Tuesday, January 26, 2016

Wednesday Watch

Evening Headlines

  • China Stocks Extend Rout as Slumping Profits Add to Outflow Risk. China’s stocks resumed a rout after a report showed industrial companies’ profits slumped, adding to concern a deepening economic slowdown will spur capital outflows. The Shanghai Composite Index dropped 0.6 percent to 2,733.88 as of 9:54 a.m., extending bear-market losses to 25 percent since December. Technology and industrial companies led declines. Industrial profits slid 4.7 percent in December from year-earlier levels. The benchmark gauge tumbled 6.4 percent to a 13-month low on Tuesday after data showed outflows hitting an estimated $1 trillion last year and some of the nation’s most accurate forecasters said the index may not bottom until it falls to the 2,500 level. 
  • China's Industrial Profits Drop a Seventh Month as Sales Weaken. Profits at industrial companies in China fell for a seventh month, extending a record streak of declines, as demand and sales weakened amid the economic slowdown. Total profits of China’s industrial enterprises fell 4.7 percent in December from a year earlier, the National Bureau of Statistics said Wednesday in Beijing. That compared with a 1.4 percent drop in November and was the third-biggest drop in more than three years, based on previously reported NBS data since 2011. A main reason for the drop was "weak demand, which led to significant deceleration in production and sales," NBS said in a statement with the data. "Significantly lower prices of industrial products exacerbated the drop."
  • Why China Stocks May Fall 10% More, Technically Speaking. Market strategists are looking to the psychologically important support level of 2,500 for the Shanghai Composite Index, which closed Tuesday just shy of 2,750. Metrics used by technical analysts point to the vicinity of that same round number.
  • China May No Longer Be Apple’s(AAPL) Great Firewall. (video) The iPhone maker is feeling the effects of an economic slowdown in its most important market. China has been one of Apple's most reliable strongholds during its historic stretch of technology dominance. Even when sales began to level out in the U.S., Europe, and Japan, China was a buffer, promising a massive market of newly middle-class customers looking for a high-end, brand-name smartphone. Sales in Greater China grew 84 percent to $58.7 billion in 2015, making it the company's second-biggest market after the U.S. Apple Chief Executive Officer Tim Cook showered the region with praise at the time for its importance to the company's future.
  • China Slowdown Hits Consumer Brands as P&G(PG), J&J(JNJ) See Weak Results. Consumer product giants Procter & Gamble Co. and Johnson & Johnson reported slowing sales for some brands in China last quarter, as weakness in the world’s second-largest economy starts to hurt multinationals that have spent years building up their businesses there. P&G Chief Financial Officer Jon Moeller said Tuesday on a conference call that certain brand categories in China are growing 5 percent to 8 percent annually, “somewhat slower than they were two and three years ago.” Likewise, J&J said international sales from businesses such as its baby care and skin lines were hurt by the Chinese slump.
  • Consumer Sentiment Slides in Korea to Match Dark Days of MERS. Consumer sentiment in South Korea has dropped back to where it was last year when an outbreak of a deadly respiratory disease scared away foreign tourists and kept local shoppers at home. A key measure of economic confidence from the central bank indicates a rising number of pessimists among Korean consumers as temporary tax cuts and retail sales promotions end while downbeat news about financial markets continues to grab headlines.
  • Credit market turmoil crimps bond sales in worst start since 2005. Bond sales by companies worldwide slowed to an 11-year low in January as investors shunned risk amid a meltdown in capital and commodities markets. About $US329 billion ($472 billion) of debt has been issued so far this month, the least for a January since 2005, when $US299 billion of securities were sold, according to data compiled by Bloomberg. That's despite the biggest day ever for bond sales in the US on January 13 when Anheuser-Busch InBev sold $US46 billion of bonds to fund its takeover of SABMiller. The transaction was the second-largest dollar-denominated debt deal on record.
  • Hedge Fund Starts in Asia Drop to 14-Year Low in Turbulent Year. Hedge fund launches in Asia dropped to the lowest in 14 years last year as investors’ preference for big funds and rising regulatory costs converged with a turbulent market. The number of hedge funds that opened in Asia dropped to 76 in 2015, according to Singapore-based data provider Eurekahedge Pte, down from 117 in the prior year and the fewest since 2001. The number was less than half of the peak in 2010, when 188 new hedge funds set up operations.
  • Asia Stocks Rise While Oil Slips With U.S. Futures; Aussie Gains. Asian stocks rallied, putting a measure of regional equities on course to erase Tuesday’s drop, and high-yielding currencies strengthened. U.S. index futures slipped as oil resumed declines and Apple Inc. forecast its first drop in sales since 2003. Gains by Japan’s carmakers and banks drove the MSCI Asia Pacific Index’s 1.4 percent advance, while Chinese shares slid after a report showed industrial profits dropped last month.
  • World Bank Cuts Iron Ore Predictions Through 2020 as Glut Builds. Iron ore prices are likely to post the biggest loss among metals this year as low-cost supply continues to outstrip consumption, according to the World Bank, which cut its forecasts through 2020. Iron ore demand is nearing its peak and prices will average $42 a metric ton in 2016, a drop of 25 percent from $55.80 last year, the Washington-based lender said in its quarterly outlook Tuesday. In comparison, nickel is due to fall by 16 percent and copper by 9 percent, it said. In October, the bank had forecast 2016 iron ore prices at $59.50. It cut its 2017 estimate for iron ore by 28 percent to $44.10 a ton, and predicted that prices will remain below $50 through 2019 before rising to $51 at the end of the decade.
  • Bets on Negative U.S. Rates by End-2017 Jump Above 10% Chance. Federal Reserve officials are expecting to raise interest rates this year and next. Options markets show some investors are taking out protection in case rates instead go negative. The implied probability of U.S. interest rates sinking below zero next year has risen above 10 percent, data compiled by Bloomberg show. The move has been driven by a surge in purchases of contracts that pay out if rates are cut below zero by the end of 2017 and may be linked to investors finding a cheaper way to hedge the opposite bet -- that rates will actually rise as the Federal Reserve expects. The negative-rates trades -- created through the use of call options on futures contracts linked to the U.S. dollar London interbank offered rate -- have been placed as bonds have rallied, said Todd Colvin, a senior vice president at Ambrosino Brothers in Chicago.
Wall Street Journal:
  •  Dollar’s Rise Poses Risk for Fed Plans. Rising currency can have same impact as rate increase. As Federal Reserve officials prepare to release interest-rate guidance Wednesday, investors are bracing for the dollar to renew its rise against America’s major trading partners and intensify unrest throughout the world’s financial markets. Unlike stocks and bonds, the dollar has had a relatively muted start to 2016, and investors worry that any resumption of its gains could weigh further on global growth.
Business Insider:
  • Travel industry faces growing concern over Zika virus. Airlines, hotels and cruise operators serving Latin America and the Caribbean are facing growing concern among travelers spooked by the mosquito-borne Zika virus. 
  • Bearish views abound at elite hedge fund conference. Professional money managers gathered at an elite Morgan Stanley investment conference in Palm Beach, Florida this week expressed a range of pessimistic market views, including so-called bearish takes on the energy sector, China, and stocks such as Valeant Pharmaceuticals(VRX) and SolarCity(SCTY).
Night Trading 
  • Asian equity indices are -.25% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 154.50 +.5 basis point.
  • Asia Pacific Sovereign CDS Index 74.0 -3.5 basis points.
  • Bloomberg Emerging Markets Currency Index 67.32 +.01%.
  • S&P 500 futures -.62%.
  • NASDAQ 100 futures -.77%.

Earnings of Note 
  • (ANTM)/1.17
  • (BIIB)/4.08
  • (BA)/1.25
  • (CLF)/-.31
  • (EMC)/.65
  • (FCAU)/.33
  • (GD)/2.38
  • (HES)/-1.45
  • (ITW)/1.21
  • (NSC)/1.26
  • (PGR)/.46
  • (ROK)/1.33
  • (STJ)/1.01
  • (STT)/1.18
  • (UTX)/1.52
  • (CRUS)/.81
  • (CCI)/1.11
  • (EBAY)/.50
  • (FB)/.68
  • (JNPR)/.59
  • (KNX)/.32
  • (LRCX)/1.42
  • (LVS)/.65
  • (MCK)/3.13
  • (MSTR)/2.40
  • (QCOM)/.91
  • (SLG)/1.61
  • (TXN)/.75
  • (TSCO)/.83  
  • (URI)/2.33
  • (VAR)/.92
  • (VRTX)/.16  
Economic Releases
10:00 am EST
  • New Home Sales for December are estimated to rise to 500K versus 490K in November.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +4,377,780 barrels versus a +3,979,000 barrel gain the prior week. Gasoline supplies are estimated to rise by +631,110 barrels versus a +4,563,000 barrel gain the prior week. Distillate inventories are estimated to fall by -1,922,220 barrels versus a -1,025,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.74% versus a -.6% decline prior.
2:00 pm EST
  • The FOMC is expected to leave the benchmark Fed Funds rate at .25-.5%.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The German Consumer Confidence data, New Zealand rate decision, weekly MBA mortgage applications report, $35B 5Y T-Note auction, (KMI) analyst day, (VALE) analyst meeting and the (PGR) Dec. release could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and consumer 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.

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