Friday Watch

Evening Headlines
Bloomberg:

• China Bears Say the Capital Outflow Is Just Beginning. Yuan bears say this month’s rally shouldn’t be taken as a sign China’s great reversal in capital flows has finished. Goldman Sachs Group Inc. warns that any further shock depreciation will only accelerate the exit. Daiwa Capital Markets, which predicted the outflow risks back in 2014, says less than half of the $3 trillion of dollar debt that ended up in China has been repaid. Commerzbank AG said record new yuan loans in January showed companies are raising money to repay more debt abroad. Corporate bond sales onshore have more than doubled this year, as offshore issuance in the greenback dropped about 30 percent. Goldman Sachs says there have been $550 billion of outflows in the second half of 2015, and that every 1 percent yuan weakening risks $100 billion more. “We’re less than halfway done” in terms of carry trade unwinding, said Kevin Lai, chief economist for Asia excluding Japan at Daiwa. “My main focus is not about unwinding, but the reverse carry trade. People are taking fresh positions to sell the yuan. We’re talking about a massive deflationary scenario now, which is very bad for the market, economy, for everything.”

• China Coal Producer Defaults on Convertible Bonds as Prices Sink. Up Energy Development Group Ltd., a Hong Kong-listed producer of coking coal with mines in China, has defaulted on convertible bonds, becoming the latest firm in the industry to renege on obligations after prices of the fuel plunged. The company failed to repay an unspecified amount of convertible notes by a Feb. 18 grace-period deadline after missing payment by the Jan. 18 maturity, according to a filing Friday. That gives holders of other debt totaling HK$3.46 billion ($444.8 million), including convertible securities due 2018, the right to demand immediate repayment under a cross-default clause, it said.

• Hong Kong Developers Under Pressure to Cut Prices Amid Slowdown. Hong Kong’s developers are offering enticements from iPhones to wine coupons to counter the slowest home sales in at least 25 years, to no avail. Their options are now narrowing down to the one they’ve desperately sought to avoid: price cuts. Most buyers aren’t biting as property analysts predict prices will fall as much as 25 percent this year after declining 11 percent since September. At upscale The Avenue project in Hong Kong’s Wanchai district, developer Sino Land Co. and the Urban Renewal Authority have sold only one of 36 remaining apartments this year despite inducements including a HK$1.5 million ($193,000) voucher to buy new furniture. The next step may be the outright price cuts that developers have long resisted because of fears that they’ll fuel expectations of steeper declines.

• Global Debt Levels Skyrocket: How Much Is Too Much? (video)

• EU Quarrels Over Refugees, With Greece, Austria in Crossfire. European leaders quarreled again over the refugee influx, with fingers pointed at Greece for doing too little to seal its border and at Austria and Slovenia for doing too much. Conflicting national responses to the expected 1 million new arrivals in 2016 on top of a similar number last year left Germany with the heaviest burden and Chancellor Angela Merkel facing untold political costs. “We must first avoid a battle among plans A, B and C: It makes no sense at all because it creates divisions within the European Union,” EU President Donald Tusk told reporters after meetings ended in pre-dawn hours on Friday.

• Won Set for Worst Week in Six on Rate-Cut Bets, Rising Tension. South Korea’s won headed for its biggest weekly drop in six on rising geopolitical risk and speculation the central bank will cut interest rates. The currency fell to a five-year low on Friday as Bank of Korea Governor Lee Ju Yeol said economic uncertainties are “higher than ever” due to external volatility and increasing tensions on the peninsula. One of seven board members called for a cut as the monetary authority held its benchmark rate on Tuesday. North Korea’s Kim Jong Un has ordered his military to strengthen terror capabilities, South Korean President Park Geun Hye’s press secretary said in a briefing on Thursday. The won declined 1.9 percent this week to 1,235.14 a dollar as of 10:10 a.m. in Seoul, according to data compiled by Bloomberg.

• Asian Stocks Pare Biggest Weekly Advance Since 2011 as Oil Drops. Asian stocks fell, paring the biggest weekly rally since December 2011, as the yen strengthened and a buildup in oil supplies dragged crude prices and energy producers lower. The MSCI Asia Pacific Index declined 0.5 percent to 119.70 as of 9:07 a.m. in Tokyo. The gauge rose 6.5 percent over four days going into the final trading day of this week after sinking to a 3 1/2-year low last week amid concern about the growth outlook for the world’s largest economies and the rout in oil. “Sentiment on the oil market has been a key macro driver for stock-market sentiment recently,” said Ric Spooner, Sydney-based chief market analyst at CMC Markets. “Concerns about the potential for credit-market problems in the event of a lower-for-longer oil scenario are near the top of a fairly long list of macro factors worrying investors at the moment.”

• The Stressed-Out Oil Industry Faces an Existential Crisis. The Saudis may go public, OPEC’s in disarray, the U.S. is suddenly a global exporter, and shale drillers are seeking lifelines from investors as banks abandon them. Welcome to oil’s new world order, full of stresses, strains and fractures. For leaders gathering in Houston next week at the IHS CERAWeek conference -- often dubbed the Davos of the energy industry -- a key question is: what will break first? Will it be the balance sheets of big U.S. shale companies? The treasuries of Venezuela and Nigeria? The resolve of Saudi Arabia, whose recent deal with Russia to freeze output levels offered the first hint of a rethink?

• Citadel Said to Cut Staff as Main Funds Drop 6.5% to Start 2016. Ken Griffin’s $26 billion firm cut about 15 investment professionals from one of its stock-trading units as its main hedge funds lost 6.5 percent in the first six weeks of the year, according to a person familiar with the firm. Citadel trimmed portfolio managers, analysts and junior analysts from its Surveyor arm that was formed in 2009, said the person, who asked not to be identified because the information is private. The group currently has about 200 employees across 25 teams.

• Nordstrom(JWN) Tumbles After Holiday Sales Miss Analysts' Estimates. Nordstrom Inc., the largest U.S. luxury department-store chain, fell as much as 8.5 percent in late trading after holiday results missed analysts’ estimates and the company gave a weak earnings forecast. Excluding some items, earnings fell to $1.17 a share in the fourth quarter, the Seattle-based company said in a statement Thursday. Analysts had predicted $1.21 a share on average, according to data compiled by Bloomberg. Though sales rose 3.7 percent to $4.19 billion, that was below the $4.22 billion projection.

Wall Street Journal:

• Hillary Clinton’s Lead Shrinks as More Women Shift to Bernie Sanders, WSJ/NBC  News Poll Finds. Sanders cut Clinton’s once-commanding national lead in Democratic race by more than half, poll finds.

• The Court, Like the Country, Needs Balance. It would be wise for the president to change his mind on a nomination to replace Justice Scalia.

Fox News:

• Senate Republicans easing on blockade of Obama court pick? (video) Cracks are starting to appear in the Republican wall of opposition to President Obama nominating the next Supreme Court justice, as several prominent senators signal that a hearing -- at least -- could be allowed.

Zero Hedge:

• "I Guess It's Food Stamps": 400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts. 

• BofA(BAC) Asks: Is This The Chinese Shadow Bank Failure That Will This Trigger The Chain Reaction. (graph)

• You Are Here. (graph)

• A "Baffled" Bank Of Japan Is Shocked By Its "Message Of Despair" (graph)

• Why The Chinese Yuan Will Lose 30% Of Its Value. (graph)

• Bear Market Rallies & Bailing-Out Bad Behavior. (graph)

• Why Negative Interest Rates Spell Doom For Capitalism.

• Swiss Politicians Slam Attempts To Eliminate Cash, Compare Paper Money To A Gun Defending Freedom.

• Jobless Benefits Claims Soar 100% In Canada's Dying Oil Patch As Construction Jobs Plunge 84%. (graph)

• Gold Glows, Bonds Bid, Crude Crumbles, FANGs Fizzle. (graph)

Business Insider:

• Something terrible seems to be happening to the Chinese job market.

• RAY DALIO: Get ready for 'lower than normal returns with greater than normal risk'.

• Russia and Saudi Arabia's deal to freeze oil production is 'a bunch of bull'.

• Russian arms sale to Iran may violate UN ban.

• Markets are 'losing faith' in the world's central banks.

BuzzFeedNews: 

• In 2002, Donald Trump Said He Supported Invading Iraq. (audio) “Are you for invading Iraq?” Howard Stern asked him, and Trump answered, “Yeah, I guess so.”

Night Trading 

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

• Asia Ex-Japan Investment Grade CDS Index 162.5 +1.0 basis point. 

• Asia Pacific Sovereign CDS Index 78.25 +.75 basis point. 

• Bloomberg Emerging Markets Currency Index 68.43 -.15%. 

• S&P 500 futures -.14%. 

• NASDAQ 100 futures -.16%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (B)/.66

• (COG)/-.04

• (DE)/.70

• (TDS)/-.30

• (VFC)/1.01 

Economic Releases
8:30 am EST

• The CPI MoM for January is estimated to fall -.1% versus a -.1% decline in December.

• The CPI Ex Food and Energy MoM January is estimated to rise +.2% versus a +.1% gain in December.    

• Real Average Weekly Earnings YoY for January. 

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Fed's Mester speaking and the UK retail sales report could also impact trading today.

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