the Chinese government. Companies listed on China's stock exchanges received 85.68 billion yuan ($13.83 billion) in government subsidies last year, up 23% from a year earlier, while corporate profits rose less than 1%, according to a Chinese data provider. The subsidies were equivalent to more than 4% of the companies' total profits last year, up from around 3% between 2009 and 2011.

• Australians Nervous Over China Investment. Most Australians think the government is allowing too much Chinese investment, a poll suggests, even as ownership of local assets by the nation's biggest trading partner remains relatively small. In the Lowy Institute poll, 57% said they were concerned over Chinese buying of assets from farmland to listed companies. The institute surveyed 1,002 Australian voters in March. 

• Brazil Finds Itself in a Bind over Spending. Demonstrators Have Been Promised Better Services, But Investors May Be Scared Off by Bigger Deficits, Higher Inflation. "The problem that they have is they need to calm down two very nervous stakeholders, the market and the population, and they are demanding different things," said Pedro Barbosa, a partner at Rio de Janeiro-based hedge fund STK Capital.

• The IRS's Best Friend in Congress. Rep. Elijah Cummings says the House investigation is a 'witch hunt.' Yet revealing evidence keeps coming.

Marketwatch.com:

• Weak yen is not the answer to Japan’s problems. Commentary: ‘Abenomics’ has many disturbing contradictions.

• China’s alarming credit crunch. Commentary: People’s Bank of China may have bigger problems.

Fox News:

• US revokes NSA leaker Edward Snowden's passport, as he reportedly seeks asylum in Ecuador.
  The anti-secrecy website WikiLeaks said Sunday it is helping Edward Snowden, the former National Security Agency contractor who exposed secrets about the federal government's surveillance program, to seek asylum in Ecuador. The announcement came as a source confirmed to Fox News Saturday that the United States revoked Snowden's passport. 

CNBC:

• Hedge Funds Shift to Stocks, Just in Time for Pullback. Hedge fund investors have begun to like stocks again—just in time for what appears to be a rough summer ahead for the equity markets. Reversing a trend that began in March 2010, hedge funds in May saw inflows to equity-based products and outflows from fixed income. 

• Housing Market: From Recovery to Bubble–Already? Only a year after the housing market bottomed, "bubble" talk has surfaced as soaring, double-digit price gains sweep markets across the country. 

• Average Pay of Top Bankers Drops 10%.

• Goldman(GS) Joins Bandwagon, Downgrades China.

Zero Hedge:

• Treasuries' Worst Week In 50 Years; Stocks Worst Week In 2013.

• The Illustrated History Of High Yield. (graph)

• The Waste List: 66 Ways The U.S. Government Is Blowing Your Hard-Earned Money.

• Everything Is Being Sold. (video)

• David Stockman's Non-Recovery Part 4: The Bernanke Bubble.

• The Toxic Feedback Loop: Emerging <-> Money <-> Developed Markets.

• The Pandering And Politics Of The Fed's Punch-Bowl.

• Meet The Man In Charge Of America's Secret Cyber Army (In Which "Bonesaw" Makes A Mockery Of PRISM).

• How Resilient Is EM To The End Of QE – A Vulnerability Heatmap.

• China's Mea Culpa: "It Is Not That There Is No Money, But The Money Has Been Put In The Wrong Place".

• 5 Reasons Why Now Is The Time To Buy Bonds.

• Profiling Japan's Daytrading "Mister Watanabe".

• The BIS Chart That Abe And Kuroda Would Rather You Didn't See.

• David Stockman's Non-Recovery Part 5: Peak Debt And The Wages Of Keynesian Sin.

• The Bank Of International Settlements Warns The Monetary Kool-Aid Party Is Over.

Business Insider:

• Report: Britain's Spying Agency Is Intercepting A Huge Amount Of Data From Fiberoptic Cables To Share With The NSA.

• REPORT: The CIA Has Been Secretly Training Syrian Rebels For Months.

• Drone Spying Capabilities Are About To Take Another Huge Leap.

• Wall Street's Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD.

• This Is What's Happening To Everyone Who 'Bought Brazil'.

• NOMURA: It Was An Epic Week, The Rules Have Changed, And There Will Be No Reversing The Fed's Big Bang.

• PRESENTING: The Bubble With No Name Yet. (graph)

• MAULDIN: Regulations And Socialism Are Crushing The French Economy, And It's Going To Get Worse.

• In One Chart, Here's How Assets That People Thought Were 'Safe' Got Buried.

• The World's Central Banks May Have Just Started A Strike.

• Stocks Have Lost A Major Advantage They Had Over Bonds.

• MARK YOUR CALENDARS: We've Got 7 Huge Fed Speeches Coming Up This Week.

• FTC To Conduct Antitrust Review Of Google(GOOG) Over $1.1 Billion Waze Deal.

• The Housing Finance Mechanism In The US Is Not Fixed.

Wall Street All-Stars:

• Indicator Update: Digesting the Fed News.

New York Times:

• China Said to Have Made Call to Let Leaker Depart. The Chinese government made the final decision to allow Edward J. Snowden, the former National Security Agency contractor, to leave Hong Kong on Sunday, a move that Beijing believed resolved a tough diplomatic problem even as it reaped a publicity windfall from Mr. Snowden’s disclosures, according to people familiar with the situation.

LA Times:

• Wi-Fi is about to get a lot faster and more reliable. Next-generation Wi-Fi routers, using 802.11ac technology, will be able to accommodate more devices and provide better coverage in a home or office space.

Washington Post: 

• Risky derivatives trading comes roaring back. The exotic financial products that nearly crippled the economy in 2008 are roaring back at the nation’s biggest banks, according to data released Friday that reform advocates worry come just as regulations to rein in risky trading are being weakened in Washington. Demand for derivatives — contracts whose value is derived from stocks, bonds, loans and currencies — is growing as investors and corporations try to lock in low interest rates. But critics worry that there are too few rules to protect taxpayers from a market dominated by a handful of banks. On Friday, the Office of the Comptroller of the Currency reported that banks pulled in $7.5 billion in revenue from trading derivatives in the first three months of 2013, a 7 percent increase from the corresponding period a year ago, and a 72 percent jump from the fourth quarter of 2012. The face value of the derivatives held by banks rose 4 percent over the prior year to $231.6 trillion, according to the report.

Market News International:

• China International Capital Corp. cuts China 2013 GDP growth forecast to 7.4% from 7.7% earlier.

Telegraph:

• BIS fears fresh bank crisis from global bond spike. Soaring bond yields across the world threaten trillion of dollars in losses for investors and a fresh financial crisis unless banks are braced for the shock, the Bank for International Settlements has warned.

Sueddeutsche Zeitung:

• Weidmann Sees No Need for Immediate Interest-Rate Increase. Bundesbank head Jens Weidmann comments in interview. The ECB's new bond-buying program OMT has 'noticeable restrictions,' which is a step in the right direction. Potential bond buys by ECB are still 'problematic'.

Real News:

• Greece Needs Another Debt Writedown, Merkel Aide Says. Greece needs a further reduction in its sovereign debt level and participation by government creditors shouldn't be considered a taboo, citing an interview with Peter Bofinger, economic adviser to German Chancellor Angela Merkel. Bofinger says will be "very difficult" for Greece to cut debt to acceptable level over next years. Bofinger says he doesn't see turn for the better in Greek economy based on current data. Bofinger repeated view that tax should be imposed on wealthy in indebted euro-area countries, austerity has mainly hit the poor.

Financial News: 

• Reserve Ratio Cut Not Best for China Growth. Monetary easing policies such as cutting reserve requirement ratio are not the best options for China's growth, according to a front-page commentary written by reporter Xu Shaofeng. Reserve ratio cut will increase overcapacity and expand debt scale for local government financing vehicles. Financing environment for smaller companies which need funds will not be improved with a reserve ratio cut. 

China Securities Journal:

• China Credit Market Liquidity Mismatch 'Serious'.  China's credit market has a "very serious" mismatch in liquidity as reflected by the current tight money conditions, Liu Yuhui, a researcher at the Chinese Academy of Social Sciences, writes in a commentary. Some institutions match short-term interbank funds with long-term assets for profit, Liu writes. Risks are exposed when cash flows from long-term assets can't cover short-term debt obligations when the economy slows. The sale of new debt to cover interest payments on old debt displays "ponzi" characteristics, Liu said. A quick drop in asset prices triggered by a sell-off of assets would cause a "hard landing," he said. Crackdowns on shadow banking and expansion of leverages are "timely," Liu wrote.

Night Trading

• Asian indices are -2.0% to -.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 160.0 -6.0 basis points.

• Asia Pacific Sovereign CDS Index 126.25 -8.0 basis points.

• FTSE-100 futures -.15%.

• S&P 500 futures -.40%.

• NASDAQ 100 futures -.31%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (SONC)/.26

Economic Releases
8:30 am EST

• The Chicago Fed Nat Activity Index for May is estimated to rise to -.15 versus -.53 in April.

 10:30 am EST

• The Dallas Fed Manufacturing Activity Index for June is estimated to rise to -1.0 versus -10.5 in May.

Upcoming Splits

• (SIX) 2-for-1

• (CRVL) 2-for-1

Other Potential Market Movers

• The Fed's Fisher speaking, German IFO Business Climate and the JPMorgan Healthcare Conference could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity 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 week.