Wednesday Watch

Evening Headlines 

Bloomberg:

• Leverage in China's bond market at record high. Chinese bankers say a debt-driven bond market rally is starting to show the same signs of overheating that preceded a collapse in equities. Repurchase transactions allowing investors to use existing note holdings as collateral to borrow money for one day doubled in the past year to a record 2.1 trillion yuan ($330 billion) on Monday. The cost of such funding in the interbank market has risen to 1.89 per cent from a five-year low of 1 per cent in May and has swung violently before, reaching 11.74 per cent in June 2013. A similar contract on the Shanghai stock exchange climbed to 2.21 per cent as equities rallied. Credit spreads at the narrowest in six years are being questioned as a steel trader delays making debt payments. "There are signs of an overheating market, and certainly the rally can't last for long," said Wei Taiyuan, an investment manager at China Merchants Bank Co. in Shanghai. "Leverage in the bond market is much higher than at any time in history. If equities continue to perform well, or initial public offerings resume, the liquidity-fueled rally may come to an end."

• More Money Leaving China: Is It a Cause for Concern? (video)

• Japan's Exports Grow at the Slowest Pace in More Than a Year. Japan’s exports grew at the slowest pace in more than a year in September, with a drop in shipments to Asia all but overwhelming gains in sales to Europe and the U.S. The trade data are one of the most crucial economic indicators before the Bank of Japan meets on Oct. 30 to consider whether the nation needs more monetary stimulus to stoke inflation and economic activity. Exports to China, India, Indonesia, Thailand and Malaysia all fell as the slowdown in China’s economy sapped demand across Asia. The value of Japanese shipments rose just 0.6 percent in September from a year earlier, marking the third straight month of waning growth, the finance ministry reported Wednesday. Economists surveyed by Bloomberg had expected a 3.8 percent increase. The value of imports sank more than 11 percent, underscoring a lack of demand in Japan’s domestic economy as well as falling oil prices.  

• The Thai Connection That Tells You Turkish Bank Debt Is Souring. Before July, SCB Asset Management Co., part of Thailand’s second-largest bank, held about $2 billion of medium-term notes issued by Turkish lenders. That’s now dropped to about $1.2 billion. While a fraction of the more than $88 billion of debt due within a year from Turkish banks, the decline in holdings by Thai investors like SCB shows one of the most robust markets for nation’s lenders is waning. Since 2013, when Moody’s Investors Service lifted Turkey from junk status, Thais have become some of the biggest buyers of medium-term notes to capture the highest yields in the universe of investment-grade banks.

• Asian Stocks Follow U.S. Equities Lower as Drugmakers Retreat. Asian stocks fell after U.S. shares declined amid mixed company earnings. Drugmakers and finance shares led losses on the regional benchmark gauge. The MSCI Asia Pacific Index retreated 0.1 percent to 133.59 as of 9:01 a.m. in Tokyo.

• Disney's ESPN Said Planning to Eliminate as Many as 350 Jobs. Walt Disney Co.’s ESPN sports network, confronting rising programming costs and a loss of viewers, plans to eliminate as many as 350 positions, about 4.3 percent of its workforce, according to people with knowledge of the matter. 

Wall Street Journal:  

• Debt, Growth Concerns Rain on Deficit Parade. Budget success yields to concerns about debt-to-GDP ratio and the economic outlook. The U.S. budget deficit is lower than before the 2008 financial crisis. But the good news is tempered by concerns on two fronts, one about the nation’s debt load and the other about the economy. Deficit hawks are concerned that the improvement will lead both parties to overlook the red ink set to rise later this decade from a surge in spending on health care and retirement benefits for the baby-boom generation. They worry that while the deficit is at the lowest level since 2007, the U.S. has added nearly $8 trillion in debt, an increase of 140%. That has nearly doubled the nation’s debt-to-GDP ratio, which stands near 73%—based on federal debt held by the public—and isn’t projected to fall in the coming years.

• New Guidelines Push Back Age for Mammograms. American Cancer Society recommends women start having mammograms every year at age 45, instead of 40.

• Why Benghazi Still Makes a Difference. Hillary Clinton may not see the point, but her Thursday testimony may tell us much about her ability to lead. Only in Perry Mason stories does the real culprit break down in open court. After Hillary Clinton’s now-immortal Capitol Hill outburst about investigations into the deadly 2012 terrorist attack in Benghazi, Libya—“What difference, at this point, does it make?”—the former secretary of state and Democratic candidate for president is unlikely to offer any such spontaneity when she testifies Thursday before the House Select Committee on Benghazi. Nonetheless, the committee’s work is utterly serious, its preparations... 

Fox News: 

• Ryan to run for House speaker if he gets full party support. Wisc. Rep. Paul Ryan told House Republicans Tuesday he would run for speaker if he gets broad support from all wings of the party and gave colleagues until Friday to express their views. A statement released by his spokesman, Brendan Buck, said Ryan “discussed what’s necessary, in his view, for the next speaker to be successful” at the closed-door meeting. “If the members agree with his requests and share his vision, and if he is a unity candidate - with the endorsement of all the conference's major caucuses - then he will serve as speaker,” the statement said. “He will be all in.

MarketWatch.com: 

• What a Democratic president could mean for your taxes.

CNBC:

• Chipotle(CMG) stock falls after earnings disappoint. (video) Revenue increased to $1.22 billion from $1.08 billion a year ago. Wall Street analysts forecast Chipotle Mexican Grill would deliver earnings per share of $4.62 and revenue of $1.22 billion, according to a Thomson Reuters estimate. Shares were last 7 percent lower after the bell.

• Yahoo(YHOO) cuts Q4 guidance after earnings miss. (video) The firm cut its fourth-quarter revenue outlook to a range of $1.16 billion to $1.2 billion. Analysts expected $1.33 billion in sales, according to StreetAccount. 

Zero Hedge: 

• Offshore-Onshore Yuan Spread At 1-Month Wides Hinting At Outflows As Japanese Stocks 'Mysteriously' Meltup At The Open. (graph)

• Banks Turn Down Deposits As Stealth NIRP Takes Hold.

• Meet The New Generation Of Traders.

• PM-Elect Of 'US Ally' Canada Wastes No Time: Tells Obama Will Withdraw Fighter Jets From Syria, Iraq.

• Show Of Hands: Who's Interested In A CDO Backed By A Pool Of Subordinated Community Bank Debt?

• Then It Was BlackRock(BLK), Now It's Blackstone(BX) But The Result Will Be The Same.

• Confusion, Delusions, & Illusions. (graph) Telling people the truth today is meaningless, as they don’t want their illusions destroyed. But destroyed they will be, when this teetering edifice of debt comes crashing down on their heads. 

• Europe Secretly Starts Imposing TTIP Despite the Public’s Overwhelming Opposition.

• Crude Tumbles As API Reports Another Huge Inventory Build. (graph)

• Ferrari Prices IPO At $52 (Upper End Of Range), Raises $893 Million.

• How The Entire Short Volatility ETF Complex Could Be Wiped Out Overnight. (graph)

• Bonds & Stocks Drop Amid Crude Carnage; Bills, Biotechs, & Big-Boy-Toys Battered. (graph)

Business Insider:

• Gold is making a comeback. (graph)

• Obama just slammed the door on Arctic drilling.

• NSA chief: This is what keeps me up at night.

• Oil inventories are piling up. (graph)

Reuters: 

• VMware's(VMW) revenue forecast misses estimates, shares fall. Virtualization software maker VMware Inc forecast current-quarter revenue largely below Wall Street's estimates, sending its shares down 5 percent in extended trading. VMware, whose parent EMC Corp is being acquired by Dell Inc in a $67 billion deal, said EMC and Dell have committed to support the company's independent partnering strategy. The company said it had seen softer bookings in the quarter due to speculation about its future and weakness in China, Russia and Brazil.

• Bridgewater's $70 bln 'All Weather Fund' down 6 pct in 2015 - sources. The $70 billion Bridgewater All Weather Fund, managed by hedge fund titan Ray Dalio, was down 1.9 percent in September and is down 6 percent through the first nine months of the year, three people familiar with the fund's performance said on Tuesday.

• Texas teen arrested over clock is moving to Qatar with his family. The Texas boy arrested for bringing to school a homemade clock that was mistaken for a bomb is moving to Qatar, his family said on Tuesday, a few hours after he was at the White House for an astronomy night hosted by President Barack Obama. Ahmed Mohamed, 14, a bespectacled ninth-grader who became an Internet sensation for an arrest that supporters said was influenced by bias against his Muslim religion, has accepted an offer from the Qatar Foundation to study at its Young Innovators Program. "This means, that we, as a family, will relocate to Qatar where Ahmed will receive a full scholarship for secondary and undergraduate education," his family said in a statement. The teenager, who dabbles in robotics and had attended a Dallas-area high school, has basked in celebrity status since his arrest in September. The family has been traveling the globe to meet dignitaries. Sudanese state radio reported that his father took him to meet Sudanese President Omar al-Bashir. The Sudanese leader is accused by the International Criminal Court of masterminding genocide, crimes against humanity and war crimes during Sudan's Darfur conflict.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -.25% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 138.75 -.5 basis point.

• Asia Pacific Sovereign CDS Index 77.25 +2.25 basis points.

• Bloomberg Emerging Markets Currency Index 72.68 -.01%. 

• S&P 500 futures +.11%.

• NASDAQ 100 futures +.13%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (ABT)/.53

• (ARMH)/.07

• (BHI)/-.14

• (BIIB)/3.79

• (BA)/2.20

• (CSL)/1.62

• (KO)/.50

• (EMC)/.43

• (GM)/1.19

• (ITW)/1.36

• (KMB)/1.49

• (MAN)/1.55

• (OC)/.67

• (STJ)/.97

• (TMO)/1.79

• (WFT)/-.11

• (WIT)/9.08

• (AXP)/1.31

• (CCI)/1.05

• (EBAY)/.40

• (FWRD)/.59

• (KMI)/.19

• (KNX)/.36

• (LRCX)/1.72

• (LVS)/.63

• (RJF)/.92

• (RHI)/.73

• (SNDK)/.80

• (TXN)/.73

• (TSCO)/.63

• (URI)/2.36

• (VMI)/1.36

Economic Releases

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +3,660,000 barrels versus a +7,562,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -745,000 barrels versus a -2,618,000 barrel decline the prior week. Distillate inventories are estimated to fall by -1,160,000 barrels versus a -1,520,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.34% versus a -1.5% decline prior.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Bank of Canada rate decision, Brazil Central Bank decision, OPEC special meeting, weekly MBA mortgage applications report, (STX) annual meeting and the (CS) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.