Wednesday Watch

Evening Headlines

Bloomberg:  

• North Korea Quake Near Nuclear Site Was Artificial, Says South. A 5.1-magnitude earthquake detected near North Korea’s nuclear test site appears to have been artificial, according to South Korea’s meteorological service, raising the prospect the isolated regime tested a nuclear device. The quake had a depth of ten kilometers, the U.S. Geological Survey said, while Chinese earthquake networks put it at zero. It was centered 19 kilometers from Sungjibaegam. A 4.9-magnitude earthquake in a similar location was recorded before confirmation of North Korea’s third nuclear test in 2013. The regime in Pyongyang has given notice that it will make an important announcement at midday North Korea time, South Korea’s Yonhap News Agency said. The government in Seoul is convening an emergency meeting, according to an official at the presidential office. South Korea’s Kospi index extended losses to 0.6 percent, while the won declined 0.6 percent against the dollar. The MSCI Asia Pacific Index of the region’s stocks dropped 0.7 percent.
• Offshore Yuan Sinks to 5-Year Low as PBOC Fixing Cut for 7th Day. China’s yuan sank to a five-year low in offshore trading after the central bank lowered its reference rate for the seventh day in a row. The currency fell 0.30 percent to 6.6649 a dollar as of 9:56 a.m. in Hong Kong’s freely traded market, reversing initial gains, after the People’s Bank of China cut its daily fixing by 0.22 percent to the weakest level since April 2011. That’s 1.9 percent weaker than the onshore exchange rate, which declined 0.33 percent to 6.5374.
• China Vanke Hong Kong Shares Plunge After Resuming Trading. China Vanke Co., the developer whose shares were halted last month amid a battle for control with its largest shareholder, tumbled the most in a year-and-a-half after resuming trading in Hong Kong on Wednesday. The shares dropped as much as 14 percent, the most since June 26, 2014, and were 12 percent lower at HK$19.90 as of 9:36 a.m. local time. The stock of China’s largest publicly traded developer traded on the Shenzhen stock exchange will remain suspended pending an asset restructuring and share sale.
• China Excavator Demand to Stay Stagnant This Year, Kobe CEO Says. China’s demand for excavators will remain stagnant this year after sales almost halved in 2015 as its slowing economy cooled construction spending, according to Kobe Steel Ltd., owner of a major Japanese supplier. “We shouldn’t assume demand for construction machinery will come back for another year, ” Chief Executive Officer Hiroya Kawasaki said Tuesday in an interview at a steel industry group meeting in Tokyo, adding a recovery isn’t likely until 2017. “We have to have a negative view on the market.”
• Hong Kong's Gravity-Defying Property Gains May Reverse in 2016. The Hong Kong property market’s gravity-defying climb to records may be set for a reversal this year. Hong Kong is forecast to overtake Singapore as the weakest-performing luxury residential market, with prime property prices declining an estimated 5 percent this year,  according to a report by Knight Frank LLP of 10 global cities that was released Tuesday. Of the 10 cities analyzed, Hong Kong, Singapore and Paris are the three expected to see price declines this year. “A number of new developments are due to come to the market in 2016,” according to the report. “This new supply coupled with a strengthening HK Dollar (pegged to the US Dollar) will see prime prices soften.”
• Apple(AAPL) Suppliers Drop in Asia After IPhone Output Cut Report. Apple Inc. suppliers led by Sharp Corp. and Pegatron Corp. fell after Nikkei Asian Review reported the U.S. company would reduce the first quarter output of its latest iPhones by about 30 percent. Sharp dropped 4.1 percent as of 10:21 a.m. in Tokyo and Japan Display Inc. slumped 3.2 percent. The Japanese companies both supply screens for Apple devices. Pegatron, which assembles iPhones, fell as much as 5.6 percent in Taipei. Inventories of the new iPhones, which debuted in September, have piled up at retailers in China and Europe amid lackluster sales as an increase in the dollar against emerging markets currencies makes the device more expensive in those countries, Nikkei reported.  
• Yen's New Year Rally Driven by China Nerves Spurring Haven Flows. The yen has gained against all of its major peers since the start of the year as a rout in Chinese stock markets sparked demand for safer assets, and traders are betting that trend will continue. The Japanese currency gained 0.9 percent against the dollar since Dec. 31, the third year in a row that it started off climbing against the dollar. Options showed sentiment favoring the yen over the dollar by about the most in more than two weeks, based on one-month risk reversals. 
• Asian Stocks Decline as Weak Yuan Fix Weighs on Risk Appetite. Asian stocks fell for a third day after China set a weaker fix for the yuan and Apple Inc. suppliers tumbled on a report it may cut production. The MSCI Asia Pacific Index lost 0.9 percent to 127.24 as of 11:30 a.m. in Tokyo, with technology companies posting the largest declines. 
• Credit Market Turmoil Could Sour Outlook for U.S. PE-Backed IPOs. You can add one more factor to the reasons why U.S. private equity-backed initial public offerings have had a shabby few months: the convulsing junk bond market. Languishing commodities prices and turmoil in emerging markets had already prompted a selloff in high-yield credit, even before the markets could fully react to the impact of the Federal Reserve raising interest rates in mid-December. In 2015, U.S. junk debt registered its first annual loss since 2008, down 4.64 percent, according to Bank of America Merrill Lynch Indexes. That could be a harbinger for new equity offerings, and not an auspicious one. 
• Carmakers Enter 2016 Facing Slower Growth After Record U.S. Year. With record U.S. vehicle sales now on the books for 2015, automakers are propelling into the new year with a sense that they’ll have to work harder to see more growth ahead. Carmakers dialed up discounts in 2015’s second half to win market share as Americans surged into showrooms amid cheap gasoline and a growing job base. The gambit paid off: Full-year sales beat the standard set 15 years ago, rising 5.7 percent to 17.5 million cars and light trucks. Analysts and executives alike project another record this year -- although with slower growth -- provided that the dealmaking keeps pace.

Wall Street Journal: 

• Iran Crisis Puts Pressure on New Generation of Saudi Leaders. Saudi Arabia’s ruling family is confronted by an unprecedented array of challenges. Hours after the Saudi execution of a Shiite cleric that has set off a diplomatic crisis in the Persian Gulf, the two leaders of the Saudi royal family’s younger generation took in a horse race at the Janadriya track outside the capital. The appearance by Crown Prince Mohammed bin Nayef and his cousin, Deputy Crown Prince Mohammed bin Salman—who are partners and rivals—was an important show of unity at a critical moment. The crown prince is next in line to the throne.  
• 5 Things to Watch in the Fed’s December Minutes.
• A Victory Over ObamaCare. Congress puts a repeal bill on the President’s desk. 
• A Glittery Gun-Control Distraction. Obama tightens rules for gun dealers—which will do little other than allow him to duck the real questions.
• How Trump-Style Politics Turned California Into a Blue State. In 1984, 45% of the state’s Hispanics voted for Reagan. Then Pete Wilson drove them into Democrats’ arms.              

Fox News:

• Obama's gun control actions open legal can of worms. (video) President Obama’s executive action to expand gun sale background checks has opened up a legal can of worms, specifically the president’s bid to broaden the definition of who’s a dealer -- and therefore must get a license and conduct background checks. Under current federal law passed by Congress, only federally licensed dealers must conduct background checks on buyers. The law does not specify whether this applies to online sales and other areas -- so those selling or trading guns on websites or in informal settings such as flea markets often don’t register.

Zero Hedge:

• Pentagon Looking Into "Artificial Quake" Near North Korean Nuclear Test Site.
• Dow Futures Plunge 170 Points After Yuan Crashes To 5-Year Lows As PBOC Loses Control. (graph)
• Visualizing How The Global Economy Played Out In 2015.
• China Set To Establish No-Fly Zone Over Islands After Successful Test Flight.
• The Shale Defaults Begin Here: Banks Quietly Shrink These 25 Companies' Credit Facilities. (table)
• Central Bank Money Printing - The Rotten Philosophy That Lies Beneath.
• Here's The Ultra-Clever Way That The Chinese Are Circumventing Capital Controls.
• Nomi Prins' Financial Road Map For 2016: "The Potential For Chaotic Fluctuations Is Greater Than Ever".
• Keynesian Economics 101 (In 4 'Simple' Lessons).
• Hong Kong Publishers Reportedly Being Kidnapped By Chinese Authorities, Taken To Mainland.
• Crude Spikes Higher As API Reports Large Inventory Draw. (graph)
• All Bubbles Are Different (But End The Same). (graph)
• 'Still' Safe On The Sidelines - 501 Days And Counting. (graph)
• What Does Citi's "Bear Market Checklist" Predict About The Future.
• Wall Street's Biggest Permabull Just Slashed His Q4 GDP Forecast To 0.5%, Says "It May Be Too High".
• Dear Retail Investor: Here's How Your Stop Orders Really Work.
• Dow Swings 1000 Points In 24 Hours As Crude Carnage Continues. (graph)

Business Insider:

• China's all-important services sector is slowing to a crawl. (graph) Growth across China’s services sector slowed to a crawl in December, fueling fears that economic growth within the country is faltering. The latest Caixin-Markit services PMI gauge fell to 50.2 from 51.2 in November, the lowest level seen since July 2014. On top of the concerning headline reading, Markit noted that firms expressed a relatively low level of optimism towards the 12-month business outlook in December with the reading sitting only marginally above the record low level hit just two months earlier.
• REPORT: Valeant(VRX) is appointing a new CEO.
• Missouri lawmakers want police to take 'racial bias training'.
• YouTube might spend more on content than Netflix.
• Wall Street banks have been left hanging in a critical market.
• Here's a sign the stock market could deteriorate from here.

Reuters:

• Yen buoyed as growth concerns fan risk-averse mood. The yen held firm near multi-month highs against major currencies on Wednesday as concerns over sluggish global growth and choppy oil and financial markets prompted investors to seek shelter in the low-risk low-return currency. The U.S. dollar traded at 119.08 yen JPY=, not far from its 2-1/2-month low of 118.705 touched on Monday.
• Ackman's Pershing Square ends 2015 with 20.5 pct drop.

Financial Times:

• Fears mount over rise of sovereign-backed corporate debt. More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research. The stock of so-called quasi-sovereign bonds issued in dollars and other hard currencies by emerging markets has risen sharply in the past 12 months to overtake that of all external emerging market sovereign debt by the end of 2015.

Telegraph:

• If China stumbles again, so will stock markets, warns IMF chief economist. 'The global spillovers from China’s reduced rate of growth ... have been much larger than we would have anticipated,' says Maurice Obstfeld.  
• Greece on a collision course with creditors after vowing not to slash pensions. Athens maintains it will not cut pension spending as part of reforms demanded by the Troika.   

Evening Recommendations 

• None of note

Night Trading 

• Asian equity indices are -1.25% to +.25% on average.
• Asia Ex-Japan Investment Grade CDS Index 141.75 +2.5 basis points.
• Asia Pacific Sovereign CDS Index 73.0 -2.5 basis points.
• Bloomberg Emerging Markets Currency Index 68.43 -.19%.
• S&P 500 futures -1.06%
• NASDAQ 100 futures -1.07%.

Morning Preview Links 

Earnings of Note 

Company/Estimate

• (MON)/-.27
• (RECN)/.24
• (MSM)/.87

Economic Releases

8:15 am EST

• ADP Employment Change for December is estimated to fall to 198K versus 217K in November.

8:30 am EST:

• The Trade Deficit for November is estimated to widen to -$44.0B versus -$43.89B in October.

9:45 am EST

• Final Markit US Services PMI for December is estimated to rise to 54.0 versus 53.7 in November.

10:00 am EST

• ISM Non-Manufacturing Composite for December is estimated to rise to 56.0 versus 55.9 in November.
• Factory Orders for November are estimated to fall by -.2% versus a +1.5% gain in October.

10:30 am EST

• Bloomberg consensus estimates call for a weekly crude oil inventory build of +654,550 barrels versus a +2,629,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +1,827,270 barrels versus a +925,000 barrel gain the prior week. Distillate supplies are estimated to rise by +1,241,820 barrels versus a +1,795,000 barrel gain prior. Finally, Refinery Utilization is estimated to fall by -.22% versus a +1.3% gain prior.

2:00 pm EST

• FOMC Minutes from Dec. 15-16 meeting released.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Eurozone Services PMI, Australia Trade Balance, weekly MBA Mortgage Applications report, Goldman Energy Conference and CES 2016 could also impact trading today.

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