Tuesday Watch

Evening Headlines

Bloomberg:

• BofA's Woo: U.S. and China on a Collision Course. (video)
• Asian Stocks Drop With Dollar Amid Fed Countdown as Bonds Rally. Japanese indexes fell from their highest levels this year, and equity futures in Hong Kong and China tipped further losses after the worst day for mainland stocks since June distracted from Monday’s global rally. Sovereign debt from Australia to the U.S. snapped declines as oil failed to build on gains spurred by OPEC’s deal at the weekend with rivals to curb production. The yen held its advance versus the dollar as the Korean won and Thai baht led gains in Asia. About 80 more stocks fell as rose on the dollar-denominated MSCI Asia Pacific Index as of 10:03 a.m. Tokyo time, with Japan's Topix index declining at least .2% with the Nikkei 225 Stock Average. FTSE China A50 Index futures lost .3% following Monday's 2.5% slide in the Shanghai Composite Index.
  
• Bill Gates Pushes Green Energy on Call With Trump, While Building $1 Billion Fund. Microsoft co-founder, while hopeful, fears for federal support of renewable projects under new US president.
• Quest Diagnostics Says 34,000 Customer Accounts Hacked. Medical laboratory operator Quest Diagnostics Inc. says a hack of an internet application on its network has exposed the personal health information of about 34,000 people. The Madison, New Jersey-based company says "an unauthorized third party" on Nov. 26 gained access to customer information including names, dates of birth, lab results and in some instances, telephone numbers. The stolen data did not include Social Security numbers, credit card accounts, insurance details or any other financial information.

Wall Street Journal:

• McConnell Backs Intelligence Committee Probe of Russian Hacking in Elections. McConnell says election cyberattacks must be investigated in nonpartisan manner.
• Trump’s Punitive Power Over Companies Appears Hedged. President-elect could impose tariffs on a specific firm’s goods, but would likely face legal challenges if he did so.

Fox News:

• Intel committee chairman: Report on Russia meddling conflicts with DNI testimony. (video)

Zero Hedge:

• Iran Warns Of "World War, The Destruction Of Israel", If Trump Tears Up Nuclear Pact.
• US Budget Deficit Doubles As November Spending Hits All Time Monthly High.
• Two New Jersey Traders Arrested For Manipulating $10 Billion Worth Of Stocks, Making $26 Million In Profit.
• Boeing(BA) Stock Jumps To New Record Highs After Cutting 777 Production, But Raising Dividend, Buybacks.
• World's "Most Bearish Hedge Fund" Suffers Worst Month In History, Refuses To Capitulate.
• The Big 3 Broken Trendlines. (graph)
• The Dow Is The Most Overbought In Over 20 Years (And Options Traders Have Never Been More Bullish). (graph)
• Trump's Wisconsin Victory Confirmed - Gained Net 162 Votes In Statewide Recount.
• Beware "Extreme Volatility" Ahead Of Quad-Witching Friday: BMO.
• Hillary Begs For Benghazi Lawsuit Dismissal While Plaintiffs Blast "Special Favors" For "Political Elite".
• "Extremely Greedy" Traders 'Shocked' As Stocks Stumble Most Since Election, Dollar Dumps. (graph)

Business Insider:

• Here's what Point72 President Doug Haynes looks for when hiring young people.
• Bank insiders are selling stock like there's no tomorrow.
• Goldman Sachs'(GS) No. 2 exec will get a big payout now that he's joining Trump's administration.

Telegraph:

• China powerless against Trump's economic threats but can beat war drums.

Economic Information Daily:

• China Should Closely Watch Rising Local Fiscal Risks. China should be vigilant about rising fiscal risks at local governments in non-eastern regions, citing a report by MOF's fiscal science institute as saying. 32.6% of cities and counties in northeaster regions reported negative or no growth in fiscal revenue in first 3 quarters, according to the report.

Night Trading 

• Asian equity indices are -.25% to unch. on average.
• Asia Ex-Japan Investment Grade CDS Index 119.5 +1.5 basis points.
• Asia Pacific Sovereign CDS Index 36.25 +.25 basis point.
• Bloomberg Emerging Markets Currency Index 70.31 -.02%. 
• S&P 500 futures +.04%. 
• NASDAQ 100 futures +.07%.

Morning Preview Links

Earnings of Note
Company/Estimate 

• (ABM)/.50

Economic Releases
6:00 am EST

• The NFIB Small Business Optimism Index for November is estimated to rise to 96.5 versus 94.9 in October.  

8:30 am EST

• The Import Price Index MoM for November is estimated to fall -.4% versus a +.5% gain in October.

Upcoming Splits 

• None of note

Other Potential Market Movers

• The German ZEW Index, Japan Industrial Production report, $12B 30Y T-Bond auction, IEA Release, US weekly retail sales reports, (JBLU) investor day, (BG) investor day, (SYNA) analyst meeting, (CNX) investor day, (TEX) analyst meeting and the (WY) investor meeting 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 China Bubble-Bursting Fears, Yen Strength, Technical Selling, Defense.Transport Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Most Sectors Declining
  

• Volume: Slightly Above Average

• Market Leading Stocks: Underperforming
  

Equity Investor Angst:

• Volatility(VIX) 12.69 +8.0%

• Euro/Yen Carry Return Index 127.80 +.53%

• Emerging Markets Currency Volatility(VXY) 11.40 +1.97%

• S&P 500 Implied Correlation 49.88 -2.92%

• ISE Sentiment Index 74.0 -14.94%
  

• Total Put/Call .80 -1.23%

• NYSE Arms .78 +2.35%

Credit Investor Angst:

• North American Investment Grade CDS Index 67.94 +.62%
  

• America Energy Sector High-Yield CDS Index 485.0 +4.93%

• European Financial Sector CDS Index 94.25 -4.22%

• Western Europe Sovereign Debt CDS Index 22.69 -5.20%

• Asia Pacific Sovereign Debt CDS Index 36.27 +.93%

• Emerging Market CDS Index 244.65 -2.30%
  

• iBoxx Offshore RMB China Corporate High Yield Index 133.12 +.07%

• 2-Year Swap Spread 22.75 -.25 basis point

• TED Spread 44.0 +1.5 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -54.75 -.25 basis point
  

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 70.32 +.69%
• 3-Month T-Bill Yield .51% -2.0 basis points

• Yield Curve 133.0 -1.0 basis point
  

• China Import Iron Ore Spot $83.58/Metric Tonne +2.35%

• Citi US Economic Surprise Index 29.70 -.5 point

• Citi Eurozone Economic Surprise Index 60.10 -2.5 basis points

• Citi Emerging Markets Economic Surprise Index 2.0 -2.0 points

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

Overseas Futures:

• Nikkei 225 Futures: Indicating -35 open in Japan 
• China A50 Futures: Indicating -15 open in China

• DAX Futures: Indicating -25 open in Germany

Portfolio: 

• Slightly Higher: On gains in my medical sector longs, index hedges and emerging market shorts

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

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• China Warns Trump Against Using Taiwan for Leverage on Trade. (video) China warned Donald Trump against using the One-China policy regarding Taiwan as a bargaining chip in trade talks, a swift response that indicates Beijing is losing patience with the U.S. president-elect as he breaks with decades of diplomatic protocol. “Adherence to the One-China policy is the political bedrock for the development of the China-U.S. relationship,” Foreign Ministry spokesman Geng Shuang told reporters in Beijing at a regular briefing on Monday. “If it is compromised or disrupted, the sound and steady growth of the China-U.S. relationship as well as bilateral cooperation in major fields would be out of the question.”
• China’s Red Line Has Asia Braced for Lose-Lose Battle With Trump. (video) U.S. President-elect Donald Trump’s willingness to test China’s red line on Taiwan has the region braced for a lose-lose scenario where the world’s two economic superpowers take tit-for-tat swipes at each other. Initial hopes in Beijing that China would strike a grand bargain with the businessman-turned-politician are fading fast. His weekend remarks that the decades-old One-China policy could hinge on trade negotiations touches one of Beijing’s rawest nerves and threatens a “core interest” that China has long said it’ll defend at any cost.
• EU Calls for Brexit Talks ‘Swiftly’ After Article 50, Draft Says. The European Union will set out for the first time on Dec. 15 how it will conduct its Brexit negotiations with the U.K. as preparations intensify before Prime Minister Theresa May officially fires the starting gun. EU governments will be asked to “proceed swiftly” in authorizing the opening of the negotiations once May triggers Article 50 of the Lisbon Treaty to formally start the withdrawal, according to a draft of the EU statement read out to Bloomberg.
• China Stocks Sink Most in Six Months as Property Concerns Build. (video) Chinese stocks slumped the most in six months on worsening concern about the outlook for the property market and as curbs on insurers’ equity investments spurred selling. The Shanghai Composite Index fell 2.5 percent to 3,152.97 at the close, its biggest loss since June 13. A measure of property companies tumbled 3.5 percent after China Vanke Co.’s president predicted home sales will drop “significantly” in the coming year. Gree Electric Appliances Inc. sank 6.1 percent. Foresea Life Insurance Co. said it won’t increase its holdings in Gree and will gradually sell the shares, while the insurance regulator suspended Evergrande Life’s entrusted stock investment. The nation’s top securities official has slammed leveraged stock buyers as “robbers” as officials move to rein in financial risks associated with a surge in dealmaking. Since 2014, Chinese insurers have stepped up acquisitions as their premium income has expanded. The opening up of Shenzhen’s stock market has failed to stimulate much demand from foreign investors, with a daily quota yet to be filled and the city’s key measure tumbling. The Shenzhen Composite Index dropped 4.9 percent, while the ChiNext gauge of small-cap shares in the city sank 5.5 percent.
• Real Estate Firms Drag Europe Stocks Down While Oil Shares Rise. (video) The Stoxx Europe 600 Index fell 0.5 percent, following the biggest weekly rally in almost two years. Oil and gas companies surged to their highest prices since July 2015 after Saudi Arabia signaled it’s ready to cut production more than earlier agreed, sending crude prices soaring. Last week’s jump in equities helped push more prices into a technical level that analysts consider overbought, a pullback from which could trigger declines.
• Goldman Says Saudis Wrong to Rule Out U.S. Shale Oil Rebound. (video) Saudi Arabia is wrong to think that U.S. shale production won’t respond to higher oil prices in 2017, according to Goldman Sachs Group Inc. While crude may rise to over $60 a barrel if OPEC members and other nations cut production as promised, a rebound in U.S. shale output would bring prices back to $55, the bank’s forecast for the first half of next year, it said in a report. Saudi Energy Minister Khalid al-Falih said on Saturday he didn’t expect a big supply response from American shale producers in 2017. 
• Watch Out OPEC, the Americans Are Coming. U.S. production will limit how far oil prices can climb.
• Morgan Stanley Has Four Reasons Why It's Different This Time for the U.S. Dollar. Wall Street's betting on dollar strength - again. (video)
• Hedging Is an Afterthought for Traders With S&P 500 Near Record. Fresh off three straight record closes and with call volume at all-time highs, options traders are adding to bullish bets on the S&P 500 Index. They’re paying the least since July 2014 to protect against a decline in the SPDR S&P 500 ETF Trust before Wednesday’s Federal Reserve rate decision.
• For Stocks, Hard Part of This Tightening Cycle Comes Next Year. (video)
• Yellen Outlook Blurred by Trump Fiscal Plans: Decision-Day Guide. (video)
• McConnell, Ryan Back CIA After Trump’s Attacks on Hacking Probe. (video) The two top Republicans in Congress offered strong support for the intelligence community Monday, in sharp contrast to President-elect Donald Trump’s attack on the CIA after reports the agency found that the Russian government tried to help him win the presidency.
• JPMorgan(JPM) Traders Back Risky Property Deals as Bank Shows Caution. Real estate developers who can’t get funding from JPMorgan Chase & Co.’s commercial bank may have another option: a JPMorgan trading desk. A group of traders in JPMorgan’s investment bank has expanded from selling commercial mortgage-backed securities to underwriting loans that are unsuitable for bonds, such as those for big construction projects, according to people with knowledge of the matter. In recent months, the desk has helped fund developments including Manhattan condominiums, a Times Square hotel and New Jersey’s troubled American Dream mega-mall. The biggest U.S. bank by assets is making the deals as traditional lenders pull back from construction loans, which carry bigger risks and juicier yields than mortgages for occupied buildings. Traders in JPMorgan’s investment bank are harnessing demand from investors and developers to take part in potentially lucrative projects, even as the company’s commercial bank -- which holds most of its real estate debt -- signals caution about riskier property financing after a six-year surge in prices.

Wall Street Journal:

• Listen Closely: Donald Trump Proposes Big Mideast Strategy Shift. He signals a break from Obama and Bush: ‘We will stop looking to topple regimes and overthrow governments’.
• Syria Expands Control to Most of Aleppo. Syrian military says it has gained control of 98% of the formerly rebel-held eastern area of the city.

Fox News:

• F-35 program 'cost is out of control,' Trump says. (video)

CNBC:

• Drug company Alexion's(ALXN) shares plunge after CEO, CFO exit. The chief executive and chief financial officers of rare-disease drugmaker Alexion Pharmaceuticals were replaced Monday after losing confidence of the board of directors, according to a person familiar with the matter. The stock sank more than 15 percent.
• The seven stumbling blocks that could trip up the stock market.
• Fiorina, reportedly considered for national intelligence director, calls China 'most important adversary'. (video)

Zero Hedge:

• Clinton Campaign Calls For Intel Briefing Ahead Of Electoral College Vote.
• Money Managers Have Never Been More Sure That Interest Rates Will Continue To Rise. (graph)
• Amazon's(AMZN) Bezos Will Attend Trump's Tech Roundtable; Elon Musk No Longer "Too Busy", Will Also Attend.
• New York Times Slams "Liberal Bubble" Safe Spaces Across America's College Campuses.
• Kremlin Praises Trump's Pick Of Exxon CEO Tillerson As Secretary of State.
• Exposing The "Mystery" Of Last Week's "Massive" E-Mini Trade.
• The Climate Changes Back – What Comes Next? (graph)
• Lockheed(LMT) Responds To Trump Tweet.
• Why The Mainstream Media Is Freaking Out.
• Goldman President Gary Cohn Accepts NEC Director Role.
• China Flies Nuclear Bomber Above South China Sea In Response To "Ignorant Child" Trump.
• Eurozone Day Of Reckoning Coming Soon: Showdown Between Italy And Germany Looms.
• Lockheed Martin(LMT) Tumbles After Trump Tweets On "Out Of Control" F-35 Costs.

Reuters:

• Exclusive: Bank of Japan likely to upgrade economic view next week - sources.
• Iraq to abide by OPEC cut, expects output growth in future.
• China launches WTO complaint against U.S., EU over dumping rules. 

Nikkei:

• Micron's(MU) Durcan Warns China Could Cause Memory Chip Glut. Micron CEO Mark Durcan says China's plan to develop its own semiconductor industry could create oversupply in memory chips, citing his comments to reporters in Taipei.