Tuesday Watch

Evening Headlines 

Bloomberg:  

• China's Stocks Extend Rout as Factory Data Adds to Economy Woes. China’s stocks fell, extending the biggest two-month tumble since 2008, after an official factory gauge slumped to a three-year low and concern grew that government intervention to shore up equities will fail. The Shanghai Composite Index slid 3.2 percent to 3,102.08 at 10:05 a.m. local time. The gauge lost 12 percent last month after declining 14 percent in July. The official Purchasing Managers’ Index was 49.7 for August, down from 50 in July. Numbers below 50 indicate contraction. “The manufacturing index still shows that the economy is in the process of seeking a bottom,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance. “The market is unlikely to pick up anytime soon.” The CSI 300 Index dropped 3.7 percent. Hong Kong’s Hang Seng China Enterprises Index retreated 1.6 percent. The Hang Seng Index slipped 0.7 percent. The Shanghai gauge plunged 12 percent last month, adding to July’s 14 percent tumble.

• China Orders Banks to Hold Reserves for Currency Forwards. China’s central bank moved to curb speculation in the currency market and limit capital outflows, imposing a reserve requirement on financial institutions trading in foreign-exchange forwards for clients. The People’s Bank of China, effective Oct. 15, will mandate a deposit of 20 percent of sales to be held at zero interest and frozen for a year, according to six people familiar with the matter. The change, which will take effect on Oct. 15, is aimed at preventing macro financial risks, said the people, who asked not to be identified because they aren’t authorized to speak publicly.

• Probes of China's Market Crimes Intensifies. (video)

• China’s Official Factory Gauge Shrinks to Lowest in 3 Years. China’s official factory gauge fell to the lowest reading in three years as monetary easing failed to revive old growth drivers weighed by overcapacity and sliding prices. The official Purchasing Managers’ Index was 49.7 for August, matching the median estimate in a Bloomberg survey and down from 50 in July. Numbers below 50 indicate contraction, with small, medium and large enterprises all below that level last month. "Both domestic and external demand are weak," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "Market sentiment is bad and it’s too early to say the Chinese economy is bottoming out." Xie said a stock market rout and the yuan devaluation in August have added additional risks for manufacturers.

• Alibaba(BABA) Investors Backpedal as China Slowdown Saps Sales Growth. The rush that drove Alibaba Group Holding Ltd. to a record U.S. initial public offering has turned into a retreat a year later as the Chinese online retailer is beset by the slowest economic growth in 25 years and a domestic stock selloff that has shaken global investor confidence. The American depositary receipts, which surged as much as 75 percent from the initial listing price, tumbled 16 percent to $66.12 in August in their third straight monthly decline in New York. The drop pushed the ADRs below the debut price of $68 as short sellers boosted bearish bets on the stock to the highest since April.

• Concerns Over Asean Default Risks Mount. (video) 

• Southeast Asia's Biggest Companies Risk $392 Billion Debt Burden. Southeast Asia’s biggest companies have increased debt sixfold since the regional financial crisis, stoking concern over default risks as investors draw parallels with the 1998 meltdown. The region’s 100 largest listed companies by assets, including Thailand’s CP ALL Pcl, Petron Corp. of the Philippines and Singapore’s Wilmar International Ltd., had accumulated $392 billion by June 30, data compiled by Bloomberg show. That’s up six times from December 1998. Debt loads as a proportion of assets are climbing back near levels from the crisis at 31.7 percent, up from 29.5 percent in 2010.

• South Korea's Exports Fall Most Since 2009 in August. South Korea’s exports tumbled in August by the most since 2009, as weaker overseas demand hit Asia’s fourth-largest economy. Overseas shipments fell 14.7 percent from a year earlier, an eighth straight monthly decline, the Ministry of Trade, Industry and Energy said on Tuesday. The median estimate of economists surveyed by Bloomberg was for a 5.9 percent drop. South Korea generates about half of its gross domestic product from exports and is the world’s biggest exporter to China. The nation is one of the most exposed to depreciation in the yuan, and is also facing increasing competition from Chinese companies that are moving up the value-added chain, according to the Institute of International Finance last week. 

• Toshiba Says New Accounting Problems Delay Earnings Again. Toshiba Corp. uncovered 10 new cases of accounting problems, including at a U.S. unit, prompting it to miss a regulator’s deadline for submission of its fiscal 2014 earnings release. The Japanese industrial group obtained permission from the securities regulator to postpone the report due Monday until Sept. 7. President Masashi Muromachi, who took charge after three of his predecessors left following a July third-party report showing accounting irregularities at the company, said he may quit if the new deadline was missed.

• Asian Stocks Drop as China Manufacturing Slump Boosts Yen, Gold. Asian stocks showed no sign of shaking off last month’s worst selloff since 2012, sinking with U.S. index futures as a gauge of Chinese manufacturing fell to a three-year low. The yen rallied with gold, while oil pulled back after entering a bull market. Fresh from one of the most volatile trading periods since the global financial crisis, investors are scanning data for signs of China’s impact on the world economy. Factory gauges for Japan to India, Europe and the U.S. are scheduled, along with updates on consumer prices in Thailand and Indonesia. Australia will review interest rates. “Investors are concerned about the strength of the global economy, which is why you’re seeing a selloff in various stock markets,” said Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. The MSCI Asia Pacific Index dropped a second day, losing 0.9 percent by 10:36 a.m. in Tokyo, after sinking the most since May 2012 last month. Japan’s Topix index slid 1.7 percent.

• Barclays: There's a New Oil Glut in Town. And it could make the old glut even bigger. (graph) "The surplus in the petroleum market is increasingly evident in refined products," says the team led by commodities analyst Miswin Mahesh. "Global refinery throughput touched a record high of 80.6 million barrels per day in July, with utilization rates at the highest in eight years."

• Fischer Doesn’t Sway December Camp as 48% See Sept. Fed Liftoff. U.S. central bankers face their toughest policy call in years next month -- raise interest rates or wait a little longer. Whatever the decision, about half of economists will be wrong. Forty-eight percent of 54 economists surveyed Aug. 27-31 by Bloomberg News see a September increase in the benchmark lending rate, the first move up since 2006. That’s down from 77 percent in an Aug. 7-12 survey, though it is still double the 24 percent who say the first move will occur in December. Seventeen percent said October.

Wall Street Journal:

• Renaming of Mount McKinley Roils GOP. Republicans question renaming North America’s tallest peak and one of the few monuments dedicated to the 25th president. Late Sunday, on the eve of his visit to Alaska, President Barack Obama announced that Interior Secretary Sally Jewell had used her authority to rename North America’s tallest mountain from Mount McKinley to Denali, which in the Athabaskan language means “the great one,” the name that was used for centuries by Alaska natives.

• Hillary Clinton vs. Ashley Madison. A website for adulterers faces more accountability than a U.S. secretary of state. What a world we live in when a website promoting adultery is held more accountable than a U.S. secretary of state. Only weeks after a hack exposed the names and other confidential information about Ashley Madison’s mostly male clientele, it’s hard to see how the company can recover. By contrast, Hillary Clinton remains the Democratic Party’s likely 2016 nominee for president, even though we’ve known since at least March 2013 (thanks to a Romanian hacker named Guccifer) that she conducted State Department business over...

CNBC:

• Oil may test $30 again this year: Trader. (video)

Zero Hedge:

• US & China Stocks Are Plunging After PMI Hits 6.5-Year Low, PBOC Strengthens Yuan Most Since Nov 2014. (graph)

• Dow Futures Plunge 240 Points As Oil Drops 4% Ahead Of China PMI. (graph)

• Brazil Throws In Towel On Budget; Citi Compares Fiscal Outlook To "Bloody Terror Film". (graph)

• Recession Odds Surge To 47%, Highest Since 2011. (graph)

• How China Cornered The Fed With Its "Worst Case" Capital Outflow Countdown.

• Is This Man Responsible For China's Stock Market Crash?

• Russian Military Forces Arrive In Syria, Set Forward Operating Base Near Damascus.

• Citi Slams Today's Historic Oil Surge: "Another False Start, Time To Fade The Rally". (graph)

• Saudi Arabia's Stock Market Just Logged Its Worst Month Since Lehman. (graph)

• The Age Of Voodoo Finance.

• China Rocked By Another Massive Chemical Explosion.

• Stocks Suffer Biggest Monthly Drop In Five Years As Oil Spikes Most Since 1990. (graph)

Business Insider:

• Something is hurting morale in police departments all across America.

• 150 more of Hillary Clinton’s emails have now been deemed classified.

• Russia and China could be 'making it impossible for the US to hide' its intelligence activities.

Reuters:

• Einhorn and Loeb's hedge funds both decline 5 pct in Aug. Hedge fund billionaires David Einhorn and Daniel Loeb saw their main funds lose roughly 5 percent in August during a dramatic market sell off, two people familiar with their returns said on Monday. Einhorn's Greenlight Capital fell 5.3 percent, extending the roughly $12 billion firm's loss for the year to 13.8 percent, the sources said. Loeb's Third Point fund dropped 5.2 percent, but is up 1.2 percent for the year. Loeb"s Third Point Ultra fund fell 9.1 percent in August and is essentially flat on the year with a 0.8 percent gain, one of the sources said.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -2.0% to -.5% on average.

• Asia Ex-Japan Investment Grade CDS Index 135.25 +3.0 basis points.

• Asia Pacific Sovereign CDS Index 80.75 +.75 basis point.

• S&P 500 futures -1.69%.

• NASDAQ 100 futures -1.74%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (DLTR)/.68

• (DCI)/.42

• (AVAV)/-.16

• (BOBE)/.30

• (HRB)/-.39

• (SCVL)/.18

Economic Releases

9:45 am EST

• Final Markit US Manufacturing PMI for August is estimated at 52.9 versus a prior estimate of 52.9.
  

10:00 am EST

• Construction Spending for July is estimated to rise +.6% versus a +.1% gain in June.

• The IBD/TIPP Economic Optimism Index for September is estimated to rise to 47.1 versus 46.9 in August. 

• ISM Manufacturing for August is estimated to fall too 52.5 versus 52.7 in July.

• ISM Prices Paid for August is estimated to fall to 39.0 versus 44.0 in July.
  

Afternoon:

• Total Vehicle Sales for August are estimated to fall to 17.3M versus 17.46M in July.
  

Upcoming Splits

• (RAI) 2-for-1

Other Potential Market Movers

• The Fed's Rosengren speaking, Eurozone Manufacturing PMI, UK Manufacturing PMI, Australia GDP report, RBA Meeting, weekly US retail sales reports, KeyBanc Basic Materials/Packaging conference and the (F) US sales conference call could also impact trading today.

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