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Daily Agenda: After a Sharp Dip, Beijing Intervenes

Chinese policy makers intervene after equity correction; another major hedge fund closes; oil futures give up gains as tensions simmer between Saudi Arabia and Iran.

After Monday’s brief and violent rout in Chinese equity markets, the government moved in to prop up stock prices. Significant buying by state-controlled investment vehicles was buttressed by a fresh liquidity injection into money markets by the People’s Bank of China. Meanwhile, the China Securities Regulatory Commission informed investors that the limit on sales by major shareholders set to expire next week would be extended until further notice. After ending 2015 with pledges to cease artificially supporting markets, which included a withdrawal for repurchase transactions by the PBOC, Monday’s $600 billion loss in market capitalization appears to be more than Beijing’s leaders could bear. The response from other global stock markets, which sold off sharply on Monday, was muted Tuesday, with both the Stoxx Europe 600 and DAX indexes down slightly in midday trading.

Major shift in hedge fund industry continues. Nevsky Capital is the latest casualty among major hedge fund managers. The London firm will return roughly $1.5 billion to its investors as opportunities for fundamentally driven long/short equity managers remain scarce. Meanwhile Scott Bessent, who oversaw George Soros’s family office investments for the past four years, has reportedly raised more than $4 billion for his new fund management firm, Key Square Group.

Oil rally stalls. Despite escalating tensions between Iran and Saudi Arabia, rivals in both the Middle East and in the Organization of Petroleum Exporting Countries, oil markets gave up gains from trading sessions on Sunday and Monday with futures contracts for February delivery surrendering all gains for the week in trading in London. Most strategists argue that barring military conflict, tensions are likely to extend OPEC’s commitment to robust production levels, with an accord between member states to cut back now less likely.

German unemployment declines. December unemployment data released on Tuesday by the German Federal Labor Agency improved by a margin exceeding consensus economist forecasts, with a decline of 14,000 on a seasonally adjusted basis. The headline jobless rate remained unchanged at 6.3 percent — the lowest level since the early 1990s.

Funds lose on Porsche ruling. A ruling by the German Federal Constitutional Court today dealt a blow to fund managers, including New York-based Elliot Associates, when it restricted access to government prosecutors’ research into trading in shares of Porsche Automobil Holding. The funds took heavy losses when Porsche executed an options strategy in secret as part of a failed attempt to acquire Wolfsburg, Germany car giant Volkswagen in 2009 and subsequently launched civil litigation accusing the car maker of market manipulation.

Legg Mason seeks to acquire Clarion. On Tuesday, Bloomberg reported that Baltimore asset manager Legg Mason is in advanced talks to purchase New York real estate investment firm Clarion Partners. The report, based on anonymous sources, places the value of the transaction at roughly $850 million. Clarion oversees more than $35 billion in assets.

Portfolio Perspective: Two Critical Questions for Equities in 2016

There are two essential questions that must be answered in order to get a handle on the outlook for the U.S. stock market in 2016: Will the credit boom persist and continue to generate financial engineering designed to boost stock prices, and will the unwinding of the commodity bubble cease?

As to the credit boom, we believe that it will persist not only through 2016, but likely into 2019 as well.

As to the commodity bubble, we believe it is likely that it will continue to unwind through at least the first part of the year. If enough of the speculative demand for commodities is removed, there is a chance that the unwind may conclude later in the year.

This combination of a credit boom and the unwind of the commodity bubble will continue to drive periodic bouts of volatility.

Brian Reynolds is the chief market strategist for New Albion Partners in New York.

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