Tuesday Watch

Evening Headlines
Bloomberg:

• China Seen Making Fewer Reserve Ratio Cuts Amid Policy Shift. The People’s Bank of China is seen making fewer reductions to the proportion of deposits that lenders must lock away as the central bank retools its policy framework. The PBOC will lower banks’ reserve required ratio to 17 percent in the first quarter and 16.5 percent in the second, from 17.5 percent now for the largest lenders, according to the latest Bloomberg survey. The RRR is now seen at 15.5 percent at the end of the year, versus 15 percent seen in the previous survey.
• Are China Stocks Repeating the 2008 Bust? (video)
• Trader Who Made 6,200% on China Futures Says Go Short or Get Out. Huang Weimin, the hedge fund manager whose Chinese stock-index futures wagers returned more than 6,200 percent last year, has some advice for investors in 2016: Sell your shares now, before it’s too late. The 45-year-old former worker at a state-owned company, a virtual unknown until last year, has become a star of the Chinese futures market after a slew of timely bets on the direction of share prices propelled his Yourong Fund to the top of the country’s performance rankings. He’s carried the winning streak into 2016, returning 35 percent through Jan. 22 after selling stock-index futures just days before the market’s worst-ever start to a year. Huang, who opened the Yourong Fund in 2014, says China’s benchmark Shanghai Composite Index could drop another 15 percent in the first half as slowing economic growth and a weaker yuan fuel capital outflows. While he’s sticking with bearish futures bets to take advantage of further losses, he says the average Chinese stock investor would be better off shifting into cash.
• China Stock Chartist Sees Shanghai Composite Retreating to 2,400. Thomas Schroeder, the chartist who predicted in October that a rebound in Chinese stocks wouldn’t last, is sticking to a call that the selloff has further to go. The Shanghai Composite Index will drop to 2,400, according to Schroeder. Any bounce will likely be short-lived as the moving average convergence-divergence line, a measure of momentum, is trending lower, he said. A two-day rally in the Shanghai gauge -- which closed at 2,938.52 on Monday -- was just setting the stage for further declines, according to Schroeder. The equity index slid 1.7 percent as of 10:12 a.m. local time on Tuesday. 
• Junk Bonds in Europe Find Greater Losses From Brazil Than China. European investors focused on risks from China to the east should also be looking west. More than half of the region’s worst-performing junk bonds in euros over the past year were sold by companies with operations in Brazil, exceeding those with even indirect exposure to China, according to data compiled by Bloomberg. Bonds sold by French retailer Casino Guichard-Perrachon SA and Spanish engineering firm Grupo Isolux Corsan SA, both with links to Latin America’s largest economy, are among 10 billion euros ($11 billion) of securities with the biggest losses. European firms piled into emerging markets as they sought to mitigate the sovereign debt crisis at home. Brazil is now heading toward its deepest two-year recession in more than a century and a widening corruption scandal involving state-run oil producer Petroleo Brasileiro SA is undermining any political effort to revive growth.
• Scotiabank Is Downgraded by Moody's One Level on Riskier Lending. Bank of Nova Scotia, Canada’s third-largest lender by assets, had its credit rating cut one level by Moody’s Investors Service for its focus on credit cards and auto financing while expanding internationally.
• China's Stocks Fall Amid Concern Capital Outflows May Accelerate. China’s stocks fell for the first time in three days amid concern capital outflows may intensify as the economy slows. The Shanghai Composite Index dropped 1.5 percent to 2,896.03 as of 10 a.m. local time. PetroChina Co. and coal producers slumped after oil prices slid below $30 a barrel. The Hang Seng China Enterprises Index decreased 2.3 percent.
• Asian Stocks Follow Oil Lower as Japanese Shares Lead Declines. Asian stocks fell, halting a two-day rebound, as oil slipped back below $30 a barrel and Japanese shares led losses.The MSCI Asia Pacific Index declined 0.9 percent to 118.75 as of 9:10 a.m. in Tokyo after capping its biggest two-day rally since October 2011.
• Cheaper Oil May Hurt More Than Help Importers, Citigroup Says. Lower oil prices may prove to be more a curse than a blessing for commodity importers in developing nations. That is because oil-exporting countries will liquidate their investments in emerging markets to plug the shortfall in revenues, according to Citigroup Inc. The capital outflows will more than offset the cost savings from cheaper import bills for countries such as Turkey and India, undermining economic growth. Sovereign wealth funds in oil-producing nations “help to create the global liquidity that generates capital flows to EM,” David Lubin, London-based head of emerging-market economics at Citigroup, wrote in a report Monday. “As that liquidity disappears, capital flows and growth could continue to suffer.” Lubin correctly forecast in February 2014 that the rout of emerging-market currencies would continue.
• China Copper Premium Surges on Fears of Weaker Yuan: Chart.

Wall Street Journal:

• Why the Fed Is the Root of Much Market Turmoil. Fed is a key reason markets have plunged and risk of recession rising. 
• China Slowdown Stokes Fears of Peak Oil Demand. Exxon(XOM) cuts China energy demand forecast to 2025. A bedrock belief among oil forecasters has been that China’s voracious appetite for fossil fuels would stoke global energy demand for decades to come. That assumption now appears increasingly shaky.
• As Stock Prices Slump, Don’t Count on Buybacks. Companies tend to repurchase stock at times when market logic suggests they should be selling.
• The Deficit Rises Again. Obama has set up deficits and debt to soar after he leaves office. Perhaps you’ve heard President Obama’s talking point that the federal budget deficit has fallen by two-thirds on his watch. That overlooks that the deficit first soared on his watch, and then fell thanks largely to the GOP House and modest economic recovery, and that as he leaves office he is going to need one more asterisk: The deficit in 2016 has begun to rise again, in dollars and as a share of the economy. And after he leaves office, it takes off.

Fox News:

• Fox News Poll: Clinton drops below 50 percent as her lead over Sanders shrinks. (video) Hillary Clinton’s lead in the Democratic primary race has narrowed to its slimmest margin yet. The front-runner’s support has slipped under 50 percent, and cracks may be appearing in what some called her “firewall” -- the African-American voter bloc. 
• Grand jury in Texas indicts activists behind Planned Parenthood videos. (video) A Houston grand jury investigating criminal allegations against Planned Parenthood stemming from a series of undercover videos on Monday instead indicted two of the anti-abortion activists who shot the footage. In a stunning turn of events, the grand jury declined to indict officials from the abortion provider, and instead handed up a felony charges of tampering with a government record against Center for Medical Progress founder David Daleiden and center employee Sandra Merritt. Daleidon was also charged with a misdemeanor count related to purchasing human organs.

CNBC:

• Why Iran is a problem for the oil market. (video)
• Credit Suisse: Sell FANG, other crowded stocks.

Zero Hedge:

• Chinese Rush To Buy Foreign Assets As Mammoth $1 Trillion In Capital Flees Country. (graph)
• Offshore Yuan Drops To 3-Week Lows As China Injects Another $70 Billion Liquidity. (graph)
• Gundlach Slams Yellen: "The Market Will Humiliate You". (video)
• "If All The Markets Crashed Tomorrow" - Here Are The Cheapest Hedges For A Systemic Collapse.
• "Gangs" Of "All-Male" Moroccan Migrant Children “Take Over” Stockholm Train Station; Steal, Grope, Beat Women.
• The Fed Passes The Buck: Blame Oil And China.
• "Don't Overstay Your Welcome In This Bounce": JP Morgan(JPM) Crushes Last Week's Exuberance.
• Why You Should Question "Buy-And-Hold" Advice. (graph)
• As US Inflation Expectations Plunge And Converge With Europe's, Here Is One Way To Trade It. (graph)
• Don't Say You Weren't Warned (Again). (graph)
• Crude Crash Crushes Stock Knife-Catchers - Bonds & Bullion Bid. (graph)

Business Insider: 

• The bond market is going to get ugly if there isn't a rebound soon. The high-yield market needs to see a broad-based, solid rebound soon, or things are going to get a lot worse.
• The US is now in a planes, trains and trucks 'recession'.
• 3 reasons oil prices can go even lower.

Economic Information Daily:

• Over 10 Chinese Provinces Set Lower Consumption Targets. Provinces and municipalities including Chongqing, Inner Mongolia, Fujian and Jiangxi set lower consumption growth targets this year, citing its own calculation. 

Night Trading 

• Asian equity indices are -1.25% to -.5% on average.

• Asia Ex-Japan Investment Grade CDS Index 154.0 +2.0 basis points.

• Asia Pacific Sovereign CDS Index 77.5 +2.5 basis points.

• Bloomberg Emerging Markets Currency Index 66.94 -.08%.

• S&P 500 futures unch.

• NASDAQ 100 futures +.04%.

Morning Preview Links 

Earnings of Note 

Company/Estimate

• (MMM)/1.62
• (AKS)/.06
• (ATI)/-.45
• (COH)/.66
• (GLW)/.31
• (DHR)/1.27
• (DD)/.27
• (FCX)/-.16
• (JNJ)/1.42
• (LMT)/2.92
• (NVR)/29.63
• (PH)/1.18
• (PII)/1.64
• (PG)/.98
• (S)/-.26
• (AAPL)/3.23
• (T)/.63
• (COF)/1.62
• (CB)/2.29
• (ETH)/.44
• (SYK)/1.55
• (X)/-.86
• (VWM)/1.25 

Economic Releases

9:00 am EST

• The FHFA House Price Index MoM for November is estimated to rise +.5% versus a +.5% gain in October.
• The S&P/CS 20 City MoM SA for November is estimated to rise +.8% versus a +.84% gain in October.

9:45 am EST

• The Preliminary Markit US Services PMI for January is estimated to fall to 54.0 versus 54.3 in December.

10:00 am EST

• Consumer Confidence for January is estimated at 96.5 versus 96.5 in December.
• The Richmond Fed Manufacturing Index for January is estimated to fall to 2.0 versus 6.0 in December.

Upcoming Splits

• None of note

Other Potential Market Movers

• The China Industrial Production report, Australian CPI, $26B 2Y T-Note auction, weekly US retail sales reports, TD Securities Mining conference and the (GRA) investor day could also impact trading today.

BOTTOM LINE: Asian indices are lower, weighed down by industrial and financial 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 Falling into Final Hour on Rising European/Emerging Markets/US High-Yield Debt Angst, Oil Decline, Earnings Outlook Worries, Energy/Financial Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Around Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 23.14 +3.58%

• Euro/Yen Carry Return Index 134.18 +.12%

• Emerging Markets Currency Volatility(VXY) 11.80 -2.16%

• S&P 500 Implied Correlation 63.73 -.06%

• ISE Sentiment Index 97.0 +22.78%

• Total Put/Call .95 -13.64%

• NYSE Arms 1.14 -20.39% 

Credit Investor Angst:

• North American Investment Grade CDS Index 105.77 +1.38%

• America Energy Sector High-Yield CDS Index 1,789.0 -1.18%

• European Financial Sector CDS Index 89.90 +1.96%

• Western Europe Sovereign Debt CDS Index 20.47 +6.42%

• Asia Pacific Sovereign Debt CDS Index 76.08 +1.55%

• Emerging Market CDS Index 383.81 +1.87%
  

• iBoxx Offshore RMB China Corporate High Yield Index 122.03 -.03%

• 2-Year Swap Spread 5.75 -.5 basis point

• TED Spread 32.5 -1.75 basis points

• 3-Month EUR/USD Cross-Currency Basis Swap -23.25 unch.

Economic Gauges:

• Bloomberg Emerging Markets Currency Index 67.02 -.46%
• 3-Month T-Bill Yield .28% -1.0 basis point

• Yield Curve 115.0 -4.0 basis points

• China Import Iron Ore Spot $41.57/Metric Tonne -1.49%

• Citi US Economic Surprise Index -40.7 +3.1 points

• Citi Eurozone Economic Surprise Index -14.0 -8.2 points

• Citi Emerging Markets Economic Surprise Index -9.1 -1.1 points

• 10-Year TIPS Spread 1.34% unch.
• 25.0% chance of Fed rate hike at March 16 meeting, 30.7% chance at April 27 meeting

Overseas Futures:

• Nikkei 225 Futures: Indicating -185 open in Japan 
• China A50 Futures: Indicating -97 open in China

• DAX Futures: Indicating -25 open in Germany

Portfolio: 

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

• Islamic State Plans Attacks From Camps in Europe, Europol Says. Islamic State has set up a special operations command to mastermind more terrorist attacks on “soft targets” in Europe, drawing on training camps on European soil and with France as the most at-risk country, the European Union’s crime-fighting agency said. The model is the simultaneous shootings at several locations in Paris in November which killed 130, with most of the bloodshed at a concert hall in eastern Paris, said the agency, known as Europol. It is possible that similar operations “are currently being planned and prepared,” Europol said in a report released on Monday during a meeting of EU interior ministers in Amsterdam. “The wide range of possible targets in combination with an opportunistic approach of locally based groups creates a huge variety of possible scenarios for future terrorist events.” While Syria remains the hub, Islamic State has set up “smaller scale” training camps in the 28-nation EU and in the Balkans, granting local operatives greater tactical freedom to strike at will, Europol said.

• EU to Extend Border Checks Amid Refugee Crisis, Terror Fears. European Union governments prepared to prolong passport checks at some internal borders for up to two more years, as the unrelenting inflow of refugees overwhelms countries from debt-stressed Greece to economically mighty Germany. Extended controls at borders in northern and western Europe would come as the 28-nation bloc fails to get to grips with the more than 1 million migrants who have flooded in over the past year. Near-permanent alerts of further terrorism after November’s Paris attacks add to the close-the-borders mood.

• It's the Cross-Border Deleveraging, Stupid. Foreign borrowing comes home to roost.

• Russian Economy Shrinks Most Since 2009 as Oil Prices Sink. Russia’s economy, facing renewed pressure from plunges in energy prices and the ruble, contracted the most since 2009 last year on oil’s decline and sanctions over the conflict in Ukraine that curbed access to international financing. Gross domestic product fell 3.7 percent after growth of 0.6 percent in 2014, the Federal Statistics Service said Monday on its website, citing preliminary estimates. Economists in a Bloomberg survey forecast a 3.8 percent drop. A separate release of consumer data for December showed spending continued to decline as real wages and disposable incomes fell further. Russian consumers are suffering amid the recession, with retail sales diving 15.3 percent from a year earlier in December, matching the median forecast in a survey of economists. Wages adjusted for inflation plummeted 10 percent, more than analysts predicted, while disposable incomes fell 0.7 percent, less than the 5.6 percent decline seen by economists. 

• Record Cash Shows Emerging-Market Firms Going Into Cocoon. (video) Cash is king in developing nations these days. The 838 companies in the MSCI Emerging Markets Index on average had a record $608 per share in cash or short-term investments at the end of last year, according to data compiled by Bloomberg. That’s up 34 percent from the previous year, the biggest annual jump in a decade. The extra cash typically comes from postponed spending, according to Simon Quijano-Evans, the chief emerging-market strategist at Commerzbank AG.

• Brazil Price Outlook Surges as Analysts Forecast Lower Key Rate. Brazil analysts raised inflation forecasts and pared estimates for the benchmark interest rate, after the central bank last week unexpectedly balked at increasing borrowing costs. Analysts surveyed by the central bank expect the so-called Selic rate to reach 14.64 percent by year-end, down from last week’s forecast of 15.25 percent. They also increased their 2016 inflation estimate to 7.23 percent from 7 percent.

• 90% Chance of a 'Bumpy Landing' in China: Xingtai Capital. (video)

• Hong Kong Feels the Squeeze of a Slowing China and Rising Rates. As a premier Asian financial center parked at the doorstep of one of the fastest-growing economies on the planet, Hong Kong has long lived a charmed life. The former British colony’s Western-style legal and regulatory system made it a magnet for global investors interested in buying listed Chinese stocks on the Hong Kong Stock Exchange. Its banks, insurance companies, ports and cargo carriers have made a nice living off their powerful neighbor. An added bonus: Since 2008, low global interest rates in the post-financial crisis era have powered a property market that has kept the $300 billion economy humming. Yet now China’s economy is decelerating and just turned in its weakest full-year economic growth since 1990. Global investors are no longer gravitating to Hong Kong-- they’re scrambling for the exits.

• Emerging Market ETFs Lose More Than $1 Billion Led by China Flow. Investors pulled more than $1 billion out of U.S. exchange-traded funds that invest in emerging-markets as a third week of outflows left the ETFs down $3.9 billion this month. Redemptions from emerging-market ETFs that invest across developing nations as well as those that target specific countries totaled $1.17 billion in the week ended Jan. 22, according to data compiled by Bloomberg. While losses narrowed from $2.12 billion the previous week, the outflows so far this month are the most since August, when they reached $6.1 billion.

• German Business Sentiment Falls as Market Woes Cloud Outlook. German business confidence fell for a second month in January in a sign that companies in Europe’s largest economy are increasingly worried about slowing global growth. The Ifo institute’s business climate index dropped to 107.3 from a revised 108.6 in December. The median estimate in a Bloomberg survey of economists was for a decline to 108.4.

• Ford(F) Shutting Operations in Japan, Indonesia on Lack of Profit. Ford Motor Co. will close down all operations by the end of this year in Japan and Indonesia, where the U.S. automaker says it has no path to boost sales or earn profits. The step is being taken “after pursuing every possible option,” Karen Hampton, Ford’s Asia Pacific spokeswoman, said in an e-mailed statement. The company will provide ongoing support to customers for service, spare parts and warranties, she said.

• European Stocks Halt Rebound as Banks, Commodity Producers Slide. (video) Declines in commodity shares and lenders put an end to a rally in European stocks. The Stoxx Europe 600 Index fell 0.6 percent at the close of trading in London. Seadrill Ltd. led the slide, tumbling 8.9 percent as oil fell after the world’s biggest crude exporter said it’s keeping up investments in energy projects. A gauge of miners also dropped, while lenders slid the most among industry groups.

• Oil Drops as Saudis to Maintain Spending, China Diesel Use Falls. Oil dropped after Saudi Arabia, the world’s biggest crude exporter, said low prices won’t reduce its spending on energy projects and China’s diesel consumption dropped for a fourth consecutive month. Futures dropped as much as 5.3 percent in New York. Saudi Arabian Oil Co., also known as Saudi Aramco, is maintaining its investment plans despite the rout in the crude market, Chairman Khalid Al-Falih said Monday. Diesel use in China dropped 5.6 percent in December compared with a year earlier and gasoline consumption grew at the slowest pace in more than two years. 

• Bets on WTI Oil Slumping Below $25 Rise to a Record: Chart. Bets that crude oil will retreat below $25 a barrel have reached an all-time high as stockpiles continue to grow. Open interest, or the amount of total contracts outstanding, for March West Texas Intermediate crude $25 put options rose to 29,023 on Jan. 22, the highest among all March WTI options. The puts expire on Feb. 17. 

• So Yes, the Oil Crash Looks a Lot Like Subprime. The price of crude has been tracking an infamous subprime mortgage index.

• Hedge Funds Had Worst Year Since 2008 Betting on Commodities. Hedge funds betting on raw materials had the worst performance since the global financial crisis of 2008 as everything went wrong for commodities. The funds lost 5.2 percent in 2015 and recorded losses in 10 out of 12 months, based on an index compiled by Societe Generale SA that tracks the performance of commodity trading strategies including equities and physical products.

• Potash Corp.(POT) Falls Amid Speculation Dividend Will Be Reduced. Potash Corp. of Saskatchewan Inc., the largest supplier of its namesake fertilizer in North America, fell the most in more than two years after analysts at JPMorgan Chase & Co. said lower nutrient prices probably will prompt management to cut payments to shareholders. Potash Corp. fell 7.9 percent to $14.82 at 11:57 a.m. in New York. The shares slide earlier as much as 9 percent, the largest intraday decline since July 2013.

• Chances of a Fed Rate Increase Fall After Market Selloff.

CNBC:

• Morgan Stanley(MS) sees big plunge in Treasury yields. (video)

Zero Hedge: 

• China Warns "Social Stability Threatened" As 400,000 Steel Workers Are About To Lose Their Jobs.

• WalMart(WMT) Store Closures Leave Elderly Villagers With No Grocery Stores, Pharmacies. Last week, WalMart doubled down on the wage hike debacle when the world’s largest retailer decided to give everyone a raise in February. The all-in cost will be around $2.7 billion. While some were surprised at the move, it was easy to see coming. Indeed, we’ve long said that the company’s decision to hike wages for its lowest-paid employees would eventually necessitate similar raises for workers higher up the corporate ladder. 

• When The Fed Put Fails.

• What Buyback Slowdown: "Our Buyback Desk Is Very Busy" Admits Credit Suisse. (graph)

• Bad Loans Pile Up In Alberta, As Oil Bust Weighs On State Lender. (graph)

• ...Until The Bubble Bursts. (graph)

• Which Italian Banks Are Most Exposed To Soaring NPLs: Citi Crunches The Numbers. (graph)

• Texas Economy Collapses - Dallas Fed Survey Crashes To 6-Year Lows As "D" Word Is Uttered. (graph)

• Spain's Election Quagmire: What Wall Street Thinks.

• Ray Dalio Admits QE Won't Work, Asks For More Anyway.

• Why Junk Bonds Will Sink Stocks. (graph)

Business Insider:

• McDonald's(MCD) fixed customers' top complaint — and sales are soaring.

• Jony Ive is reportedly not happy with the Apple(AAPL) Car and there's a hiring freeze in place.

• The Obama administration just 'made a scary retreat' in its Syria policy — and negotiations are quickly unraveling.

USA Today: 

• Islamic State releases video of Paris attackers. (video) The Islamic State released a video purporting to show nine Paris attackers before they launched their assaults on the French capital. The video was released Sunday by the extremist group’s media center and shows militants training, beheading and shooting captives in its territory.

Bear Radar

Style Underperformer:

• Small-Cap Value -1.8%

Sector Underperformers:

• 1) Oil Service -4.7% 2) Disk Drives -3.7% 3) Homebuilding -3.3%

Stocks Falling on Unusual Volume:

• OMED, DRII, JCI, KS, PETS, GPK, PKG, GRUB, IP, WRK, POT, COL, ESNT, SNDK, FCAM, KMB, IHS, IFF, BT, PRXL, SSYS, PITB, INSY, HHC, BGS, IFF, MIDD and FITB

Stocks With Unusual Put Option Activity:

• 1) TGT 2) FFIV 3) BID 4) X 5) OPK

Stocks With Most Negative News Mentions:

• 1) CAT 2) WFM 3) IP 4) COP 5) POT

Charts:

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