Stocks Falling Substantially into Final Hour on China Bubble-Bursting Fears, Surging European/Emerging Markets/US High-Yield Debt Angst, Oil Decline, Commodity/Homebuilding Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Above Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 25.15 +22.29%

• Euro/Yen Carry Return Index 134.19 +.54%

• Emerging Markets Currency Volatility(VXY) 11.67 +3.18%

• S&P 500 Implied Correlation 61.26 +1.96%

• ISE Sentiment Index 60.0 -17.81%

• Total Put/Call 1.33 +31.68%

• NYSE Arms 1.13 -41.52% 

Credit Investor Angst:

• North American Investment Grade CDS Index 95.44 +2.75%

• America Energy Sector High-Yield CDS Index 1,597.0 +2.43%

• European Financial Sector CDS Index 79.26 +1.45%

• Western Europe Sovereign Debt CDS Index 17.30 +5.49%

• Asia Pacific Sovereign Debt CDS Index 78.05 +3.45%

• Emerging Market CDS Index 368.10 +2.06%
  

• iBoxx Offshore RMB China Corporate High Yield Index 123.73 -.14%

• 2-Year Swap Spread 9.5 -.75 basis point

• TED Spread 41.75 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -20.0 +.75 basis point

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 68.08 -.01%

• 3-Month T-Bill Yield .20% unch.

• Yield Curve 120.0 +1.0 basis point

• China Import Iron Ore Spot $42.65/Metric Tonne -.61%

• Citi US Economic Surprise Index -29.8 -.5 point

• Citi Eurozone Economic Surprise Index 28.9 +11.6 points

• Citi Emerging Markets Economic Surprise Index 2.40 -3.5 points

• 10-Year TIPS Spread 1.52% -4.0 basis points

• 35.0% chance of Fed rate hike at March 16 meeting, 42.2% chance at April 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -182 open in Japan 

• China A50 Futures: Indicating -178 open in China

• DAX Futures: Indicating -117 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging markets shorts

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg:

• China's 29 Minutes of Chaos: Stunned Brokers and a Race to Sell. (video) Even by the rough-and-tumble standards of China’s stock market, it was a chaotic 29 minutes. With share prices going into free fall almost as soon as local exchanges opened, market gurus at Huaxi Securities Co. were at a loss to explain why. One manager of $46 million in Shanghai liquidated all his holdings. Other investors, including a top-performing hedge fund, tried in vain to cash out as circuit breakers brought trading to an abrupt halt. By 9:59 a.m. local time it was all over -- except that it wasn’t. Next came a torrent of calls from angry clients upset by the carnage in a week that’s seen two abbreviated trading sessions and a 12 percent tumble in the benchmark CSI 300 Index. And it’s only January 7th. "We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit breaker," said Wei Wei, an analyst at Huaxi Securities in Shanghai. "We are also feeling at a loss and confused today as we didn’t quite figure out what was going on in the market."

• China renews curb on investors’ stock sales to ease panic. Chinese regulators have renewed restrictions on the amount of stock major corporate shareholders can sell as authorities move to allay panic among equity investors. Starting Jan 9, major investors are permitted to sell no more than 1% of a company’s shares on the open market in three months, the China Securities Regulatory Commission said in a statement on Thursday. The rule doesn’t apply to transactions such as block trades and transfer agreements, and replaces an existing six-month ban on any secondary market sales that was due to expire Friday, it said.

• Is China Relying on Too Much Debt for Growth? (video)

• China's Defense of the Yuan Is Growing More Costly: Chart. (video) China is burning through cash as it battles to support the yuan. The nation’s foreign currency reserves tumbled by a record $108 billion in December as the central bank sold dollars to stem a slide in the currency. That was about four times greater than analysts predicted in a Bloomberg survey, and reduced the stockpile to the lowest level in three years. Despite the intervention, the yuan’s descent has steepened, with the currency falling to a five-year low on Thursday.

• China Reserves Post First Yearly Drop Since 1992 Amid Yuan Slide. China’s foreign reserves shrank last year for the first time since 1992, ending a 22-year ascent that began under former top leader Deng Xiaoping and accelerated with presidents Jiang Zemin and Hu Jintao. The currency hoard plunged by $513 billion in 2015 to $3.33 trillion as of Dec. 31, the People’s Bank of China said Thursday. It was dragged down down by factors including central bank intervention to prop up the yuan after an August devaluation roiled global markets and capital flight from the world’s second-largest economy, analysts said.

• If Options Traders Are Right, the Yuan's Slump Is Far From Over. The options market is signaling that the yuan’s slide to a five-year low has plenty of room to run. Contract prices on Wednesday indicated a 79 percent probability that the currency will weaken and 33 percent odds that it will drop beyond 7 per dollar, a rate last seen in 2008, according to Bloomberg calculations. That’s up from 15 percent at the start of December and comes as the central bank shows signs of reining in its support for the exchange rate in the face of rising intervention costs and sliding exports. The yuan dropped 0.6 percent in onshore trading at 4:07 p.m. local time after the central bank cut its reference rate.

• Hedge Funds in China Facing Forced Sales as Panic Spreads. Hedge funds in China are facing forced sales of stock holdings as the market plunge triggers a mandatory liquidation of assets. The manager of a Chinese hedge fund that returned a surprising 86 percent during last year’s stock rout, Xinhong Investment, plans to sell all its stock holdings on Friday, Chairman Lu Weidong said in an interview. Hedge funds in China generally have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value, and as many as 30 percent of Chinese hedge funds may have reached those levels or are approaching them, Lu said. “The selling pressure is huge,” Lu, whose firm oversees less than $3 million in assets, said on Thursday from his base in Dongguan in southern China. “They absolutely want to run.”

• VW, BMW Shares Tumble as China's Woes Put Growth Under Threat. Shares in Volkswagen AG, BMW AG and Daimler AG tumbled as China’s woes put growth plans at risk. The German carmakers were among the biggest losers in the European market, leading the Euro Stoxx autos and parts index to its lowest level since October 2015. Volkswagen, already reeling from the emissions-cheating scandal, fell 4.9 percent. BMW shares dropped 5 percent, and Daimler, the parent of Mercedes-Benz, slid 4.8 percent. “The massive devaluation of the Chinese currency is currently seen as the single biggest threat to the global economy and the reason for panic selling,” Arndt Ellinghorst, a London-based analyst with Evercore ISI, said in a report. He estimates that a 20 percent drop in the yuan’s value will equate to a loss of about 5.5 billion euros ($6 billion) in the combined profit of the German automakers.

• ADXY Below 1998 Trendline Points to More Downside Risk: Analysis. (video) It's not just the yuan. 

• Brazil Industry Drop Signals Recession Deepened at Year-End. Brazil’s industrial production fell more than all analyst forecasts in November, underscoring the challenge that policy makers face in pulling Latin America’s largest economy out of its worst slump in decades. Output in November decreased 2.4 percent from the previous month after a revised 0.6 percent decline in October, the national statistics agency said Thursday. The biggest slip since December 2013 was more than twice than the median 1 percent drop in a Bloomberg survey of analysts. From a year earlier, industrial production fell 12.4 percent, and hasn’t registered year-on-year growth since the first half of 2014. “This adds to evidence that the recession deepened in the fourth quarter,” said Edward Glossop, emerging market economist at Capital Economics.

• George Soros Sees Crisis in Global Markets That Echoes 2008. (video) Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday. China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008. Global currency, stock and commodity markets are under fire in the first week of the new year, with a sinking yuan adding to concern about the strength of China’s economy as it shifts away from investment and manufacturing toward consumption and services. Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday as a plunge in Chinese equities halted trade for the rest of the day. “China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

• Brazil Real Drops as Commodities, China Turmoil Spark Selloff. The real dropped as China weakened the yuan reference rate for an eighth straight day, fueling concern that the slowdown in Brazil’s top export market is deeper than official data suggest and dimming prospects for trade. The move spurred a selloff in Chinese equities and forced a trading halt for the second time this week. China is the biggest buyer of the commodities many developing nations rely on to fuel growth, and Brazil is its second-largest supplier of goods from developing nations. The S&P GSCI Index of raw materials declined 0.2 percent to an 11-year low. The real dropped 0.5 percent to 4.0484 per dollar at 2:51 p.m. in Sao Paulo.

• Junk-Bond Risk Gauge Jumps as China Meltdown Adds to Energy Rout. Junk-bond investors coming off their first losing year since 2008 are in the crosshairs again, as a stock-market meltdown in China and a plunge in oil prices cloud the outlook for debt sold by the least credit-worthy companies. The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, surged as much as 21 basis points to 516 basis points, rising toward the highest mark in three years. The average borrowing costs for the riskiest portion of the high-yield market surged to 18.5 percent, Bank of America Merrill Lynch index data show, a level not seen since 2009.

• Emerging Stocks Slump as China Turmoil Prompts Broad Selloff. Emerging-marketstocks sank to the lowest since 2009 as China’s move to further weaken the yuan’s reference rate sparked a selloff in mainland stocks that spread throughout developing nations. The CSI 300 Index of companies listed in Shanghai and Shenzhen plunged more than 7 percent before exchanges were halted by circuit breakers in the first half-hour of trading. South Africa’s rand weakened to a record low against the dollar. The Ibovespa tumbled for a second day as a plunge in Brazilian industrial production added to concern that demand for the nation’s exports will weaken further as China’s economy slows. The MSCI Emerging Markets Index fell 2.5 percent to 740.12 at 11:22 a.m. in New York. Its 14-day relative-strength index fell to 22.9, below the level of 30 that some analysts see as a signal a market is set to rebound. The developing stock measure has tumbled 6.7 percent this week, compared with a 4.5 percent drop in the MSCI World Index.

• European Stocks Pummeled on China Woes as DAX Falls Below 10,000. (video) European stocks fell for the third time in four days, mirroring declines that shook global equities in August, as they extended the worst start to a year since 2000 amid a China-fueled selloff in mining and energy shares. Europe’s equities have tumbled 5.3 percent in the first four days of the year, and companies with the most sales in the world’s second-biggest economy are bearing the brunt. Anglo American Plc and Glencore Plc slid 8.3 percent or more today, pushing a gauge of miners to its lowest level since 2009. Carmakers fell to to the lowest since October. Stocks around the world are in retreat as an eighth day of cuts in the yuan’s reference rate exacerbated concern that growth in China is slowing more than previously forecast. The declines are a setback for European equity bulls who had speculated that central-bank stimulus and a slowly improving economy would insulate the region from stress in Asia and North America. “The Chinese economic outlook is getting bleaker,” said Daniel Weston, chief investment officer of Aimed Capital in Munich. “Chinese demand for European exports is weakening. In August, the Chinese said it would be a ‘one off’ devaluation, but now the market knows it is much more than that.” The Stoxx Europe 600 Index fell 2.2 percent at the close of trading. It pared losses of as much as 3.6 percent.

• Crude Oil Is Having Its Worst-Ever Start to the Year: Chart. (video)

• Oil Falls to Lowest Since 2003 as Yuan Drop Shows China Turmoil. Oil plunged to a 12-year low in New York on speculation slower economic growth in China will curb fuel demand, worsening a worldwide oversupply. West Texas Intermediate oil for February delivery fell as much as $1.87, or 5.5 percent, to $32.10 a barrel, the lowest in intraday trade since December 2003. China’s central bank reduced the onshore yuan’s fixing to the lowest since March 2011, triggering a selloff that led to the closure of Chinese stock exchanges.

• Deepening Metals Rout Sends Copper Below $2 for First Time Since '09. Copper futures fell below $2 a pound for the first time in more than six years as a slump across industrial metals deepened on concern that China’s economic slowdown is worsening. The retreat in prices helped send a gauge of world mining companies to the lowest since 2004 on Thursday. The Bloomberg Industrial Metals Subindex tumbled 27 percent in 2015, the worst loss since the global recession of 2008. Weak Chinese economic reports this week triggered turmoil across global markets and billionaire George Soros warned of a crisis.

• Anglo Leads Mining Collapse as China Woes Driving Vicious Spiral. Anglo American Plc led a slump in mining stocks to the lowest in more than a decade as market turmoil in China, the biggest consumer of metals, ignites a vicious spiral of tumbling equities and collapsing commodity prices around the world. The 80-member Bloomberg World Mining Index sank as much as 4.1 percent on Thursday, with Anglo sliding 12 percent at one point to a record low and Glencore Plc down as much as 7.9 percent in London trading. The Bloomberg Commodity Index, a gauge of returns on raw materials, dropped to its lowest level since 1999 as industrial metals and oil declined.

• Fed's Lacker Urges Higher Rates as Inflation Heads Back to Goal. Federal Reserve Bank of Richmond President Jeffrey Lacker expressed confidence that inflation will return to the central bank’s target after oil prices and the U.S. dollar stabilize and called for a continued tightening in monetary policy. “While there is uncertainty about the pace at which monetary policy rates will rise, the case for an upward adjustment in rates should be clear,” Lacker said in the text of a speech Thursday in Raleigh, North Carolina.

• Charts to Make You Go: 'ARGGHHHH'. (graph) A painful paradigm shift. Matt King has a smorgasbord of ugly charts to share. In an aptly-timed note, the Citigroup strategist suggests markets are "dangerously close to a paradigm shift" that would entail the end of  liquidity-fueled markets and a "return to fundamentals." The only problem is "those fundamentals are themselves following markets." Scared yet? Here's a quick sampling.

• The 'Average' Stock Is Already in a Bear Market. (video) For most companies, the bear market is already a reality.

Bear Radar

Style Underperformer: 

• Small-Cap Growth -3.0%

Sector Underperformers: 

• 1) Gaming -8.8% 2) Oil Tankers -8.2% 3) Alt Energy -5.7%

Stocks Falling on Unusual Volume:

• EPZM, NHTC, SAGE, OTIC, FINL, KBH, MGRC, CFMS, IFN, VTTI, HLT, ACAD, GBX, NAP, RUSHA, IHG, NXST, RECN, KWEB, IPGP, FIT, CEMP, PAYX, SRE, ADAP, APD, EXPD, BRO, NFLX, DNKN, ADP, SWHC, IPGP, AN, HTLD, MET, EWBC, TOL, SAH, XLRN, GWR, GMED, NUE, LVS, RLYP, CEMP, GBX and RVNC

Stocks With Unusual Put Option Activity: 

• 1) XLB 2) SMH 3) EFA 4) XBI 5) XLK

Stocks With Most Negative News Mentions: 

• 1) SWFT 2) HPQ 3) EXPD 4) CMG 5) FIT

Charts:

• ETFs Falling on Unusual Volume 
• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Mid-Cap Value -2.2%

Sector Outperformers: 

• 1) Gold & Silver +3.2% 2) Utilities -.7% 3) Retail -1.0%

Stocks Rising on Unusual Volume: 

• DVAX, QURE, ZUMZ and CSAL

Stocks With Unusual Call Option Activity: 

• 1) MAS 2) DVAX 3) HL 4) AVP 5) BAX

Stocks With Most Positive News Mentions: 

• 1) ZUMZ 2) CCMP 3) LB 4) PLCE 5) SIG

Charts: 

• ETFs Rising on Unusual Volume 
• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running +26.3% Above 100-Day Average
• 0 Sectors Rising, 10 Sectors Declining
• 19.4% of Issues Advancing, 78.7% Declining
• 16 New 52-Week Highs, 411 New Lows
• 25.0% of Issues Above 200-day Moving Average
• Average 14-Day RSI 35.1%
• Vix 22.6 +9.8%
• Total Put/Call 1.35 +33.66%
• TRIN/Arms .98 -49.39%

Thursday Watch

Evening Headlines

Bloomberg:  

• 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.

• Why Are Global Markets So Transfixed by the Yuan? (video)

• 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: Chart. Australia 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 Aversion. South 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.

MarketWatch.com:

• 3 big reasons oil’s caught in a death spiral.

CNBC:

• Why oil will keep breaking down. (video)

• 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:

• Here We Go Again: China Halts Trading For The Entire Day After Another 7% Crash. (graph)

• Options Traders See Yuan Collapse Continuing In "Dangerous Situation For Policy-Makers". (graph)

• Cologne Mayor Slammed For Telling German Women It Is Their Responsibility To Keep Rapists At "Arm's Length".

• Gallup Explains Trump: "A Staggering 75% Of Americans Believe In Widespread Government Corruption".

• Spot The Most Manipulated Market In The World. (graph)

• Sell In 1973, And Go Away. (graph)

• "We The People Are Pissed": New Poll Finds Whites And Republicans Are Angriest Americans.

• Trader Psychology Is Reversing, Scotiabank Warns Market Is "Ripe For Volatility Spikes".

• Will Weak Closes Drag Markets Down? (graph)

• Stocks Plunge To 3-Month Lows Amid Crude Carnage, Chinese Currency Collapse. (graph)

Business Insider:

• This could be the next CEO of Morgan Stanley(MS).

• Yahoo(YHOO) is prepping to lay off 10% or more of its workforce.

• The Benghazi investigation has now taken longer than the 9/11 investigation.

• A North Korean hydrogen bomb test would be a game-changer.

• This device lets you watch broadcast TV shows with the convenience of Netflix — and without having to pay for cable.

• Apple(AAPL) execs made a boatload of money last year — and Tim Cook wasn't the highest paid.

• World Bank warns on contagion risk.

• 3 industries that might die in 2016.

• TransCanada is suing the US over the rejection of Keystone XL.

• 2015 was brutal for oil stocks, and one industry guru thinks 2016 might be even worse.

• A critical Afghan town, once secure, is now a Taliban hotbed again.

• There's bad, there's worse, and then there's this China chart.

Reuters:

• 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.

• Yen surges on heightened risk aversion, Aussie hit hard.

• 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.

Telegraph:

• Emerging economies can no longer power global growth, warns World Bank. An unprecedented 'synchronised slowdown' in emerging markets could yet jeopardise the world's prospects over the coming years.   

• Chinese companies warned to tell investors when executives go missing. The finance minister's comments come after dozens of business leaders have been unreachable in recent months.  

• This investor called the financial crisis - and is predicting market falls again. Martin Gray, one of a handful of fund managers who made money during the financial crisis, is concerned global equity stock markets are ripe for a fall.  

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%.

Morning Preview Links 

Earnings of Note 

Company/Estimate

• (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.