Stocks Slightly Lower into Final Hour on European Debt Angst, Yen Strength, Profit-Taking, Financial/Restaurant Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Higher
  

• Sector Performance: Mixed
  

• Volume: Around Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 14.09 +.14%

• Euro/Yen Carry Return Index 126.60 -.36%

• Emerging Markets Currency Volatility(VXY) 10.95 +.09%

• S&P 500 Implied Correlation 52.71 -4.51%

• ISE Sentiment Index 105.0 +25.0%
  

• Total Put/Call .98 +4.26%

• NYSE Arms .91 +36.38%

Credit Investor Angst:

• North American Investment Grade CDS Index 72.82 -.81%
  

• America Energy Sector High-Yield CDS Index 551.0 -3.23%

• European Financial Sector CDS Index 104.75 -1.76%

• Western Europe Sovereign Debt CDS Index 23.18 -.79%

• Asia Pacific Sovereign Debt CDS Index 41.47 -.38%

• Emerging Market CDS Index 272.82 -.17%
  

• iBoxx Offshore RMB China Corporate High Yield Index 132.95 -.02%

• 2-Year Swap Spread 20.5 +.75 basis point

• TED Spread 47.5 +1.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -61.0 -4.0 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 69.34 +.21%
• 3-Month T-Bill Yield .47% unch.

• Yield Curve 129.0 unch.
  

• China Import Iron Ore Spot $77.79/Metric Tonne -.73%

• Citi US Economic Surprise Index 24.70 +6.5 points

• Citi Eurozone Economic Surprise Index 61.40 +.1 point

• Citi Emerging Markets Economic Surprise Index 1.5 +3.0 points

• 10-Year TIPS Spread 1.95% -5.0 basis points
• 100.0% chance of Fed rate hike at Feb. 1 meeting, 100.0% chance at March 15 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -51 open in Japan 
• China A50 Futures: Indicating +12 open in China

• DAX Futures: Indicating -8 open in Germany

Portfolio: 

• Slightly Higher: On gains in my medical/biotech/tech/retail sector longs

• Disclosed Trades: None

• Market Exposure: 25% Net Long

Morning Market Internals

NYSE Composite Index:

• Volume Running +10.2% Above 100-Day Average
• 7 Sectors Rising, 3 Sectors Declining
• 58.9% of Issues Advancing, 37.7% Declining
• 49 New 52-Week Highs, 50 New Lows
• 53.6% of Issues Above 200-day Moving Average
• Average 14-Day RSI 43.2%
• Vix 14.0 -.6%
• Total Put/Call .94 unch.
• TRIN/Arms .94 +39.3%

Friday Watch

Evening Headlines

Bloomberg: 

• China Seizes Opening in U.S. Backyard After Trump Upends Policy. As Donald Trump weighs plans to tear up trade deals and deport illegal migrants from Latin America, Chinese President Xi Jinping is moving swiftly to reset relations in America’s backyard. Xi returned from a Latin American swing last week having lavished Ecuador with $10 billion in energy and infrastructure deals, and bestowed Ecuador and Chile with China’s highest diplomatic status. He told Peru’s Congress relations were “standing at a new historical starting point.” While attending a summit in Lima with his lame duck U.S. counterpart, Barack Obama, he cast China as the region’s most eager trade advocate. The Chinese leader’s trip highlighted how Trump’s surprise election win was tipping the geopolitical scales even before the Republican takes office with his “America First” platform. Until the vote, China had grappled with how to advance its more than 15-year foray into the traditional U.S. sphere, as its demand for commodities slows and left-wing political allies face setbacks in the region.
• Jakarta on High Alert as Muslim Groups Protest Christian Leader. Hard-line Islamic groups began gathering in the Indonesian capital Friday to call for the detention of Jakarta’s Christian governor, who has been accused of blasphemy. President Joko Widodo put Jakarta on high alert and dispatched 22,000 soldiers and police to keep order, after a similar protest last month turned violent. Foreign embassies including the U.S. warned its citizens of the potential for extremists to use the demonstration as cover to incite violence.
• Dollar Slips With Asian Stocks as New Angst Unseats Trump Trades. The Bloomberg Dollar Spot Index is headed for its first weekly drop since Donald Trump’s election to the presidency fueled bets on increased fiscal stimulus and a subsequent bounce in U.S. growth. A selloff in technology shares flowed through into Asia, driving declines in Japan, Australia and South Korea. The yen extended its rebound against the greenback amid caution ahead of key American jobs data, Italy’s weekend referendum and Austria’s presidential vote, and gold also rallied. Bonds in the region extended their slide as crude oil rose above $51 a barrel following the OPEC deal. Copper futures retreated. Almost twice as many stocks fell as advanced on the MSCI Asia Pacific Index as of 9:51am Tokyo time, with Japan's Topix index slipping .3% and the Kospi index down .6% in South Korea.
• OPEC History Shows Hard Work on Cuts Deal Is Only Just Beginning. (video) OPEC’s work isn’t done yet. Oil traders and investors cheered Wednesday’s landmark deal to curtail oil production. But history shows compliance with past accords to be patchy at best. Even if countries stick to their output caps, those that won exemptions could make the collective target all but unreachable if they boost production. The difficulty of monitoring non-OPEC cuts adds a further layer of uncertainty.
• Chipmakers Tumble Most Since June on Report Apple(AAPL) Cut Orders. Chipmakers dropped the most in five months after a report that Apple Inc. is reducing orders for iPhone 7 parts reignited a post U.S.-election selloff in technology stocks. The Philadelphia Semiconductor Index slumped 4.9 percent as all 30 members fell. The gauge is on pace for its worst week in almost 11 months, having declined 5.9 percent. The S&P 500 Information Technology Sector Index fell 2.3 percent, the most since early September. Apple slipped 1 percent to $109.47 after Digitimes said the company is cutting orders amid fading sales momentum.
• Merck(MRK) CEO Says Drugmaker Is ‘Restrained’ on Price Increases. Merck & Co. keeps a disciplined approach to drug pricing and is “restrained” when it comes to price hikes, Chief Executive Officer Ken Frazier said Thursday in an interview. “I’m not saying we’re perfect,” he said Thursday after speaking on a panel at the Forbes Healthcare Summit in New York. “There will always be an individual drug in an individual year that you can point to and say, ‘That looks large in relation to others.’ But if you look at the whole portfolio, you will see that Merck has tended to be rather restrained when it comes to drug prices.” 

Wall Street Journal:

• Bond Market Slide Intensifies. Rise in yields since July has pushed the 10-year Treasury note up by more than 1 percentage point.
• Gatlinburg Residents Vow to Rebuild After Wildfires Ravage Area. The blazes and smoke forced people in Tennessee to flee for their lives; ‘we lost everything,’ says one resident.
• Democrats Send Their Regrets. Blowing up the filibuster, keeping Pelosi in charge—the list of mistakes is long.

Fox News:

• Trump says he'll nominate retired Marine Gen. Mattis as secretary of defense. (video)

CNBC:

• Starbucks(SBUX) shares fall as CEO Schultz steps down.
• Trump's Carrier speech 'absolutely chilling,' economic analyst says. (video)
• America can double its oil production, says fracking pioneer Harold Hamm. (video)

Zero Hedge:

• Visualizing The "Tectonic Shift" In The Markets' Narrative.
• Fake News: Newsweek Admits They Didn't Write Or Even Read "Madam President" Issue.
• 70% Of Immigrants Admitted Under Obama's "Minor Refugee" Program Are Actually Adults.
• Gundlach Turns Bearish Again: "Stocks Have Peaked, It's Too Late To Buy The Trump Trade".
• Trump Warns US Companies There Will Be "Consequences" For Outsourcing Jobs.
• Mexican Central Bank Head Quits Amid Fears Over "Trump Impact".
• 3 Things: Exuberance, Small Caps, & 6% Realities.
• Yahoo's(YHOO) Advice To Trump: Educate Children In Media Literacy To Combat Fake News.
• Treasury-Bund Spread Widest Since The Fall Of The Berlin Wall.
• Dollar General's(DG) Startling Admission: Half Of U.S. Consumers Are Feeling More "Dire" Than Ever.
• Twitter(TWTR) Threatens Trump Ban Over "Harassment And Hateful Conduct".
• Party's Over? Bonds, Stocks, Dollar Dive As VIX Jumps Most In A Month. (graph)

Business Insider:

• Italy's referendum has the potential to set off a global landslide.
• Steven Mnuchin will not 'drain the swamp' on Wall Street.
• Fox Business Network scores highest-rated month in network history.

Night Trading 

• Asian equity indices are -.75% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 126.0 +1.0 basis point.
• Asia Pacific Sovereign CDS Index 41.75 +.25 basis point.
• Bloomberg Emerging Markets Currency Index 69.23 +.04%. 
• S&P 500 futures -.17%. 
• NASDAQ 100 futures -.21%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (BIG)/-.01
• (GCO)/.93

Economic Releases 
8:30 am EST

• The Change in Non-Farm Payrolls for November is estimated to rise to 180K versus 161K in October.
• The Unemployment Rate for November is estimated at 4.9% versus 4.9% in October.
• Average Hourly Earnings MoM for November are estimated to rise +.2% versus a +.4% gain in October.

9:45 am EST

• The ISM New York for November.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The Fed's Tarullo speaking, Eurozone PPI, (DAL) November Traffic data, (FRED) Investor Day, (AFL) Outlook Call and the (ITW) Investor Day could also impact trading today.

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

Stocks Reversing Lower into Final Hour on Higher Long-Term Rates, European/Emerging Markets/US High-Yield Debt Angst, Technical Selling, Tech/Biotech Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Above Average

• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• Volatility(VIX) 14.24 +6.9%

• Euro/Yen Carry Return Index 126.87 +.24%

• Emerging Markets Currency Volatility(VXY) 10.98 +2.23%

• S&P 500 Implied Correlation 53.01 +6.3%

• ISE Sentiment Index 90.0 +1.12%
  

• Total Put/Call .93 +3.33%

• NYSE Arms .56 -8.69%

Credit Investor Angst:

• North American Investment Grade CDS Index 73.46 +.66%
  

• America Energy Sector High-Yield CDS Index 578.0 +2.80%

• European Financial Sector CDS Index 106.63 -.81%

• Western Europe Sovereign Debt CDS Index 23.37 -.47%

• Asia Pacific Sovereign Debt CDS Index 41.76 +.80%

• Emerging Market CDS Index 272.77 +2.69%
  

• iBoxx Offshore RMB China Corporate High Yield Index 132.98 unch.

• 2-Year Swap Spread 19.75 -1.0 basis point

• TED Spread 45.75 +1.0 basis point

• 3-Month EUR/USD Cross-Currency Basis Swap -57.0 +2.0 basis points
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 69.19 -.22%
• 3-Month T-Bill Yield .47% -1.0 basis point

• Yield Curve 129.0 +4.0 basis points
  

• China Import Iron Ore Spot $78.36/Metric Tonne +8.71%

• Citi US Economic Surprise Index 18.20 +.4 point

• Citi Eurozone Economic Surprise Index 61.30 +2.4 points

• Citi Emerging Markets Economic Surprise Index -1.5 +2.9 points

• 10-Year TIPS Spread 2.0% +3.0 basis points
• 100.0% chance of Fed rate hike at Feb. 1 meeting, 100.0% chance at March 15 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -73 open in Japan 
• China A50 Futures: Indicating +30 open in China

• DAX Futures: Indicating -42 open in Germany

Portfolio: 

• Slightly Lower: On losses in my medical/biotech/tech/retail sector longs

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges and to my (EEM) short

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• China's Central Bank Is Facing a Major New Headache. People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month. That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1 percent of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion -- more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.
• China's Spending Spree Is Making the World Nervous. (video)
• Rogoff: China Risks Crisis Without Currency Flexibility. (video)
• Hollande Takes Himself Out of France’s 2017 Presidential Race. French President Francois Hollande said he won’t run for re-election, stunning the nation and opening the way for his more popular prime minister to enter the 2017 presidential race. Hollande made the announcement in a televised address on Thursday evening, saying that his lack of support opened the country to the risk of extremist movements. He becomes the first president since the Fifth Republic began in 1958 not to seek re-election.
• Treasuries Drop Before Jobs Data as Oil Gains; Tech Shares Sink. (video) Financial markets started the month with continued confidence in economic growth, with Treasuries extending losses, the dollar sitting near a decade high and cyclical shares accelerating gains against safety stocks. Declines in Treasuries extended the biggest increase in 10-year yields since 2009 before a payrolls report on Friday. Energy shares rallied globally for a second day as oil topped $50 a barrel. Rising rates boosted financial shares while hurting dividend stocks. Technology shares fell as the only group that’s left out of the rotation to economic-sensitive stocks. The Nasdaq Composite Index sank 1.1 percent, poised for the biggest two-day slide since September. The S&P 500 500 lost 0.2 percent, hovering near an all-time high.

Fox News:

• Many Muslim-Americans suggest Trump presidency could help anti-terror fight.

CNBC:

• Lower corporate rates can drive US economic growth, tax reform advocate says. (video)
• Trader Talk: Caterpillar fires a warning shot to the bulls. (video)
• Why small caps could see big gain in the Trump tax plan.
• S&P: Trump tax cuts could produce 'eye-popping' market gains.

Zero Hedge:

• More Bad News For Jill Stein As Pennsylvania Judge Blocks Recount Petitions.
• "The World Has Changed" - Average S&P Target Before Trump: 2,087; After Trump: 2,425.
• Nasdaq Tumbles Into Red Post-Trump As Bond Market Crashes. (graph)
• Taper Tantrum 2.0: German Bunds Tumble On Report ECB Is Preparing To Taper Bond Purchases. (graph)
• Protests Slam India's Economy As "The Concept Of Money Dies".
• China Losing Control? PBOC Imposes New Yuan Outflow Limits For First Time In Two Decades.
• CAT Halted After 15% Post-Trump Spike: Warns Estimates "Too Optimistic", Announces Cost Cuts, Layoffs.
• Less Than 1 In 3 Trust Mainstream Media, Martin Armstrong Warns "Their End Is Near".
• US Manufacturing Surges To 20-Month Highs Despite Employment, Export Orders Drop. (graph)
• Turkish Lira Crashes To All Time Lows, Biggest Drop Since Failed Coup Attempt. (graph)
• The Details Behind Trump's Deal With Carrier Revealed.
• "Shell-Shocked" Democrat Donors Concerned At Rudderless DNC: "I May Well Be Done With Political Giving Entirely".
• Initial Jobless Claims Soar Most In 2 Years Following Trump Election. (graph)
• The Bond Bloodbath Is Back: US, Chinese Yields Soaring. (graph)
• OPEC Deal Sends Crude Curve Into Backwardation For First Time Since 2014. (graph)
• US Manufacturing Surges To 20-Month Highs Despite Employment, Export Orders Drop. (graph)