Tuesday Watch

Evening Headlines 

Bloomberg:

• Levy Pitches Budget Cuts and Tax Hikes to End Brazil Deficit. Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades. The government will reduce expenditures by 26 billion reais ($6.8 billion) next year in large part by capping salaries of civil servants and trimming social programs, Levy said Monday. Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions. 

• Yen Pares Loss as Bank of Japan Refrains From Adding to Stimulus. The yen pared losses after the Bank of Japan refrained from adding to already unprecedented stimulus at a policy meeting Tuesday. Demand for the yen increased after central bank Governor Haruhiko Kuroda kept a pledge to expand the monetary base at an annual pace of 80 trillion yen ($666 billion). All but two of the 35 economists surveyed by Bloomberg had predicted policy would be unchanged. Traders are shifting their focus to Kuroda’s briefing at 3:30 p.m. in Tokyo. “The market is placing a higher probability that the BOJ will ultimately add more stimulus via quantitative easing,” Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore, said before the BOJ decision. The yen was little changed at 120.16 per dollar as of 12:11 p.m. in Tokyo, after falling as much as 0.3 percent earlier. It traded at 136.01 against the euro from 136.07 on Monday.

• How Likely Is a Physical Conflict in the South China Sea? (video) 

• China Brokers Shut Out of Own Futures Market Try Singapore. Chinese brokerages ruing the collapse of futures trading in Shanghai are pitching clients similar contracts in Singapore. "Goodbye, China Financial Futures Exchange; Hello, FTSE A50!" reads an advertisement by a unit of Shenzhen-based Essence Securities Co. on the WeChat messaging service, referring to Singapore-traded futures on an index of the biggest mainland companies. China’s domestic equity futures market, ranked the world’s busiest as recently as July, has seen volumes plunge 99 percent since June as policy makers curbed leverage and position sizes and announced investigations into “malicious” short sellers. That’s left brokerages, which boosted staff numbers by 50 percent since 2011, turning to promoting contracts on the SGX FTSE China A50 Index as an alternative.

• RBA Says China Slowdown, Market Rout Raise Global Risks. The Reserve Bank of Australia said China’s slowdown and market volatility increased risks to global growth, highlighting the economic challenges confronting new Prime Minister Malcolm Turnbull. “International economic developments had increased the downside risks to the outlook,” the central bank said in minutes of its Sept. 1 meeting released Tuesday, in which it unusually gave global markets top billing. “But it was too early to assess the extent to which this would materially alter the forecast for GDP growth in Australia’s trading partners.”

• The U.S. Dollar Is Gaining Like It's the 1980s -- For Better or Worse. The dollar is in the midst of its strongest rally since 1984 and -- unlike then -- there may be little anyone can do to stop it. Thirty years ago this month, the U.S. was powerful enough to muscle its way out of a damaging trade imbalance when it took financial markets by surprise with the Plaza Accord. In that agreement, it persuaded Japan, Germany, France and the U.K. to join in coordinated action to help weaken the dollar.

• China Stocks Post Biggest Two-Day Loss in Three Weeks on Economy. China’s stocks fell for the steepest two-day loss in three weeks amid concern the economic slowdown is deepening as traders weighed state support for equities. The Shanghai Composite Index dropped 1.8 percent to 3,059.01 at 9:33 a.m. local time, led by material and technology shares. The benchmark gauge plunged 2.7 percent on Monday after weekend data showed industrial output missed economists’ forecasts and investment in the first eight months increased at the slowest pace since 2000.

• Asia Stocks Erase Gains as China Shares Slide; Yen Slips on BOJ. Asian stocks dropped as Shanghai shares fell, while Australia’s dollar snapped a six-day advance after the country’s central bank said volatility emanating from China has increased risks to global growth. The yen weakened amid speculation policy makers will signal more stimulus Tuesday. The Shanghai Composite Index headed for its biggest two-day slide in three weeks, while a measure of Chinese shares in Hong Kong was little changed. Australia’s S&P/ASX 200 Index deepened declines and the Aussie weakened after the Reserve Bank of Australia released minutes of its Sept. 1 meeting. The yen slipped 0.2 percent, boosting Japanese equities. U.S. oil held below $45 a barrel before data on American stockpiles, while corn climbed.

• Investors in Riskier Slice of CLOs Signal More Pain Ahead. Investors in funds that are the biggest buyers of leveraged loans are signaling concern that some managers may have taken on too much risk as the commodities slump persists. To own the BB rated portion of collateralized loan obligations in the secondary market, investors are demanding 7 percentage points to 9 percentage points more than a benchmark rate, according to Wells Fargo & Co. analyst Dave Preston. The gap probably hasn’t been that wide since the financial crisis, he said. The $411 billion U.S. CLO market’s exposure to commodities-related companies has risen this year, even as crude prices have dropped about 60 percent from last year’s high, increasing concerns about the potential for downgrades and defaults. Leveraged-loan prices fell last month to a more than three-year low, with some energy debt being particularly hard hit.

• Here's Why the Fed May Not Raise Rates This Week. (video)

• Get Used to Volatility, Says Hedge Fund That Called August Rout. Anthony Limbrick, whose hedge fund profited on bearish wagers during the August rout, says the recent turbulence in markets heralds a new era in increased volatility. One clear sign to Limbrick: U.S. stocks are expensive -- valuations for U.S. stocks when compared to earnings before interest, tax, depreciation and amortization hark back to the dot-com bubble era. Another: Emerging markets will continue to plague developed peers for years to come, mirroring the Asian financial crisis of the 1990s, he says. Limbrick’s firm, 36 South Capital Advisors, saw trouble brewing in developing economies back in 2013. And he says the Federal Reserve won’t do anything to calm equities after the twin concerns about China and a rate hike sent the VIX soaring 135 percent last month. “It may well be ‘sell the rumor, buy the fact’ into the Fed meeting,” with stocks initially rising, but “how long that relief rally lasts for is an important question,” said Limbrick, the head of quantitative research at 36 South in London. “Markets may have an upward bias for a while, but we’d expect to see another leg down.”

Wall Street Journal:

• Oil Patch Braces for Financial Reckoning. Smaller producers are girding for cuts to credit lines, as crude prices show little sign of rebounding. U.S. energy companies have defied financial gravity for more than a year, borrowing and spending billions of dollars to pump oil, even as crude prices plummeted. Until now. The oil patch is expected to finally face a financial reckoning, experts say, with carnage occurring as early as this month. One trigger: Smaller drillers are bracing for cuts to their credit lines in October as banks re-evaluate how much energy companies’ oil and... 

• Citic Securities Draws Beijing’s Ire After Meltdown. The brokerage arm of China’s most politically pedigreed financial firm has found a number of its executives entangled in a government inquiry. The brokerage arm of China’s most politically pedigreed financial firm entered the summer with big gains in profit. Now, Citic Securities Co. is contending with a near meltdown in markets and a government crackdown that has entangled a number of its top executives.

• Insiders Beat Market Before Event Disclosure: Study. Researchers from Columbia, Harvard find small but persistent edge.

• Hillary’s For-Profit Education. The company that paid Bill doesn’t do well on the Obama scorecard. Hillary Clinton has vowed to crack down on for-profit colleges. Very interesting. We wonder if she or her aides have looked at the new “college scorecard” that the Obama Administration released on the weekend.

Fox News:

• Cold War weaponry and modern military hardware: Inside the ISIS arsenal. In January the U.S. Central Command announced that U.S. and coalition airstrikes against Islamic State targets in Iraq and Syria destroyed some 184 Humvees, 58 tanks and nearly 700 other vehicles. The number of ISIS military vehicles destroyed may seem significant, but is really just a drop in the bucket compared to the militants' overall firepower. While specific numbers are difficult to come by, reports suggest that ISIS has a huge fleet of vehicles – including tanks - its possession. Last year, for example, the jihadists captured 2,300 Humvees from Iraqi forces when they captured the city of Mosul, some of which were then converted to armored vehicles.

• Obama’s revamped college evaluation site ripped as ‘misleading,’ unnecessary. (video) President Obama has launched a scaled-back college evaluation website that does not include what some in the higher-ed world had feared -- a government rating system of America’s roughly 7,000 colleges and universities.

CNBC:

• Ex-Fed official: Central Bank should bring more uncertainty. (video)

Zero Hedge:

• Barclays Slashes China GDP Projections After Weak Data.

• USDJPY Surges Ahead Of BoJ Statement, China Strengthens Yuan As Washington Folds On Cybersecurity Sanctions. (graph)

• Goldman Warns: VIX Is Not Going Back To Low-Teens, No Matter What Fed Does. (graph)

• A Panicked Brazil Promises Billions In Austerity, Does 180 On Budget After Downgrade.

• "Ineffective & Reckless" Fed Is An "Engine of Disaster". (graph)

• "The Danger Is That It Bursts Just Like In The US": Sweden Goes Full Krugman, Gets Massive Housing Bubble.

• Fourth Turning: Crisis Of Trust, Part 2. (graph)

• A Flock Of Black Swans.

• "There's Just No Cash" Oil Price Increase Will Not Come Fast Enough To Save Alberta. (graph)

• VIX Has Not Done This Since The USA Was Downgraded. (graph)

• It All Comes Down To This. (graph)

• The Fed Shouldn't Worry About Losing Credibility: It Already Lost It.

• China Churn & Fed Fears Spark Sleepy Stock Slippage. (graph)

Business Insider:

• A new global recession has begun.

• This number may be the biggest 'alarm siren' in Hillary Clinton's brutal summer.

• Why European leaders are lining up behind Assad.

• Global trade is slowing. (graph)

Reuters:

• Japan business mood sinks on China anxiety, weak demand -Reuters Tankan. Japanese manufacturers' confidence slumped the most in a year in September to an eight-month low and is forecast to worsen further as fears of a China-led global economic slowdown grow, a Reuters poll showed. Domestic demand also looks increasingly fragile as service companies reporting the weakest sentiment since March and predicted further deterioration in the coming three months.

Telegraph:

• Fitch warns of emerging market shock if Fed sticks to rate plan. Investors do not believe the US Federal Reserve will dare to take away the punch bowl. They may be in for a nasty surprise if it does.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.25% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 133.5 -1.5 basis points.

• Asia Pacific Sovereign CDS Index 85.5 -.5 basis point.

• S&P 500 futures +.11%.

• NASDAQ 100 futures +.13%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (UNFI)/.72

Economic Releases

8:30 am EST

• Retail Sales Advance for August are estimated to rise +.3% versus a +.6% gain in July.

• Retail Sales Ex Autos for August are estimated to rise +.2% versus a +.4% gain in July.

• Retail Sales Ex Auto and Gas for August are estimated to rise +.4% versus a +.4% gain in July.

• Empire Manufacturing for September is estimated to rise to -.5 versus -14.92 in August.

9:15 am EST

• Industrial Production for August is estimated to fall -.2% versus a +.6% gain in July. 

• Capacity Utilization for August is estimated to fall to 77.8% versus 78.0% in July. 

• Manufacturing Production for August is estimated to fall -.3% versus a +.8% gain in July.
  

10:00 am EST

• Business Inventories for July are estimated to rise +.1% versus a +.8% gain in June.
  

Upcoming Splits

• (MDVN) 2-for-1

Other Potential Market Movers

• The Eurozone Trade Balance, German ZEW Index, UK CPI report, RBA minutes, US weekly retail sales reports, BMO Media/Telecom Conference, (HPQ) analyst meeting, (ARMH) investor day, (CRM) investor day and the (SYY) investor day could also impact trading today.

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