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U.S. Futures Slip Though ADP Reports In-Line; Tokly Improves; Europe Mixed

This morning. Today, U.S. equity futures are moderately lower after fair value adjustment, apparently unable to extend yesterday's rally. Trading desks report low conviction levels. Japan equities rebounded, but remain solidly in correction with tomorrow's futures lower. The Hang Seng also close with another loss. Chinese equity markets remain closed through Thursday. The market's focus remains squarely on this Friday's U.S. employment report, which follows the surprisingly weak January employment report.

In January, U.S. equities closed lower, their first such lower January since 2010. Wednesday's Nikkei 225 March 2014 (NKH4) equity futures are down -0.423%.

The quarter's earnings reports remain generally positive, and U.S. financials' earnings are particularly strong. This morning, focuses on the January ADP employment report, which as in January came in generally in-line with survey. Overseas, economic reporting generally focuses on services PMIs, which were slightly light or in line with surveys. In China, equity markets remain closed for the New Year's holiday. Short-term Chinese interest rates appear to be stabilizing at around 5%, about +1.50% higher than in the recent past.

Tuesday, U.S. equity markets gapped higher, rose to early afternoon highs, then traded narrowly to the close with moderate gains. On lower but above average volume, the S&P 500 (SPX), DJ Industrials (DJI), Nasdaq, and NYSE composite rose +0.76%, +0.47%, +0.86%, and +0.77%, respectively. The DJ Transports (TRAN) rose +1.15%. NYSE volume fell -9.20% to 1.11x the 20-day moving average. Since January 29th, the U.S. equity market outlook is "in correction", following a "market uptrend" that commenced on September 8th.

Trading desks report that sentiment remains fragile despite yesterday's equity gains. Late in the session, markets dipped several points on news of S&P's downgrade of Puerto Rico's government debt to junk. Anxiety levels remain high, with rallies viewed with suspicion. With SPX equities trading at a 15.9x 2013 earnings multiple, attention focuses on 2014 earnings and valuations (15.9x times survey $117.97 2014 SPX operating earnings suggests a 1876.90 SPX level next year, a +7.11% rise).

Technicals were little changed. Only the Nasdaq closed above its 100-day moving average. Led by telecommunications, most SPX market segments closed higher. Market breadth was positive, and up volume led down volume. Volatility fell sharply from its highest level since late 2012. Treasury bond markets weakened. The U.S. Treasury 10-year bond yield rose +5.33 bps to 2.6294%, compared to 2.5761% at the prior close.

This morning, 10-year U.S. Treasury yields are up +0.72 bps at 2.6366%, compared to the prior close. Spanish and Italian 10-year debt yields are 3.72% and 3.75%, respectively, compared to 3.75% and 3.78% the prior day. The U.S. dollar is mixed.

U.S. options markets worsened to neutral, compared to neutral to bullish the prior day. The CBOE SKEW rose +0.86% to 127.26, compared to 126.17 the prior day, above a neutral range (115-120), but below 130, which generally correlates well with short-term market tops.

In pre-market futures trading, March SPX equity futures (SPH4) price near the top of a 1734-1746 trading range. After a fair value adjustment of +5.60 points, SPX equity futures price at 1743.00, down -5.35 points. The SPX opens -3.23%, -3.08%, and -0.87% below its respective 20-, 50-, and 100-day moving averages, but +2.74% above its 200-day moving averages. Initial resistance is 1761.35. Initial support is 1746.44, then 1737.67.

In Asia, equity markets in Japan and Hong Kong closed mixed. In a volatile day, the Nikkei 225 index (NYSEARCA:NKY) closed up +1.23%, less than a third of its prior day loss. The Hang Sang index (HSI) closed down -0.60%. The Shanghai composite (SHCOMP) remains closed for the New Year's holiday through Thursday. Indexes are at least -3.92% lower in 2014. The indexes closed mixed in December. All closed higher in November. The NKY and HSI are now in correction, ending bull markets that began in July 2012. The NKY is -13.0% below its year-end highs. In January, the NKY fell -8.45%, its largest monthly drop since May 2012, which also marked the start of the index's bull market. Today's volumes are unavailable.

Economic reporting was light. The Japanese yen strengthened slightly. In China, short-term interbank lending rates rose, as 7-day Shibo rates were 4.98%, compared to 5.10% the prior day.

Regional relative strength indexes (RSI) suggest that these markets are oversold. The NKY RSI fell to 31.86, compared to 27.92 the prior day, which was its worst showing since May 2012, the start of the index's long bull market. The HSI RSI ended at an oversold 24.02, compared to 25.24 the prior day. The SHCOMP's RSI closed Thursday at 43.54, compared to 47.41 the prior session. On June 27, 2013, the index's RSI fell to a low of 15.27, which was also last year's low index close.

This week, the NKY is down -4.92%, the HSI is down -3.48%, and the SHCOMP has been closed for holiday. Last week, the SHCOMP closed down -0.01%, while the NKY and HSI closed off -0.61% and -5.00%, respectively. In January, the NKY lost -8.45%, the HSI closed down -5.45%, and the SHCOMP lost -3.92%. In December, the NKY rose +4.02%. The HSI and SHCOMP closed down -2.41% and -4.71%, respectively.

In 2014, the NKY is down -13.0%. The HSI and SHCOMP are down -8.74% and -3.92%, respectively. In 2013, the NKY rose +56.7%. The HSI closed up +2.87%. The SHCOMP closed down -6.75%. In 2012, the NKY rose +1.37%. The HSI rose +22.9%. The SHCOMP rose +3.17%.

In Japan, the NKY closed at 14,180.38, compared to 14,008.47 the prior day and -63.6% below its late-1989 38,915.87 high close. The index gapped higher to open above 14,200, which proved resistance through the session. In late morning, the index weakened and in early afternoon, the index briefly tested breakeven, with a 13,995.86 intraday low. The index immediately rebounded to 14,200 and set a final hour 14,245.06 intraday high. The index closed -8.13%, -8.71%, -5.28%, and -1.70% below its 20-, 50-, 100-, 200-day moving averages. Most market segments closed higher. Leaders were technology, consumer goods, and financials, which rose at least +2.21%. Laggards were health care and consumer services, which rose at least +0.27%, and telecommunications, which fell at least -0.89%.

In China, the HSI closed at 21,269.38, compared to 21,397.77 at the prior close. The index gapped higher and set an immediately 21,564.88 intraday high, but reversed lower by early afternoon and fell to a final hour 21,197.78 intraday low. Most market segments closed higher. Leaders were basic materials, telecommunications, and industrials, which rose at least +0.12%. Laggards were financials and utilities, which fell at least -0.52%, and consumer services, which fell a notable -6.35%. The index closed -11.1% below its recent December 3rd 23,910.47 high, but +17.7% above its 18,185.59 June 4, 2012 low.

Last Thursday, in Shanghai, the SHCOMP closed at 2,033.08, compared to 2,049.91 at the prior close, +4.26% above the 1,950.01 June 27th close, last year's low.

In Europe, the major equity indexes are modestly mixed, with slight gains in London, where the FTSE 100 is up +0.18%. The Euro Stoxx50, CAC 40, and DAX are down -0.21%, -0.10%, and -0.27%, respectively. This week, the indexes are at least -0.66% lower. Last week, the indexes closed at least -2.42% lower, compared to gains of at least +1.33% the prior week. In January, the indexes close at least -3.22% lower. All closed higher in December.

European bourses have recently outperformed U.S. equity indexes. Euro Stoxx50 relative strength (RSI) is 33.01, compared to 33.57 the prior day, in the lower end of a neutral (30-70) range. The indexes lowest recent RSI level was 25.77 on June 24th, which marked the year's 2,494.54 closing low.

Today, the Euro Stoxx50 trades at 2,956.52, -6.50% below its 3,168.76 January 15th post-2008 high close, and -43.6% below its 5,249.55 March 31, 2000, all-time closing high. The index opened lower, set an early 2,947.62 intraday low, then reversed higher to a mid-morning 2,976.36 intraday high. The index reversed lower again in early afternoon. Most market segments are lower. Leaders are financials, which is up +0.37%, and utilities and oil and gas, which are at least -0.06% lower. Laggards are industrials, basic materials, and technology, which are down at least -0.57%.

This week, the Euro Stoxx50, CAC 40, and DAX are down -1.69%, -0.66%, -1.06%, and -2.06%, respectively. Last week, the Euro Stoxx 50, FTSE 100, CAC 40, and DAX closed down -0.47%, -2.30%, -0.10%, and -0.49%, respectively. In January, the Euro Stoxx50, FTSE 100, CAC 40, and DAX closed down -3.06%, -3.54%, -3.03%, and -2.575, respectively. In December, the Euro Soxx50, FTSE 100, CAC 40, and DAX closed up +0.72%, +1.48%, +0.02%, and +1.56%, respectively.

In 2014, the indexes are down -4.70%, -4.185, -4.06%, and -4.57%, respectively. In 2013, the indexes closed up +18.0%, +14.4%, +18.0%, and +25.5%, respectively, compared to +13.8%, +5.84%, +15.2%, and +29.1% the prior year.

4Q2013 SPX Earnings. Of 284 (of 499) reporting companies, 222 or 78.5% surprised positively on earnings, with an average +5.44% surprise average. Of reporting companies, 187 or 65.9% reported sales or revenues above estimates. The average sales/revenue surprise is +1.06%. Financials lead with +10.7% EPS and +2.54% revenue surprises.

Valuation. The SPX trades at 15.9x estimated 2013 earnings ($110.15), 14.9x estimated 2014 earnings ($117.98), 13.4x estimated 2015 earnings ($131.03), and 12.1x estimated 2016 earnings ($144.83). The 10-year average median price/earnings multiple is 15.9x. Analysts expect 2013, 2014, 2015, and 2016 earnings to grow +6.52%, +14.1%, +11.1%, and 10.5%, respectively.

The BKX trades at 12.8x 2013 adjusted EPS ($5.16), 11.9x estimated 2013 earnings ($5.58), 10.8x estimated 2014 earnings ($5.58), 10.8x 2015 earnings ($6.15), and 9.5x 2016 earnings ($6.93). Analysts expect 2013, 2014, 2015, 2016 EPS will grow +19.4%, +8.10%, +10.4%, and +12.6%, respectively.

Composite, index, and equity options. Options markets worsened to neutral, compared to neutral to bullish the prior session. Composite options are neutral, index options are neutral, and equity options are neutral. The composite put/call ratio is 1.01, compared to 0.80 the prior day, and worse than 5- and 10-period moving averages of 0.89 and 0.87, respectively. The index put/call ratio is 1.14, compared to 0.69 the prior day, and worse than its 5- and 10-period moving averages of 0.98 and 0.97, respectively. The equity put/call ratio closed the day at 0.90, compared to 0.92 the prior day, and worse than its 5- and 10-period moving averages of 0.88 and 0.84, respectively.

NYSE Volume, Breadth Indicators. Volume fell -9.20% to 836.89 million shares, compared to 921.64 million shares the prior day, 1.11x the 752.91 million shares 20-day moving average. Market breadth was positive, and up volume led down volume. Advancing stocks led by +1,105 (compared to -2,169 the prior day), or 2.13:1. Up volume was 3.00:1 down volume.

Distribution day count and market outlook. On January 28th, the market outlook worsened to "in correction", ending the uptrend that commenced on September 9th, when the SPX opened at 1655.17, with a subsequent gain of +7.19%.

Libor, LOIS, Currencies, Treasuries, Commodities:

· USD LIBOR is 0.08500%, compared to 0.08500% the prior day. USD 3-month LIBOR is 0.23635%, down from 0.23645% the prior day, and compares to the January 4, 2013, recent peak of 0.58250%.

· The US Libor-OIS (LOIS) spread is 15.235 bps, compared to 15.145 bps the prior day, and compares to the recent June 12, 2012, 46.785 bps high. Euribor-OIS is 15.200 bps, up from 14.800 bps the prior day, and down from the December 27, 2011, high of 98.800 bps. Moves in the LOIS indicate changes in intra-bank lending risk premiums.

· The 3-month Euro basis swap is -6.862 bps, compared to -5.993 bps the prior day, up from a trough of -147.00 bps on December 14, 2011, but far better than a normal -10 bps and -40 bps range.

· Spanish 10-year debt yields are 3.72%, down from 3.75% the prior day. Italian 10-year debt yields are at 3.75%, compared to 3.78% the prior day. German 10-year debt yields are 1.62%, compared to 1.65% the prior day. Japanese 10-year debt yields are 0.60%, compared to 0.61% the prior day.

· The U.S. government overnight repo rate is +2 bps, compared to +2 bps the prior day. The January 2, 2013, 45 bps rate was the highest since late 2008. The record -2 bps low was on October 22, 2013.

· U.S. Treasury yields are lower, with 2- and 10-year maturities yielding 0.304% and 2.617%, respectively, compared to 0.312% and 2.629% Tuesday. The yield curve narrowed -0.47 bps, with the 2- to 10-year spread at +2.313%, compared to 2.318% the prior day. In the past year, the 2- and 10-year spread varied from a low of +1.429% on May 1, 2013, to a high of +2.648% on December 31, 2013.

· The U.S. dollar is mixed, better compared to the euro and British pound, but slightly weaker compared to the Japanese yen. The dollar trades at US$81.105, compared to a US$81.045 intraday low and US$81.121 the prior day, and mixed compared to its $80.598 50-day, US$80.464 100-day, and US$81.380 200-day averages. The euro trades at US$1.3511, compared to a US$1.3499 intraday low and US$1.3519 the prior day. The euro trades worse compared to its US$1.3651 50-day and US$1.3606 100-day averages, and compares to a multi-year low of US$1.1877 on June 7, 2010. In Japan, the dollar trades at ¥101.18, compared to ¥101.64 the prior day. The yen trades better than its 50-day moving average ¥103.54, and better than its January 1st 105.31 closing low, its weakest prior multi-year closing low.

· Citigroup Economic Surprise Index worsened to +31.10, compared to +32.60 the prior day. The index is worse compared to its respective +42.30 5-day and +51.10 10-day moving averages. The index turned positive on February 25th and moved to a March 25th high of 30.20, but turned negative again on May 6th and fell to a low of -32.90 on June 10th. The index improved and turned positive on July 30th and rose to 53.30 on October 1st, but subsequently fell on dollar weakness to -2.10 on October 31st. It subsequently strengthened ti a 72.70 high on January 15th, but then fell in each successive session. After a lag, the CESIUSD correlates with EPS revisions.

· Commodities prices are mixed, with mostly higher energy, higher precious metals, higher aluminum and copper, and mostly lower agriculture prices.

Volatility, Skew:

· The CBOE SPX Volatility Index (VIX) fell -10.9% to 19.11, compared to 21.44 at the prior close. The VIX is +28.2% above the 14.90 20-day moving average. Its 30-day high is 21.48. Its 30-day low is 11.69. The index's all-time closing low is 9.31 on December 22, 1993. The long-term average is 20.14.

· The Euro Stoxx 50 volatility index (V2X) is 22.57, down -1.93% from 23.01 at the prior day's close. The V2X index trades +20.7% above its 18.70 20-day moving average, -8.25% below the 24.60 30-day high, and +53.1% above the 14.74 30-day low.

· The Hang Seng volatility index (VHSI) closed at 22.03, down -0.36% from 22.11 at the prior close. The VHSI index trades +39.7% above its 15.77 20-day moving average. Its lowest historical close was 11.72, on June 30, 2005.

· CBOE SKEW (SKEW) rose +0.86% to 127.26, compared to 126.17 the prior day, above a neutral (115-120) range but below 130, a level which correlates well with market tops. The recent high was a record 143.20 on December 20th. Its recent low was 112.47 on May 25, 2013. Spikes in excess of 130 correlate well with short-term market tops, though not in October or November. The prior record high was 139.25, on March 12, 2012. The index rarely falls below 110, last on July 31, 2009. The index correlates with market tail risks, the cost of buying out-of-the-money, long-dated options, i.e., options not affected by expirations. A rise suggests that investors are buying more puts than calls, a bearish signal.

U.S. Economic Reporting and News:

· The latest week's MBA mortgage applications rose +0.4%, compared to -0.2% prior.

· At 8:15, January ADP employment change was 175K, compared to 185K survey and 227K revised prior.

· At 10:00, January ISM non-manufacturing composite, with 53.7 survey and 53.0 prior.

Overseas Economic Reporting and News:

· Australia - January AiG performance of services index was 49.3, compared to 46.1 prior.

· Eurozone - January final PMI services was 51.6, compared to 51.9 survey and prior. PMI composite was 52.9, compared to 53.2 survey and prior. MoM retail sales fell -1.6%, compared to -0.7% survey and +0.9% prior.

· France - January PMI services are 48.9, compared to 48.6 survey and prior.

· Germany - January final PMI services were 53.1, compared to 53.6 survey and prior.

· Italy - January PMI services was 49.4, compared to 48.9 survey and 47.9 prior.

· Portugal - 4Q2013 unemployment was 15.3%, compared to 15.6% prior.

· Spain - January PMI services was 54.9, compared to 55.0 survey.

· United Kingdom - January PMI services was 58.3, compared to 59.0 survey and 58.8 prior.

Company Ratings/News:

  • None.