Need to Know: China’s stock selloff could wreak a lot more havoc before it’s over—Merrill Lynch

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China growth and financial market worries have morphed into the latest buzzkill for global investors, adding to a list that includes earnings jitters and rate-hike worries.

A two-day rally sputtered out for the Shanghai Composite despite all the jawboning from Beijing officials, with an equity selloff spreading globally. That means a big haul of U.S. earnings Tuesday may need to be extra perky to reinstate any kind of ebullience on Wall Street.

“At the very least, we should be prepared for this to get worse before it gets better,” blogger Jani Ziedins at CrackedMarket told clients late Monday, though he added that the supply of nervous sellers out there could run out at any moment.

Read: Watch out for the dead-cat bounce for stocks, warns Morgan Stanley

Just in time for a China crisis is our call of the day, from David Cui, who heads up equity strategy for that country at Bank of America Merrill Lynch.

Cui, who predicted the 2015 blowout for Chinese stocks three months before it happened, said in a Monday report that no one should have expected the win streak—two sessions as of Monday—in China to last. He said if that market loses confidence and starts to see consecutive days of sharp declines with lots of participants, China officials may bring out the big guns.

“We cannot rule out such a scenario because the sentiment is jittery and fundamentals are still deteriorating,” he said, according to Bloomberg, which notes that Cui isn’t always 100% right. He called for a 20% rout in Chinese stocks in July, but the market is only about 11% off that level.

China’s latest meltdown came after the country announced new measures to ease funding worries for private companies. The market has chewed it all over and decided that such stimulus measures are “cushioning a fall rather than boosting the economy. The yuan has displayed this glass half full sentiment all along as it remains little changed around a 21 month low,” said Jasper Lawler, head of research at London Capital Group.

The market

Dow YMZ8, -1.04% S&P 500 ESZ8, -1.22%  and Nasdaq NQZ8, -1.50%  futures are deep in the red. That continues Monday’s selloff for the S&P SPX, -0.43%  and Dow DJIA, -0.50% though the Nasdaq COMP, +0.26%  squeaked by with a gain.

Read: Would you be ready for the Dow Jones Industrial Average to drop 5,700 points?

As mentioned, China stocks SHCOMP, -2.26%  walked back part of a two-day rally, dragging down the rest of the region. Europe SXXP, -1.07%  is also lower.

Check out the Market Snapshot column for the latest action.

You know investors are nervous when gold GCZ8, +1.09% —gaining 1%—wakes up and the USDJPY, -0.44%  starts dominating. Along with that, the yield on 10-year U.S. government debt TMUBMUSD10Y, -1.33%  which was last yielding 3.146% from 3.196% on Monday (yields fall as prices rise). Crude US:CLU8 is also tumbling.

The chart

Northman Trader’s Sven Henrich has been watching parallels between how stocks performed in 2007 and this year so far. “An early correction, followed by multiple months of recovery and then making new highs on negative divergences all the while volatility is increasing versus the previous year,” he writes.

Henrich provides our chart of the day, which zeroes in on fresh lows for financials—a sector that should benefit, (but isn’t) from the prospect of higher rates—on Monday. His chart shows the S&P (green line) going one way and the PHLX/KBW Bank Index (red) BKX, -2.74%  and Financial Select Sector SPDR ETF (purple) XLF, -2.14% headed the other: XLF, -2.14%

Here’s that chart in case the tweet isn’t clear enough:

Now look at his tweet about that same setup in 2007:

And here’s that chart blown up:

Read more about what Henrich has to say about other critical levels to watch in his weekly market update.

The buzz

Caterpillar CAT, -1.99% McDonald’s MCD, -0.51% 3M MMM, +0.76% Lockheed LMT, -0.41% Harley-Davidson HOG, -2.12% United Tech UTX, -1.77% Biogen and Verizon VZ, +0.15% are the big-name results out this morning.

Earnings previews: Biogen, AMD, Intel, Amazon, Whirlpool, Ford

Tesla TSLA, +0.37%  has moved up its earnings release by 48 hours, now expected after the closing bell Wednesday. CEO Elon Musk, who says that tunnel under LA will be ready for the public Dec. 10, has been tweeting random stuff, alarming the Twitter police:

Marijuana-related investments will be in the spotlight after Monday’s beatdown for Aurora ACBFF, -12.80%  and ETFMG Alternative Harvest ETF MJ, -9.36% to name a few.

European chip stock AMS AMS, -25.68%  is notable for its 30% plunge on Tuesday after a warning over the fourth-quarter and 2019.

A judge upheld Bayer’s weedkiller cancer link, but cut the jury award by more than $200 million.

The quote
Getty Images

President Recep Tayyip Erdogan

“We have strong evidence that this murder was planned. He was brutally murdered.”—That was Turkish President Recep Tayyip Erdogan addressing lawmakers Tuesday, over the death of journalist Jamal Khashoggi three weeks ago at the Saudi embassy in Istanbul.

As for the widely shunned “Davos in the Desert” conference in Riyadh, hackers took over the main website and dropped an image of Khashoggi on the home page.

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