Wednesday, January 06, 2016

Thursday Watch

Evening Headlines
  • China Stocks Halted for Rest of Day After CSI 300 Tumbles 7%. (video) Chinese stock exchanges closed early for the second time this week after the CSI 300 Index plunged more than 7 percent. Trading of shares and index futures was halted by automatic circuit breakers from about 9:59 a.m. local time. Stocks fell after China’s central bank weakened the currency’s daily reference rate by the most since August. “The yuan’s depreciation has exceeded investors’ expectations,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co. “Investors are getting spooked by the declines, which will spur capital outflows.” Under the mechanism which became effective Monday, a move of 5 percent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 percent close the market for the rest of the day. The CSI 300 of companies listed in Shanghai and Shenzhen fell as much as 7.2 percent before trading was suspended. Chinese stocks in Hong Kong, which doesn’t have circuit breakers, slumped 4.4 percent. The offshore yuan fell to a five-year low before erasing losses.
  • Shanghai Fund Manager Dumps All Holdings as Market Goes 'Insane'. "This is insane. We were forced to liquidate all our holdings this morning," says Chen Gang, chief investment officer at Shanghai Heqi Tongyi Asset Management Co., after CSI 300 plunges more than 7% and triggers circuit-breaker for second day this week. "There'll be a huge test for the market tomorrow when the lockup period on government bailout holdings ends. We won't consider getting back into the market until that overhang is gone and CSRC improves its circuit-breaker system, for instance by extending the 15-minute break to half an hour." Shanghai Heqi Tongyi manages about 300m yuan.
  • China Shares 'Panic' May Last for Couple of Weeks: CCBI's Jolley. Market likely to fall further until CNY stabilizes, economic data improves and authorities provide some regulations for circuit breaker rule, CCB International strategist Markt Jolley says by phone
  • 'Flawed' China Circuit-Breaker Causing Panic, Changjiang Says. Circuit-breaker, which has been triggered twice since introduction on Jan. 4, "flawed as it causes to a complete lack of liquidity in the market and causes more panic among investors," says Chen Xiaofei, an investment advisor at Changjiang Securities Co. in Shanghai.
  • Offshore Yuan Tumbles to Five-Year Low as PBOC Weakens Fixing. The offshore yuan traded in Hong Kong tumbled to a five-year low after China’s central bank reduced its daily reference rate by the most since August. The currency plunged 0.38 percent to 6.7383 a dollar as of 9:37 a.m. local time, according to data compiled by Bloomberg, having been up as much as 0.3 percent earlier. It dropped to as low as 6.7618, the weakest since September 2010. The spot rate in Shanghai fell 0.48 percent to 6.5870. The People’s Bank of China reduced the yuan’s fixing, which limits onshore moves to 2 percent on either side, by 0.51 percent to 6.5646, the weakest since March 2011.
  • Yuan Slump Adds to Case Against Buying China Stocks in Hong Kong. Add a sinking currency to the reasons for global funds to avoid Asia’s worst-performing stocks of 2015. An index tracking Chinese companies traded in Hong Kong slumped 19 percent last year and another 5.4 percent this week as concern over a slowdown in the world’s second-largest economy drove the yuan to a five-year low. H-shares are denominated in the Hong Kong dollar, which is pegged to the greenback. Morgan Stanley is shaving about 2 percent off an estimate for the Hang Seng China Enterprises Index’s 2016 year-end level for every 0.1 yuan depreciation past its forecast.
  • Aussie Drops to Worst Start on Record as China Angst Intensifies. The Australian and dollar fell to its the worst start of any year since it began trading freely amid concern China’s economy is struggling to regain momentum. The Aussie and kiwi currencies are dropping amid a meltdown in China, the biggest buyer of the commodities that are key for both Australia and New Zealand. Concerns that a slowdown in Asia’s biggest economy may deepen were exacerbated Wednesday when the central bank cut its yuan reference rate for the seventh day in a row, sending China’s currency to a five-year low. The yen closed at a four-month high against the U.S. dollar on Wednesday as stocks slumped worldwide, spurring demand for havens.
  • Australia Record Trade Deficit Looms as Commodities Slump: ChartAustralia might be shipping ever-larger amounts of iron ore, but slumping prices for the country’s key commodities mean it is on track for a record trade deficit. The January-to-November shortfall has already surpassed the previous annual record set in 2007 of A$26.4 billion, government data released Thursday show. The Reserve Bank of Australia’s commodity price index fell 17 percent in Australian-dollar terms in 2015 while iron ore prices dropped more than 30 percent. Capital Economics estimates net exports added just 0.5 percentage point to growth in the fourth quarter, well down from 1.5 percentage points in the third quarter.
  • South Korea 10-Year Bond Yield Drops to Record on Risk AversionSouth Korea’s sovereign bonds rose, pushing the 10-year yield to a record low, as a weaker won and North Korea’s fourth nuclear test spurred demand for safer assets. The won fell to a four-month low on speculation a weaker Chinese yuan will weigh down regional currencies. The yuan’s reference rate was cut Thursday to the lowest since March 2011. Investor sentiment toward riskier assets is unlikely to improve materially as long as concerns about China and global growth remain high, Citigroup Inc. economists including Jaechul Chang in Seoul wrote in a report. The yield on government bonds maturing December 2025 declined three basis points to 2.01 percent as of 10:47 a.m. in Seoul, Korea Exchange prices show. That’s the lowest on record for a 10-year benchmark note.
  • U.K. Economy Faces `Dangerous Cocktail' of Risks, Osborne Warns. Chancellor of the Exchequer George Osborne will say a “dangerous cocktail” of global threats faces the British economy this year as he warns that complacency is starting to take hold. In a speech in Wales on Thursday, Osborne will identify the slowing economies of China, Brazil and Russia, the slide in commodity prices and escalating political tensions in the Middle East as potential hazards. “‘Anyone who thinks it’s mission accomplished with the British economy is making a grave mistake,” he will tell business leaders in Cardiff, according to extracts of his speech released by the Treasury.
  • Ringgit Falls With Stocks, Bonds as China Spurs Global Selloff. The ringgit fell to a three-month low as concern about the extent of China’s slowdown triggered a selloff in emerging-market assets, including Malaysian stocks and bonds. A slump in Brent crude to the lowest level in more than 11 years didn’t help the ringgit either as it damps the outlook for Asia’s only major net oil exporter. The yuan extended losses after China cut its daily fixing by the most since August, adding to speculation the central bank is favoring depreciation to revive the economy. That drove a measure of developing-nation currencies to the weakest since 1993. “The unstable China economy and markets are the main drivers for risk-off,” said Masashi Murata, vice president at Brown Brothers Harriman & Co. in Tokyo. “Lower oil prices lead to a weak ringgit too.” The ringgit declined 0.7 percent to 4.4225 a dollar as of 10:16 a.m. in Kuala Lumpur and earlier fell to 4.4285, the lowest since Oct. 2, according to prices from local banks compiled by Bloomberg. The currency has weakened 2.9 percent this year, after rounding off its worst annual loss since 1997.
  • Global Stocks Tumble to Worst Start Since 2000 on China Concerns. (video) Global equities capped their worst start to a year since 2000, with the Dow Jones Industrial Average sliding more than 250 points, as China unexpectedly weakening its currency fueled fresh concern over the strength of the world economy. Bonds gained. The MSCI All-Country World Index ended the first three days of 2016 down by 3.3 percent, as U.S. stocks fell to a three-month low and emerging-market shares dropped to their cheapest level since 2009. Brent crude plunged to its lowest point since 2004, while U.S. oil spiked below $34 a barrel as supplies at a hub rose to a record. The dollar pared gains after minutes of the Federal Reserve’s last meeting were released. Treasuries jumped, with yields on 10-year notes dropping seven basis points to 2.17 percent.
  • Asian Stocks, Currencies Drop as Sinking Yuan Unnerves Investors. Asian stocks and currencies extended declines while oil erased gains as China weakened the yuan’s reference rate by the most since August, when a shock devaluation roiled global markets. Trading in Chinese equities was suspended as a selloff triggered an automatic circuit breaker for the second time this week. The MSCI Asia-Pacific Index of shares sank to a three-month low and the Bloomberg-JPMorgan Asia Dollar Index dropped to its weakest level since April 2009. The CSI 300 Index of companies listed in Shanghai and Shenzhen tumbled 7 percent, the maximum daily slide allowed before trading is halted. The offshore yuan swung from a 0.3 percent gain to a 0.7 percent loss and back in the space of about 30 minutes. U.S. crude declined to a six-year low, the yen rose to its strongest level since August and U.S. Treasuries rallied.
  • World's Cheapest Crude Hits Record Low as Oil Slump Deepens. A deepening oil market slump is adding fresh pain for producers of the world’s cheapest crude as the Canadian heavy grade reached a record low, raising the prospect of more production going offline. Spot prices for Western Canadian Select fell to $19.81 a barrel on Wednesday, the lowest since tracking began in 2008, according to data compiled by Bloomberg. The benchmark, made up of heavy conventional production and bitumen blended with synthetic crude and condensate, fell with global grades after U.S. gasoline inventories surged the most in 22 years and crude supplies at the American storage hub in Oklahoma climbed to a record.
  • Mining Woes Deepen With Worst Start in a Decade as Metals Slide. (graph) It’s already a rough 2016 for mining companies that are suffering through their worst start to a year in almost a decade. The Bloomberg World Mining Index has fallen 5.3 percent since Dec. 31, the biggest such drop since 2007. The 80-member gauge on Thursday extended losses to reach a fresh seven-year low, dragged down by slumping prices for zinc and nickel in Shanghai and London. Investors are shunning metals amid even more bad news for the economy in China.
  • Microchip(MCHP) Said to Be Reconsidering Offer to Acquire Atmel(ATML). Microchip Technology Inc. is reconsidering its interest in Atmel Corp. after Atmel’s business struggled in the fourth quarter, according to a person with knowledge of the situation. Atmel, based in San Jose, California, received an unsolicited offer from an unnamed buyer in December, according to a statement at the time. That suitor was Microchip, according to two people familiar with the matter, who asked not to be identified because the information is private. Atmel, which has said revenue will be $266 million to $286 million in the fourth quarter, is likely to report results at the low end of that range, the person said. As a result, Microchip is rethinking its current $9-a-share offer, which values Atmel at about $3.8 billion, the person said. 
  • Macy's(M) Plans to Cut Jobs as Sales Tumble More Than Forecast. Macy’s Inc. will fire or relocate about 3,000 workers and explore options for its real estate after the largest U.S. department-store company suffered a worse holiday period than it expected. The company is cutting staffing levels and shrinking its store count to match the lower sales volume, part of a plan to shave $400 million in annual expenses, according to a statement on Wednesday. The changes will affect three to four workers at each of about 770 Macy’s and Bloomingdale’s stores -- about 2 percent of its total workforce -- though half of those employees are expected to be offered other jobs. It’s also shutting 40 Macy’s locations, following through on an announcement in September.
Wall Street Journal: 
  • North Korea Bomb Test Challenges U.S. Policy in Asia. Country’s nuclear test raises concerns about Pyongyang’s advances and questions about effectiveness of administration’s stance toward region. North Korea’s fourth nuclear weapons test spread alarm through the U.S. and allied countries, reigniting concerns about Pyongyang’s advancements and thrusting the country back into the diplomatic spotlight.
  • Offshore Bets Against Yuan Gain Momentum. Spread between onshore rate and more market-sensitive offshore rate grew to its widest level. Bets that China will let the yuan weaken further gathered steam Wednesday, increasing the gap between the currency’s onshore rate and the more market-sensitive offshore price to its widest point ever. China’s central bank sparked the selling after it set the rate weaker than expected. The People’s Bank of China has fixed the yuan’s value against the U.S. dollar at a weaker level each day this year. While investors had expected the central bank to allow the currency to fall further as China’s economic growth slows, the... 
  • Tax-Trade Mess Lingers at Bank of America(BAC). BofA dismantled group that helped clients avoid paying, but regulators press on with probes; a ban on ‘SEFT’. A group at Bank of America Corp. that specialized in arranging trades to help clients around the world avoid taxes has been dismantled. Some employees claim they aren’t even allowed to say the group’s name anymore.
  • Rising Support for NRA Stymies Obama. President’s executive action on gun rules come as polls show why Congress is loathe to take action. When pollsters asked people three decades ago how they felt about the National Rifle Association, 27% said they strongly supported the gun lobby. By last month, that share had grown 38%, an 11-point increase. Meanwhile, the share that didn’t side with the NRA declined.
  • The New Nuclear Proliferation Age. North Korea’s test shows the continuing failure of arms control. The temptation in most world capitals will be to denounce North Korea’s Wednesday nuclear test but do little beyond attempting to bribe dictator Kim Jong Un with more cash in return for more disarmament promises. The more realistic view is to see this as another giant step toward a dangerous new era of nuclear proliferation that the world ignores at its peril.
Fox News:
  • Congress sends health law repeal to Obama's desk for first time. (video) Congress sent an ObamaCare repeal bill to the president’s desk for the first time on Wednesday, marking an election-year victory of sorts for Republicans who have tried since 2010 to scrap the law. The bill repealing most of President Obama's signature health care law was approved in a final 240-181 House vote Wednesday afternoon, after clearing the Senate late last year. The legislation also would strip federal funding for Planned Parenthood.
  • Clinton struggles to explain difference between socialist, Democrat. (video) It seems to be the question Democratic Party figureheads don’t want to answer: What’s the difference between a Democrat and a socialist? Hillary Clinton, in an otherwise friendly interview on MSNBC, struggled to answer that question Tuesday when asked by host Chris Matthews.
  • The market's not buying the Fed's 'leap of faith'. (video) Pay no attention to those tumbling energy prices, the Fed seems to be telling the market, all will be back to normal soon. That was the overriding message that came through from a summary of the December Federal Open Market Committee meeting, where central bank officials approved the first increase of its key funds rate in more than nine years. 
Zero Hedge:
Business Insider:
  • U.S. House leaders discussing vote to tighten N.Korea sanctions -sources. The Republican leaders of the U.S. House of Representatives are considering a vote as soon as next week on long-delayed legislation to broaden sanctions against North Korea by imposing stiffer punishments on foreign companies doing business with Pyongyang, U.S. congressional sources said on Wednesday. Representatives Ed Royce, the Republican chairman of the House Foreign Affairs Committee, and Eliot Engel, the top Democrat on the panel, introduced the measure early last year and it was passed by the committee in February.
  • Brazil auto sales to fall for fourth straight year, say dealers. Auto sales in Brazil are expected to fall in 2016 for the fourth year in a row, national dealership association Fenabrave forecast on Wednesday, accumulating a 36 percent drop since 2012 as the country plunges deeper into recession. Fenabrave projected a 5.9 percent drop in car and light truck sales and a 2.8 percent decline for bus and heavy truck sales this year, following plunges of 25.6 percent and 45.5 percent in 2015, respectively.
Financial Times:
  • Concern for China’s economy as currency sinks near 5-year low. The pace of China’s falling currency, now at its lowest level in nearly five years, has raised the prospect of renewed intervention by the central bank as Beijing seeks to control its fragile exchange rate policy. The sharp decline in the renminbi has put investors on notice that the Chinese economy, an engine of global growth, may be slowing at a faster pace than previously forecast.
Night Trading 
  • Asian equity indices are -3.0% to -1.5% on average.
  • Asia Ex-Japan Investment Grade CDS Index 144.0 +2.75 basis points.
  • Asia Pacific Sovereign CDS Index 75.50 +2.25 basis points.
  • Bloomberg Emerging Markets Currency Index 68.11 +.05%.
  • S&P 500 futures -1.15%
  • NASDAQ 100 futures -1.23%.

Earnings of Note 
  • (STZ)/1.29
  • (FINL)/-.03
  • (GPN)/.68
  • (GBX)/1.56
  • (KBH)/.51
  • (SCHN)/-.15
  • (WBA)/.96
  • (CUDA)/.08
  • (BBBY)/1.09
  • (TCS)/.05
  • (PSMT)/.83
  • (RT)/-.08
  • (WDFC)/.80
Economic Releases
7:30 am EST
  • Challenger Job Cuts YoY for December.
8:30 am EST
  • Initial Jobless Claims for last week are estimated to fall to 275K versus 287K the prior week.
  • Continuing Claims are estimated to rise to 2200K versus 2198K prior.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lacker speaking, Fed's Evans speaking, Eurozone Unemployment report, weekly Bloomberg Consumer Comfort Index, weekly EIA natural gas inventory report and the (SIG) holiday sales call could also impact trading today.
BOTTOM LINE: Asian indices are sharply lower, weighed down by tech and industrial shares in the region. I expect US stocks to open lower and to maintain losses into the afternoon. The Portfolio is 25% net long heading into the day.

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