- Greeks Return to Ballot Box, Pivotal Moment. Greeks head to the ballot box in two days for a contest that may determine the fate of the world’s first democracy and the future of the newest reserve currency, while roiling markets from Wellington to Wall Street. Almost 10 million Greeks will vote for the second time in six weeks after a May 6 ballot failed to yield a government. The constitution permits a third election too. The final polls, published on June 1, showed no party set to win a majority. Exit polls will be released when voting ends at 7 p.m. in Athens, with a first official result estimate due around 9:30 p.m. The June 17 vote will turn on whether Greeks, in a fifth year of recession, accept open-ended austerity to stay in the euro or reject the conditions of a bailout and risk the turmoil of becoming the first to exit the 17-member currency.
- Spain Grazing Junk Status Fuels Contagion Risk: Euro Credit. Spain's slide down the credit-rating ladder has brought the nation within a hair of junk status and risks triggering contagion in Italy and beyond should investors completely shun the bonds of Europe's fourth-richest economy. Moody's said Spain's decision to seek as much as 100 billion euros of European funds to shore up its banks increased the risk the country would need a full bailout. Spain's aid request and the credit rating reduction have increased foreign investor flight from its bonds, leaving the Treasury increasingly reliant on the soon-to-be rescued domestic banking industry to buy its debt. "Junk status would be serious and would confirm it is locked out of the capital markets," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York. "It would mean the bank aid turns into a full-fledged aid package, redouble pressure on Italy and France while Portugal would take another hit."
- ING Bank Cut as Moody’s Downgrades Five Dutch Banking Groups. ING Bank NV, Rabobank Nederland and three other Dutch banking groups had their credit ratings cut by Moody’s Investors Service, which cited their reliance on wholesale funding amid a recession and Europe’s debt crisis. Long-term debt and deposit ratings at ING Bank, Rabobank Nederland, ABN AMRO Bank NV and LeasePlan Corporation NV were lowered by two grades, and SNS Bank NV received a one-level cut, Moody’s said in a statement in Frankfurt today. “Dutch banks will face difficult operating conditions throughout 2012 and possibly beyond,” Moody’s said in the statement. ING Bank’s ratings have a negative outlook and those of the other lenders are stable, it said. Separately, Moody’s also downgraded UniCredit Leasing S.p.A by two levels to Baa2 from A3.
- Draghi Fails to Find Clarity in ECB Communication. European Central Bank President Mario Draghi is struggling to find the right balance between saying too much and nothing at all. Draghi won praise for his candor when he took the helm of the ECB seven months ago. Since then, he has kept investors guessing on three key Greek initiatives and confused some of them on the outlook for ECB bond purchases, whipsawing the euro and Italian and Spanish bonds. Economists from Nomura International Plc to ING Group NV say Draghi’s communication is exacerbating market turmoil. “Since the first press conference when Draghi came in with a very confident style, it has basically been downhill on the communication front,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “Clearly the communication has sometimes created the wrong impression, and that makes markets that bit more volatile.”
- Irish Tell Spain to Imagine the Worst and Burn Bank Bondholders. Ireland has this banking advice for Spain: imagine the worst and double it. Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system. "Think of the worst possible scenario on banking losses: then double it," said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin. "Adopt the most conservative assumptions." Nine hundred miles northwest of Madrid, Irish analysts wring three lessons from its own banking crisis, among the worst in history. First, quickly present an accurate estimate of the bad loans. Second, force banks to face up to losses, possibly through the creation of a so-called bad bank. Third, share as much of the loss as possible with bank bondholders. "Spain should face the economic reality, even if they have to value property loans at discounts of 40, 60 or even 80 percent," said Alan Ahearne, former economic adviser to Brian Lenihan, the finance minister who presided over Ireland's response to the near-collapse of its financial system. "If the real losses aren't faced up to, who's that going to fool?"
- France Plans Tax Changes to Raise 10 Billion Euros, Echos Says. The French government plans to propose revisions in tax laws to raise an additional 10 billion euros ($12.6 billion) in revenue to reduce the country’s budget deficit, Les Echos reported. Changes to the law will include higher inheritance taxes, an end to exemptions for payroll taxes on overtime the reestablishment of the wealth tax schedule and measures to reduce tax loopholes used by large companies, the newspaper said, without saying where it got the information. A proposed adjustment in capital taxes to the same level as salaries is planned for the fall, Figaro said.
- The EU Smiled While Spain’s Banks Cooked the Books. Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.
- Does China's Next Leader Want the Job? Anyone who thinks their job stinks should consider the one Xi Jinping is about to take on. Xi is expected to replace Chinese President Hu Jintao in the fall. He must have some serious misgivings. If the last 20 years were a golden age for the world’s most populous nation, today is one filled with growing doubts. The Bo Xilai scandal has shattered the veneer of political stability, cyber- dissidents are emboldened in their challenges of the Communist Party and diplomatic headaches abound -- many of them concerning the U.S., where China may figure in November’s presidential election. No issue looms larger than China’s suddenly shaky economy. The world is now bracing for a slowdown that pundits said was unlikely to happen. So are officials in Beijing, who worry that social unrest could boil over quickly if growth evaporates. All stimulus and no reform gives China some Frankenstein- like qualities -- a powerful economic creature born out of unorthodox experiments. Unproductive spending of the magnitude China already has unleashed, and what seems to be in the pipeline, may result in a Japan-like debt mess. When China’s reckoning does come, and every industrializing nation has one, it may be far worse than investors believe. Xi will have to do a much better job than his predecessor to keep that reckoning from becoming a monster all its own.
- Iron-Ore to Slump as China Slows, Eurofer Says. Iron-ore prices will tumble over two years as growth in Chinese demand stalls and new mines increase supply, according to Eurofer, a lobby for steelmakers including ArcelorMittal that are among the biggest buyers of the material. Chinese steel output growth is forecast to fall by 50% to less than 5% from 2013, compared with last year, as iron-ore production climbs to more than 1.4 billion metric tons by 2015, according to Macquarie Group Ltd. data. The trend may see ore prices drop to as low as $80 a ton, Eurofer said. In contrast, the lowest price among analyst estimates compiled by Bloomberg is $100 by 2015 from Toronto-Dominion Bank. The spot price was $134.70 yesterday.
- O'Neill's BRICs Risk Hitting Wall in Threat to G-20 Growth. Even Jim O'Neill is asking whether the BRICs need reinforcing 11 years after he coined the term to describe the world's future powerhouse economies. O'Neill, chairman of Goldman Sachs Asset Management, says his thesis that Brazil, Russia, India and China would together increasingly buoy the global economy faces "a more challenging test" as investors dump the countries' stocks. China pared its growth target to the lowest since 2004, Standard & Poor's may cut India's investment-grade credit rating, Brazil is on pace to expand less than 3 percent for a second straight year and falling oil prices may hurt Russia. A prolonged slowdown in the four countries poses a fresh threat to a world economy suffering its weakest spell since the end of the 2009 recession, which the BRICs helped shorten by contributing about half of the international expansion since 2007. Leaders attending next week's Group of 20 summit in Mexico are already expressing concern, with Brazilian President Dilma Rousseff warning June 4 that emerging markets can't carry the weight of the world on their shoulders. Rich-nation policy makers "are so wrapped up in their own problems they're praying some of this weakness is just temporary in the BRICs," London-based O'Neill, 55, said in a telephone interview. "If it's not, then it's pretty worrying."
- Oil Rout Has China Hoarding Most Since Olympics: Energy Markets. China is hoarding crude at the fastest rate since the Beijing Olympics four years ago as the slump in international prices prompts it to import unprecedented volumes even as refining slows. The world's second-biggest oil consumer built up a surplus of about 90 million barrels of crude in the first five months of the year, government data show. The excess, the most since the run-up to the 2008 games, is probably being kept at emergency and commercial storage centers, according to the IEA.
- Fannie Mae, Freddie Mac REO Costs Top $8.5 Billion, Auditor Says. Fannie Mae and Freddie Mac have spent $8.5 billion on foreclosed homes since 2007, the Federal Housing Finance Agency’s auditor said in a report urging the regulator to ensure taxpayer money isn’t being wasted. The FHFA, which has overseen the government-sponsored enterprises since they were seized during the credit crisis in 2008, must ensure Fannie Mae and Freddie Mac can cope with the surge of so-called real-estate owned properties on their books as a result of defaults on loans they guarantee, the agency’s Office of Inspector General said in the report released today.
- Ex-Soros Adviser Fujimaki Says Japan to Probably Default by 2017. Investors should buy assets in U.S. dollars and other currencies of strong developed nations because Japan may default within five years, said Takeshi Fujimaki, former adviser to billionaire investor George Soros. “Japan is likely to default before Europe does, which could be in the next five years,” the president of Fujimaki Japan, an investment advising company in Tokyo, said in an interview yesterday. Japanese should hold foreign-currency products, such as those denominated in the greenback, Swiss franc, sterling, Australian and Canadian dollars, Fujimaki said. Japan’s public borrowings, the world’s biggest, will balloon to 245.6 percent of its annual economic output in 2014, up from 67.3 percent in 1984, an estimate by the International Monetary Fund shows. Japanese Prime Minister Yoshihiko Noda is struggling to gather support for his plan to double the 5 percent sales tax by 2015 to help reduce debt. “The yen and the JGB market are in a bubble,” Fujimaki said. “With the gigantic debt Japan has accumulated, a thin needle, or even a gentle breeze may pop this. Events in Europe can possibly trigger this to blow up.”
- BOJ Holds Policy Ahead of Greek Vote With Eye on Global Markets. The Bank of Japan (8301) kept the size of its asset-purchase fund unchanged two days before a Greek election that may determine whether Europe’s crisis worsens, and said it will pay “particular” attention to global markets.
- Sour Mood of Greeks Makes Vote a Cliffhanger. On Sunday, Greece's future in the euro zone will be in the hands of voters like Kety Bakirtzoglu: longtime backers of the entrenched political establishment who feel burned and are ready to roll the dice on something new. For years, Ms. Bakirtzoglu was a stalwart socialist voter from the Pasok party's core, Greece's giant public sector. Then, as part of a bid to meet austerity goals mandated by its bailout, the socialist government pushed her out of her job at a state housing agency.
- Egypt's Elections in Turmoil After Rulings Boost Military. Egypt's 16-month transition toward democracy was thrust into turmoil just two days before the country's historic presidential election, as the country's highest court dissolved the Islamist-dominated parliament and its top generals took over legislative powers. Egypt's highest court stunned the country with two rulings Thursday. One effectively dissolves both houses of the country's parliament. A second overturned a law that would have barred a former regime loyalist from contesting the presidential runoff to be held Saturday and Sunday.
- Banks' Bad Debts Weigh on Vietnam. Vietnam's government is under pressure to find ways to reduce the country's spiraling bad debts, which have raised fears of loan problems cropping up elsewhere in Asia.
- Now They've Invented Laser-Guided Bullets So Snipers Can Kill You From 2 Miles Away.
- Democratic Pollster: Obama's Negative Tone And Messaging Is Going To Lose Him Michigan.
- CHART OF THE DAY: This Chart Destroys The Idea Of Peak Oil.
- Why Joint Central Bank Action Is Unlikely and Won’t Work. Speculation that major central banks are planning coordinated action heightened on Friday on a media report that Group of 20 nations are preparing to provide liquidity to financial markets.
- A Global Recession? The Warning Signs Are Everywhere.
- Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows Mitt Romney attracting 48% of the vote, while President Obama earns 44%. Four percent (4%) prefer some other candidate, and another four percent (4%) are undecided.
- Credit hedge funds profit despite rocky markets. In a year of uneven returns for many U.S. hedge funds, managers who invest mainly in bonds have outshone stockpickers. Over the first five months of the year, credit-focused hedge fund portfolios were up 4.11 percent compared with a 2.4 percent gain for stock-focused ones, according to hedge fund tracking service eVestment|HFN.
- Basel III will ‘damage developing countries’. Tough global bank reforms will be disproportionately difficult to implement in developing economies and will damage their growth, a global taskforce of bankers and businessmen from emerging markets is set to warn. The so-called Basel III rules will impose capital and liquidity requirements that were designed for US and Europe institutions but would be difficult to implement in emerging economies, according to a report set to be issued on Sunday by the B20 group of businesses, which advises the G20 group of nations.
- Post-crash malaise takes toll on CDS. Credit derivatives, where investors and speculators trade default risks of sovereigns and corporates, are a pale shadow of the boom market that was being aggressively touted by Wall Street just a few years ago.
- Egypt Bombshell Has Echoes of Algeria. For many Egyptians – not least the Muslim Brotherhood, which won the biggest share of seats in the legislature – the decision by a court packed with appointees from the ousted political order was seen as the most damaging move in a well-planned counter-revolution, engineered by the ruling military and remnants of the old regime. Across the Arab world, it will revive memories of Algeria in 1991, when the army cancelled a second round of elections to derail a victory by an Islamist party, plunging the country into a decade-long civil war.
- Central bankers brace for euro break-up. At least one country will leave the eurozone in the next five years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.
- Debt crisis: ECB last hope as dam breaks in Spain. Spain's borrowing costs have surged to record highs and are perilously close to the point of no return, threatening a full-blown sovereign crisis unless the European Central Bank comes to the rescue.
- Funding lifeline for the banks highlights how deep the crisis is. Last night's announcement of £140bn in cheap funding for banks is fundamentally an acknowledgment of the storm to come ahead of a deepening eurozone crisis. This is a lifeboat worth nearly 10pc of GDP. Things really are that bad.
- None of note
- Asian equity indices are -.50% to +1.0% on average.
- Asia Ex-Japan Investment Grade CDS Index 183.0 -7.0 basis points.
- Asia Pacific Sovereign CDS Index 150.50 -1.5 basis points.
- FTSE-100 futures +.23%.
- S&P 500 futures +.11%.
- NASDAQ 100 futures +.17%.
Earnings of Note
- None of note
8:30 am EST
- Empire Manufacturing for June is estimated to fall to 13.0 versus 17.09 in May.
9:00 am EST
- Net Long-term TIC Flows for April are estimated to rise to $45.0B versus %36.2B in March.
9:15 am EST
- Industrial Production for May is estimated to rise +.1% versus a +1.1% gain in April.
- Capacity Utilization for May is estimated at 79.2% versus 79.2% in April.
9:55 am EST
- Preliminary Univ. of Mich. Consumer Confidence for June is estimated to fall to 77.5 versus 79.3 in May.
- None of note
Other Potential Market Movers
- The ECB's Draghi speaking and BoJ interest rate decision could also impact trading today.