Tuesday Watch

Weekend Headlines 
Bloomberg:

• Ukraine Says Russians Cross Border as Airport Battle Rages. Two battalions of Russian soldiers crossed the border into Ukraine, the National Security Council in Kiev said, as government forces and pro-Moscow rebels battled for control of the Donetsk airport. The accusation follows months of complaints from the government in Kiev that Russian President Vladimir Putin is sending funds, weapons and fighters to support a separatist insurgency in Ukraine’s easternmost regions. Putin denies any military involvement in Ukraine, and Russian Defense Ministry spokesman Andrei Bobrun declined to comment when contacted by Bloomberg on Monday in Moscow. “Ukrainian and military intelligence confirms the entering from Russia into Ukrainian territory of men and equipment,” Ukrainian Prime Minister Arseniy Yatsenyuk said in Kiev on Monday. The rebels’ tanks, howitzers, artillery and anti-aircraft systems “can’t be bought at a bazaar in Donetsk or the Russian Federation. They can only come from the stock of the Russian Defense Ministry,” he said.

• Russia Cut to Baa3 by Moody’s on Oil as Junk Rating Looms. Russia’s credit rating was cut to the lowest investment grade by Moody’s Investors Service as plunging oil prices and the worst currency crisis since 1998 drag on growth. Moody’s lowered the country to Baa3, one step above junk, from Baa2. The credit grade matches those of Standard & Poor’s and Fitch Ratings. The rating, on par with India and Turkey, is on review for a further reduction, Moody’s said in a statement.  

• IMF Cuts Global Economic-Growth Forecast by Most in Three Years. The IMF made the steepest cut to its global-growth outlook in three years, with diminished expectations almost everywhere except the U.S. more than offsetting the boost to expansion from lower oil prices. The world economy will grow 3.5 percent in 2015, down from the 3.8 percent pace projected in October, the International Monetary Fund said in its quarterly global outlook released late Monday in Washington. The Washington-based lender also cut its estimate for growth next year to 3.7 percent, compared with 4 percent in October.

• Belgium Deploys Troops Amid Threat From Syrian Jihadis. Belgium is deploying more troops on its streets to counter a heightened terror threat as the fallout from last week’s attacks in France led to arrests across Europe and fueled protests in several African countries. Security forces have arrested at least 28 people across the continent after attacks in Paris last week by Islamist gunmen and a deadly police raid on Thursday in the eastern Belgian town of Verviers. The threat is an “urgent and very serious challenge,” Europol Director Rob Wainwright told Sky News today.

• Here’s Why Losses Triggered by Franc-Cap Removal Were So Painful. It’s easy to see why the Swiss National Bank’s surprise decision to abandon the cap on the franc versus the euro wreaked havoc on currency markets. You just have to look at data from the U.S.’s largest derivatives exchange. Speculators using futures to wager the franc would weaken versus the dollar had more than $3 billion worth of such bets as of Jan. 13, according to Bloomberg calculations based on Commodity Futures Trading Commission data. The SNB’s decision two days later to drop the cap sparked a rush for the exit as the franc surged 21 percent versus the greenback.

• China Brokers Fall as Regulator Curbs New Margin Accounts. Chinese brokerages’ shares plunged after the securities regulator suspended three of the biggest firms from adding margin-finance and securities lending accounts for three months following rule violations. Citic Securities Co. (600030), the nation’s biggest broker, fell 14 percent as of 9:35 a.m. in Hong Kong. Haitong Securities Co. and Guotai Junan Securities Co. were among others whose shares tumbled. 

• China’s $20 Trillion Headache Underscored by Stock Market Swings. For China’s central bank, the 36 percent stock market rally through Jan. 16 spurred in part by a surprise November interest-rate cut is the latest reminder that it’s easier to unleash money than to guide it to the right places. Since Zhou Xiaochuan became People’s Bank of China governor in late 2002, the broad money supply base has expanded almost seven times to 122.8 trillion yuan ($20 trillion) while the economy has grown about five times. That translates to a M2/GDP ratio of about 200 percent versus about 70 percent in the U.S., according to data compiled by Bloomberg. 

• Draghi asset-backed bond stimulus seen choked by red tape. Mario Draghi’s plan to stimulate Europe’s economy by buying asset-backed securities is underwhelming investors, with purchases bogged down by bureaucracy and paperwork.

• Banks Struggle to Fight Speculation Denmark’s Euro Peg at Risk. Banks in Scandinavia are joining the Danish government in trying to persuade offshore investors that the Nordic country isn’t about to copy Switzerland and drop its euro peg. SEB AB, the Nordic region’s largest currency trader, said it’s been fielding calls from hedge funds wondering whether Denmark might be next after the Swiss National Bank shocked markets by exiting a three-year-old euro cap on Jan. 15. Economy Minister Morten Oestergaard a day later sought to silence doubts surrounding Denmark’s currency peg, which he said remains “secure.” 

• China Dream Ends for Handan as Steel Slump Spurs Property Losses. Hao is among the collateral damage as China reins in years of debt-fueled investment-led growth that’s evoked comparisons to the period preceding Japan’s lost decades. As policy shifts China toward greater consumption and innovation-led growth, Handan’s reliance on the steel industry for expansion has left it among cities feeling the brunt of adjustment pain.

• Asia Stocks Advance, Led by Tech Shares, Ahead of China GDP Data. Asian stocks rose, led by technology companies, as investors awaited data from China on gross domestic product, factory output and retail sales. The MSCI Asia Pacific Index (MXAP) gained 0.1 percent to 137.74 as of 9:05 a.m. in Tokyo.

• Ibovespa Slumps as Economists Cut Growth Projections; CPFL Sinks. The Ibovespa fell the most in two weeks as CPFL Energia SA led a plunge in utilities and economists reduced their growth forecasts for Brazil. The MSCI Brazil/Consumer Discretionary Index dropped the most in a week, led by retailer Lojas Americanas SA. Utility companies sank after website UOL reported that a blackout hit at least four Brazilian states, without saying how it got the information. Vale SA slid with iron ore. The Ibovespa dropped 2.6 percent to 47,758.01 at the close of trading in Sao Paulo, as 64 of its 68 stocks retreated. The real weakened 1.4 percent to 2.6582 per dollar at 5:31 p.m. local time. Analysts lowered their outlook for Brazil’s growth in 2015 to 0.38 percent from 0.4 percent, according to the median forecast in a central bank survey published Monday.

• European Stocks Rise Third Day Amid Expectations of ECB Stimulus. European stocks advanced for a third day, extending their highest level since 2008, amid investor expectations the European Central Bank will announce a plan for quantitative easing this week. The Stoxx Europe 600 Index added 0.2 percent to 353.18 at the close of trading. The equity gauge pared gains in the final hour after earlier increasing as much as 0.7 percent.

• Treasuries Post Best Start to Year Ever as Global Appetite Rises. Treasuries extended the best start to a year on record after the Swiss National Bank’s unexpected decision to end its exchange-rate cap and cut interest rates fueled appetite for higher-yielding U.S. bonds. The 30-year bond yield reached a record low as oil prices tumbled to the least in 5 1/2 years, sinking inflation expectations. The benchmark 10-year note yield touched the lowest since 2013, buoyed by demand from investors seeking higher yields on speculation the European Central Bank will unveil expanded bond-buying, or quantitative easing, on Jan. 22. 

• Oil Drops Below $48 a Barrel as U.S. Resists Market Intervention. Oil traded below $48 a barrel as the U.S. signaled it won’t intervene in the market even as prices decline. Futures fell as much as 3 percent in New York from the Jan. 16 settlement after floor trading was closed Monday for the Martin Luther King Jr. holiday.

• Iran Sees ‘No Threat’ from Oil at $25 If Prices Keep Tumbling. OPEC has no immediate plan to cut its output target for crude, and Iran is strong enough to withstand a deeper slump in prices even if the country must sell at $25 a barrel, Oil Minister Bijan Namdar Zanganeh said. 

• HSBC Cuts GDP Outlook for 13 Oil Exporters From Russia to U.A.E. The plunge in oil prices prompted HSBC Holdings Plc to cut this year’s economic outlook for 13 crude exporters across central, eastern Europe and the Middle East as public spending drops. Economic growth in the grouping will slow to 1.8 percent, compared with an estimate of 2.6 percent in October, the London-based bank said in a report yesterday. Russia’s gross domestic product may shrink 3.5 percent, compared with an October forecast of a one percent-contraction, the bank said. 

• China Steelmaking Slows as Exports Surge While Demand Cools. China’s crude steel production growth slowed last year as domestic demand weakened and the country exported record volumes. China, the world’s largest steelmaker, produced 822.7 million metric tons in 2014, a record, according to data released by the National Bureau of Statistics on Tuesday in Beijing. Output grew by 0.9 percent last year, compared with a 7.5 percent increase the year before, according to the bureau’s data. Production in December rose for the first time in four months to 68.09 million tons. “You’ve got an industry in overcapacity with utilization rates that are not providing the producers with any pricing power,” Daniel Kang, an analyst at JPMorgan Chase & Co. in Hong Kong, said before the data was released. “We’re expecting growth to be fairly minimal.”

• Gold Assets in Biggest ETP Surge Most Since 2010 on Haven Buying. Holdings in the SPDR Gold Trust, the biggest exchange-traded product backed by the metal, surged the most in more than four years. Assets in the SPDR fund, which counts billionaire John Paulson as its biggest holder, jumped 1.9 percent to 730.89 metric tons on Jan. 16. That’s the biggest gain since May 25, 2010. This week the holdings climbed 3.3 percent. 

• China's copper short sellers not done yet, Citrine fund says. The biggest copper selloff in three years isn't over yet because Chinese traders will probably keep shorting the metal, according to Citrine Capital Management.

• AT&T(T) to Record $10 Billion in Charges for Fourth Quarter. AT&T Inc. (T) said its fourth-quarter results will include a pretax loss of $7.9 billion to account for changes in its pension and retiree benefit plans. The results will also include a $2.1 billion noncash charge because certain copper assets are no longer needed as customer demand declines for older voice and data products, the Dallas-based company said in a regulatory filing Friday. AT&T said its units’ operating results and margins won’t be affected.

Wall Street Journal:

• Fed Officials on Track to Raise Short-Term Rates Later in the Year. While Europeans Weigh Bond-Buying Program to Boost Growth, U.S. Officials Are Upbeat on America’s Economic Prospects.

• EU Considers Taxing Google(GOOG), Other U.S. Internet Firms. Bloc Seeks Single Digital Market in Europe; Auto Sector Is a Concern, Oettinger Says.

Fox News:

• Islamic State backers emerge in Afghanistan, ex-Guantanamo inmate reportedly recruiting. The Islamic State terror group may be making inroads in Afghanistan just weeks after the U.S. ended its 13-year combat mission, with a former Guantanamo Bay detainee said to be involved in the recruiting effort.

MarketWatch.com:

• ‘American Sniper’ shatters January box-office record. Clint Eastwood’s “American Sniper” has shattered the record for highest-grossing January opening weekend -- earning more than twice the gross of the previous record, held by last winter’s “Ride Along.”

• Switzerland could act on currency again, central banker says.

CNBC:

• China economy grows at slowest pace in 24 years.

• Janjuah on 2015: Oil at $30; bonds to go crazy. If you thought 2014 was volatile, hold on to your hats this year as the price of oil could hit $30 a barrel and the bond markets will outperform, according to Bob Janjuah, a closely-watched strategist from Nomura Securities.

Zero Hedge:

• Japan Set To Surpass China As America's Largest Creditor. (graph)

• WTF Chart Of The Day: "Hopium" Edition. (graph)

• This Won't End Well. (graph)

• Volatility Is Back. (graph)

• 5 Things To Ponder: A View Of A Correction.

• The Greek Bank Run Spreads To All Four Largest Banks.

• Counterparty Concerns Surge: US Bank Credit Risk At 11-Month Highs. (graph)

• There Is No Inflation (Unless You Eat Food, Use Water, Live In A House, Get Sick, Go To School, Or Do Taxes).

• Richard Koo Crushes The QE Dream (In 1 Brief Paragraph). (graph)

• The SNB's Wake-Up Call: Keynesian Central Banking Is Destroying Money And Markets. (graph)

• Dramatic Drone Footage Showing The Devastation At The Donetsk Airport. (video)

• The ECB's 4 QE Scenarios, And Why CS Thinks Waking From The "QE Dream" May Be The Worst Possible Outcome.

• "The Consequences Of The SNB Decision Will Not Be Limited To Switzerland".

• "Weak" Market Closes Suggest Trouble Ahead For Stocks. (graph)

• Everest Macro Hedge Fund Blows Up After Nearly $1 BIllion In Swiss Franc Losses.

• 'Pin' Meet 'Housing Bubble 2.0'.

• Central Banks Upside Down.

• The ECB Will Fail Given The "History Lessons Of US And Japan", Warns Deutsche Bank.

• Quote Of The Day: "Venezuela Must Deepen Socialism To Improve Economy" - Maduro. Having apparently failed on his mission to Asia to garner enough support to drag oil prices up to the $100 level he "believes is fair," Maduro went on to explain how he will "change the food supply system, not the economic model," to solve the nation's crisis, since "most of the private sector are parasitic bums."

• Draghi's Looming "Anti-Integration" QE: It's The Structure (Not Size) That Matters.

• The Next Victim Of Crashing Oil Prices: Housing. (graph)

• Ukraine's Poroshenko Rejects Putin's "Peace Plan"; Massive Shelling Ensues.

• Europe's Scariest Chart. (graph)

• SocGen Warns "Hide In Cash" - Avoiding Risk Will Be Pivotal In 2015. (graph)

• What We Can Learn From The Richest Man In Asia.

• Chinese Stocks Crash Following Renewed Crackdown On Margin Accounts. (graph)

• Architect Of Abenomics Says No More BOJ Easing.

• Yemeni Government Admits It Has Lost Control Of Nation Amid "Attempted Coup".

• 27 Facts That Show How The Middle Class Has Fared Under 6 Years Of Barack Obama.

• Christine Lagarde Calls For World To Embrace "New Multilateralism" Order In 2015.

• The End Of HFTs (And Price Discovery): America's Biggest Money Managers Launch Their Own Dark Pool.

• Why The ECB's QE Won't Work (In 4 Brief Minutes). (video)

• Chinese GDP Beats And Misses - Slowest Growth Since 1990's Tiannanmen Square Sanctions Hit. (graph)

Business Insider:

• Fitch Just Lowered Greece's Credit Outlook To 'Negative'.

• The US's Rhetoric On Assad Is Shifting In The Dictator's Favor.

• America Is In The Middle Of A New Cold War.

• The Middle-Class Decline Looms Over Obama's Legacy. Federal Reserve survey data show families in the middle fifth of the income scale now earn less and their net worth is lower than when Obama took office. Jobs have been added at the top and bottom of the wage scale, a Reuters analysis of labor statistics shows. In the middle, the economy has shed positions — whether in traditional trades like machining or electrical work, white-collar jobs in human resources, or technical ones like computer operators.

• Russia's Net Outflows Hit Their Highest Level Ever.

• The War In Ukraine Has Reached Another Critical Phase.

• FELIX ZULAUF: 2015 Will Be 'A Trader's Dream, But An Investor's Hell'.

• GUNDLACH: Here's The Bear Case For Stocks In 3 Charts. (graph)

• How We Know Russia's Economic Crisis Has Officially Arrived.

• The Scale Of The Chinese Real Estate Crash Is Terrifying.

• Students Are Blaming Michelle Obama On Twitter For New School Lunches. Desperate students are still taking to Twitter to reveal the horrors of school lunch under First Lady Michelle Obama’s rules, including empty chicken nuggets and complaints that meals taste like “prison food.”

Forbes:

• China Cities Signal Property Crash By Halting Apartment Sales. Without explanation, authorities in two Chinese cities have refused to issue approvals for transfers of apartments built by selected developers, including troubled Kaisa Group. Most analysts believe the extraordinary moves are related to Xi Jinping’s so-called anti-corruption campaign, but that explanation fails to explain certain crucial facts. There is reason to think there could be bankruptcy law factors behind the withholding of the approvals, which have unsettled markets in recent weeks. The bankruptcy explanation suggests a market correction is coming soon.

Reuters:

• Anti-bailout Syriza extends poll lead as Greece's election day nears. Greece's anti-bailout opposition party Syriza appears to be gaining momentum with less than a week before Sunday's snap election, moving further ahead of the co-ruling conservatives in three separate opinion polls. Syriza would garner 33.5 percent of the vote, up from 31.5 percent, while Prime Minister Antonis Samaras' New Democracy party, which has pushed through unpopular reforms as part of an international bailout, stood unchanged on 27 percent.

• Fertilizer maker Mosaic(MOS) forecasts bigger-than-expected Q4 profit. U.S. fertilizer company Mosaic Co on Monday estimated that it would post a larger fourth-quarter profit than expected and surpassed its targets for phosphate sales.

Financial Times:

• Energy bondholders at risk as bank loans ebb. With the price of US crude now less than 50 per cent of its recent peak of $107 a barrel, the likely consequence is that banks will significantly reduce their lending to energy firms across the US, forcing companies to look for alternative sources of financing on more punitive terms.

• S&P 500 earnings face dollar headwind. A sharp increase in the US dollar against both the euro and Japanese yen is expected to crimp profits for some of the country’s largest companies, with some strategists on Wall Street warning the currency’s gain and low energy prices could constrain quarterly S&P 500 earnings growth to just 3 per cent.

Bild:

• ECB Bond Buying Program Will Stall Reforms, Feld Says. France and Italy will continue to languish without reform, Lars Feld, economic adviser to German Chancellor Angela Merkel, said. ECB plans to approve purchase of govt bonds removes pressure on two countries to follow through with reforms. Will have a negative impact on German exports there.

China Finance:

• China Should be Cautious on Monetary Policy. Key of a prudent monetary policy is to provide a neutral and appropriate monetary and finance environment to structural adjustment, Zhang Xiaohui, head of the People's Bank of China's monetary-policy department, writes in the magazine's Jan. 16 issue. China should adjust monetary policy properly at appropriate time, and avoid doing too much or too little. The difficulty to manage liquidity is rising as affected by slower increase in yuan positions, fluctuation in asset prices and a more complex struture of banks' assets and liabilities.

Weekend Recommendations

• None of note

Night Trading

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

• Asia Ex-Japan Investment Grade CDS Index 122.0 -1.0 basis point.

• Asia Pacific Sovereign CDS Index 76.5 +1.5 basis points.

• S&P 500 futures +.13%.

• NASDAQ 100 futures +.21%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DAL)/.77

• (MTB)/1.94

• (ATI)/.00

• (RF)/.21

• (BHI)/1.07

• (MTG)/.14

• (MS)/.50

• (HAL)/1.10

• (JNJ)/1.25

• (IBKR)/.06

• (CREE)/.23

• (NFLX).44

• (IBM)/5.41

• (AMD)/.01

• (CA)/.60

• (HGR)/.44

Economic Releases
10:00 am EST

• The NAHB Housing Market Index for January is estimated to rise to 58.0 versus 57.0 in December.

Upcoming Splits

• None of note

Other Potential Market Movers

• The China Retail Sales/GDP/Industrial Production data, German ZEW Sentiment Index and the Jefferies Winter Consumer Summit could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by industrial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the week.