TheChek News Flow

Asian Market Update: PBoC defers liquidity injection for the second time just as China policymakers begin Central Economic Work Conference to iron out 2014 forecast

***Observations/Insights*** - Asian equity markets trading mixed and largely sideways as investors await the bulk of monthly economic data out of China. After the release of higher than expected trade surplus and a slightly softer inflation, industrial production, retail sales, and fixed asset investment figures are on tap. Of separate note in China, fixed income markets are not reacting to PBoC deferring an open market operation for the 2nd consecutive session, with Shibor rates falling to multi-week lows. China has also started its Central Economic Work Conference today, which is widely expected to unveil 2014 economic projections from the State Council. - Economic data from Japan reveled further signs of a slowdown from sugar high of Abenomics. Following overnight release of a softer Q3 final GDP, the Ministry of Finance posted its quarterly projects for Q4 declining from impressive Q3 levels, just as Nov money supply continues to expand. Fin Min Aso would not commit on whether FY14 bond issuance needed to be expanded, even though the govt previously hinted they would prefer not to expand its debt load. - Australian treasurer conceded the economy is locked in to a subtrend pace growth. NAB business conditions decline eased, with bank economists citing improved political environment and accommodative monetary policy, while also warning it was unclear if that improvement can be sustained.

***Economic Data*** - (JP) JAPAN Q4 BSI LARGE ALL INDUSTRY Q/Q: 8.3 V 12.0 PRIOR; BSI LARGE MANUFACTURING: 9.7 V 15.2 PRIOR (first q/q decline in 4 quarters) - (JP) JAPAN OCT TERTIARY INDUSTRY INDEX M/M: -0.7% V 0.1%E (9-month low) - (JP) JAPAN NOV M2 MONEY STOCK Y/Y: 4.3% V 4.2%E (multi-year high); M3 Y/Y: 3.4% V 3.5%E - (AU) AUSTRALIA OCT HOME LOANS M/M: 1.0% V 1.0%E; INVESTMENT LENDING: 8.2% V 6.5% PRIOR; OWNER-OCCUPIED LOAN VALUE: 1.7% V 6.2% PRIOR - (AU) AUSTRALIA NOV NAB BUSINESS CONDITIONS: -3 V -4 PRIOR; NAB BUSINESS CONFIDENCE: 5 V 6 PRIOR (3-month low) - (NZ) NEW ZEALAND NOV RETAIL CARD SPENDING M/M: 0.6% V 0.3%E; TOTAL CARD SPENDING M/M: 0.2% V 1.1% PRIOR - (NZ) NEW ZEALAND NOV TRUCKOMETER HEAVY M/M: -1.5% V +0.5% PRIOR - (PH) PHILIPPINES OCT EXPORTS Y/Y: 14.0% V 8.3%E; TOTAL MONTHLY EXPORTS: $5.0B V $5.0B PRIOR - (PH) PHILIPPINES OCT UNEMPLOYMENT RATE: 6.5% V 7.3% PRIOR - (KR) South Korea Nov Dept Store Sales y/y: +5.9% v -1.7% prior; Discount Store Sales y/y: +0.8% v -6.4% prior - (UK) UK NOV RICS HOUSE PRICE BALANCE: 58% V 60%E (highest reading since Jun 2002)

***Fixed Income/Commodities/Currencies*** - (CN) PBoC won't conduct open market operations (OMO) in today's session (2nd consecutive session of halted operations) - (AU) Australia MoF (AOFM) sells A$100M in 2030 index Bonds; avg yield: 2.0690%; bid-to-cover: 4.92x - (CN) Daily Shibor fixings: O/N: 3.5580% v 3.6200 % prior (6th consecutive decline, lowest since Oct 21st); 1-week: 4.4440% v 4.4850 % prior (5th consecutive decline, lowest since Nov 13th) - JGB: (JP) Japan MoF sells ¥545.5B in 1.7% (1.8% prior) 30-yr notes; Avg yield: 1.704% v 1.616% prior; Bid to cover: 4.15x v 4.40x prior

- USD/CNY: (CN) PBoC sets yuan mid point at 6.1114 v 6.1130 prior setting (record high setting for Yuan) - USD/JPY traded in a 20pip range, consolidating two consecutive sessions of strong gains, even though the pair did briefly test a 6-month high near ¥103.40. EUR/JPY cross extended its gains above ¥142 handle, a 5-year high, with USD trading softer on other majors. EUR/USD was up 30pips above 1.3760, AUD/USD is up 40pips from the lows above 0.9110, and NZD/USD continued to test the $0.83 level.

***Speakers/Political/In the Papers*** - (CN) Fitch: sees widening polarization and slowdown for China homebuilders - (CN) China Academy of Social Sciences (CASS): Sees China 2013 GDP at 7.7% v 7.5% official target; Sees 2014 GDP 7.8%, inflation 2.8% - annual Economic Blue Book - (CN) China Academy of Social Sciences (CASS): China to face uncertain demand and much structural adjustment brought by its systemic reform in 2014; Economy to remain generally stable - Shanghai Daily - (CN) ANZ economist: Dec CPI likely to remain at 3%; 2013 CPI estimated at 2.7% v 3.5% official control target - Shanghai Daily - (CN) According to PricewaterhouseCoopers, China 2013 production of light vehicles estimated at 18.5M units, +10.7% y/y - Shanghai Daily - (JP) Japan Fin Min Aso: Cannot determine if FY14 new bond issuance will exceed prior FY13 level - financial press - (JP) Japan Chief Cabinet Sec Suga: Cabinet level forum to be set up on nuclear energy policy - (JP) Japan PM Abe cabinet approval rating declines across multiple polls; NHK survey found Dec cabinet approval declined to 50% from 60% prior month; Kyodo News reported support declined to 47.6% from 57.9% prior - Japanese press - (AU) Australia Treasurer Hockey: Australia economy locked in below trend growth - (NZ) RBNZ dep gov Spencer: New residential construction loans will now be exempt from the loan-to-value (LVR) restrictions introduced in October even though the (LVR) building loans are only about 1% of total residential lending - NZ press - (KR) South Korea President Park: North Korea leadership purge may make ties with the South more unstable - press - (KR) South Korea Fin Min Hyun: Economic recovery shows signs of strengthening; Sees 2014 CPI in 2.0-2.5% range - (KR) According to one survey, analysts unanimously expect Bank of Korea (BOK) to maintain Base Rate at 2.50% on Dec 12th

***Equities*** Market Snapshot (as of 04:30 GMT): - Nikkei225 -0.4%, S&P/ASX +0.1%, Kospi -0.5%, Shanghai Composite +0.2%, Hang Seng -0.1%, Dec S&P500 +0.1% at 1,810, Feb gold +0.6% at $1,242, Jan crude oil +0.3% at $97.61/brl

US markets: - PVH: Reports Q3 $2.30 v $2.25e, R$2.26B v $2.22Be; CEO: believe the current holiday season will be very competitive and highly promotional; -1.3% afterhours - GM: US Treasury confirms selling last of its GM common stock holdings; recoups $39B of original investment; +0.8% afterhours - CASY: Reports Q3 $1.06 adj v $1.13e, R$2.02B v $2.03Be; -1.2% afterhours - TXN: Narrows Q4 $0.44-0.48 v $0.47e, R$2.92-3.04B v $2.99Be (prior $0.42-0.50, R$2.86-3.10B) - mid-quarter update; -0.3% afterhours

Notable movers by sector: - Consumer staples: Orient Group Inc 600881.CN +3.5% (to invest in modern agriculture project) - Industrials: Beiren Printing Machinery 187.HK +2.6% (subsidiary receives injection); Cathay Pacific Airways 293.HK +0.9% (CEO comments); Leo Group Co Ltd 002131.CN +2.4%, Luxi Chemical Group Co Ltd 000830.CN +2.7%, Shandong Kingenta Ecological Engineering Co Ltd 002470.CN +1.8% (China issues plan on high standard farmland) - Financials: Shanghai International Port Group Co Ltd 600018.CN +3.6% (to acquire stake in Bank of Shanghai) - Technology: Qingdao Haier Co Ltd 600690.CN +10.0% (enters agreement with Alibaba) - Energy: Anhui Hengyuan Coal-Electricity Group Co Ltd 600971.CN +0.6% (receives notice on reduced expense); Woodside Petroleum Ltd WPL.AU +0.7% (FY13, FY14 production guidance) - Healthcare: Takeda Pharmaceutical 4502.JP +0.2% (FDA recommendation)

After Hours Summary: ABM +7.6%, CMTL +6.2%, MCC +1.8%, LL +0.9%, PBY -12.8%, CASY -0.9%, PVH -0.7% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: ABM +7.6%, CMTL +6.2%, MCC +1.8%, LL +0.9%, TPLM +0.3%, STJ +0.2%

Companies trading higher in after hours in reaction to news: SYN +11.2% (co and and Intrexon (XON) initiate development of novel biologics for a subset of patients suffering from Irritable Bowel Syndrome), TRN +2.9% (formed strategic railcar alliance Element Financial Corporation), ARWR +2.8% (presented Phase 1 Data on ARC-520 at HepDART 2013 - New data including pharmacokinetics (PK) and adverse event (AE) attribution presented today in a poster and in an oral presentation tomorrow, support the previous findings that ARC-520 appears to be generally safe and well-tolerated at all six dose levels studied), MRVL +1.3% (announced appiontment of Michael Rashkin as interim CFO)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: PBY -12.8%, CASY -0.9%, PVH -0.7%, TXN -0.3%

Companies trading lower in after hours in reaction to news: IEP -7.0% (announced sale of 2 mln depositary units), TA -5.4% (announced public offering of 5 mln common shares), GASS -4.3% (announced public offering of 10 mln shares of common stock), ARCC -3.4% (plans to make a public offering of 14.3 mln shares of common stock), PF -3.1% (announced secondary offering of 17 mln shares of common stock), FNSR -2.2% (announced proposed $200 mln convertible Senior notes offering due 2023), NXPI -1.7% (selling shareholders commenced 25 mln secondary offering of common stock)

Volcker Trims the Banking Hedge

Final Rule Could Force Banks to Think More Directly About the Risks They Are Taking On—and Not Just the Ones Investors Would Expect

Proprietary trades are often in the eye of the banker. And they don't always have to involve a group of traders placing high-stake wagers. Sometimes, they involve seemingly routine activities.

That is why the most important provision in Tuesday's release of the voluminous final version of the Volcker rule, meant to limit banks' ability to engage in proprietary trades, could be the inclusion of a ban on so-called portfolio hedging. This is when a bank tries to protect itself from an unspecific risk, a so-called Black Swan event.

Debate over whether such a provision should be included has swirled for some time. Although not included in the first version, it emerged last week that such a ban likely will be there amid a push to stiffen the rule's provisions.

Banks have argued against this, saying it would limit their ability to avoid getting sideswiped by unforeseen risks. There is some logic to this given how exposed the biggest institutions are to macroeconomic and global market forces.

Yet the sometimes amorphous nature of the threats portfolio hedges aim to protect against opens the possibility that they are simply proprietary bets in disguise. What's more, their existence may lull banks into thinking they can always minimize the risk of certain actions, or undertake ones that look matter of course yet are themselves proprietary wagers. And such hedges can, in any case, prove ineffective or simply blow up in a bank's face.

In that sense, J.P. Morgan's JPM +0.80% "London Whale" trade, which ended up costing it more than $6 billion, is instructive. The bank said in the wake of the debacle that the trades, which involved it placing bets using credit derivatives, wouldn't have fallen afoul of the Volcker rule. Regulators have since indicated they want to make sure this won't be the case, hence the decision to include a ban on portfolio hedging.

Perhaps most telling about the Whale, though, is what led to its creation. Awash in deposits with few options to profitably redeploy them due to slack lending growth, J.P. Morgan bulked up on corporate bonds. Its holdings of these securities as a percentage of its investment portfolio was more than four times that of peers Bank of America BAC +0.13% and Citigroup C +1.20% and 17 times levels seen before the financial crisis.

While not a proprietary trade in the traditional sense, it was nonetheless a bet on a particular market. And it led J.P. Morgan to try to hedge, through credit derivatives, the risk that some global event could cause a corporate meltdown.

Granted, J.P. Morgan may have taken this gamble regardless of whether it was able to try to hedge it. But if it hadn't been able to do so through portfolio hedging, the bank may not have reached quite so far. Or it may have taken a smaller overall position if it had to hedge individual securities, which likely would have proved more expensive.

Others have also been lulled into a false sense of security by thinking that broad-based hedges can protect them from what end up being outsize bets on a particular market. During the financial crisis, for instance, banks found that their broad hedges of portfolios of so-called Alt-A mortgages, or those that fell between the designations of being prime or subprime, weren't nearly as effective as they had thought.

Just how the Volcker rule limits banks' room for maneuvering in such areas will depend on the final language related to portfolio hedging. The fact a ban is there, though, should force banks to be more particular about the risks they take—even when they aren't swinging for the trading fences.

There wasn't a lot of excitement in the stock market today and there is nothing wrong with that. After rallying in broad-based fashion on Friday, the major indices stood their ground (for the most part) amid a lack of conviction from buyers and sellers alike.

Today wasn't a case so much of the stock market going up as it was a case of some influential stocks going up to keep the major indices on a winning path. In fact, decliners were just about even with advancers at the NYSE and led by a 3-to-2 margin on the Nasdaq.

Apple (AAPL 566.43, +6.41) and Google (GOOG 1078.14, +8.27) were key drivers of the S&P 500 and Nasdaq Composite while ExxonMobil (XOM 95.84, +0.19), Chevron (CVX 123.34, +1.05), and Goldman Sachs (GS 167.67, +0.46) were key drivers specifically of the price-weighted Dow Jones Industrial Average.

Another distinction in today's market is that the small-cap sector generally sat this one out as evidenced by the underperformance of the Russell 2000 (-0.2%). The S&P 500 made an attempt to switch into a higher gear, but it was rebuffed after peaking its head above the 1811 level. That area was a technical line inthe sand that was tried and trumped on three separate occasions. The last time was around 1:25 p.m. ET. From that point forward, the broader market trended lower in a choppy trade, yet there was never a cascade of selling interest.

Three Federal Reserve Bank Presidents -- Lacker (Richmond), Bullard (St. Louis), and Fisher (Dallas) -- gave speeches today that touched on their economic views, but ultimately none of them surprised the market with their thinking. On a related note, the Federal Reserve released a report today that showed household net worth hit a record high $77.3 tln in the third quarter. The stock market took that news and sat with it. Despite the encouraging statistic, it did little to add to household net worth today.

From a sector standpoint, there wasn't a single sector that moved up, or down,at least 1.0%. The biggest gainer today was the materials sector (+0.5%), which also happens to be one of the lowest-weighted sectors in the S&P 500. A decent showing by the financial (+0.4%) and industrials (+0.3%) sectors helped carry more of today's performance load. The utilities (-0.6%) and the consumer discretionary (-0.1%) sectors were the only sectors to end the day in red figures. McDonald's (MCD 95.72, -1.08) was a notable blue chip laggard following the company's report that comparable sales in its US business declined 0.8% in November (they were up 0.5% overall). Separately, food services company Sysco (SYY 37.62, +3.31) enjoyed a strong day with investors applauding its decision to buy US Foods for a total consideration of $8.2 bln. Aside from stocks, the bond market also stood its ground today after Friday's advance. The 10-yr note added two ticks, leaving its yield at 2.85%.

Tomorrow's economic calendar features the Wholesale Inventories and JOLTS - Job Openings reports for October. Neither is known for having market-moving potential. o Nasdaq +34.7% YTD o Russell 2000 +32.7% YTD o S&P 500 +26.8% YTD o DJIA +22.1% YTD

Fed's Fisher says uncertainty from fiscal and regulatory side hurting hirings; says cost of bond buying is exceeding benefits; sees rates remaining low long after QE 3