Today's Headlines

Bloomberg:

• Spanish Bonds Slide With Italy’s Amid Signs of Global Slowdown. Spanish and Italian bonds led losses among the securities of Europe’s so-called peripheral nations as China’s manufacturing and euro-area services and factory output all contracted, sapping demand for higher-yielding assets. Spanish five-year yields climbed the most in eight weeks as the nation’s borrowing costs increased at a 4.08 billion-euro ($5.26 billion) sale of debt maturing between 2016 and 2026. Portuguese and Greek bonds also slid as Europe’s benchmark stock index slumped 2 percent and Japan’s Topix index tumbled the most since March 2011. German bunds were little changed.
• Europe’s Carmakers Fall on Chinese Manufacturing Decline. Volkswagen AG (VOW) (VOW), PSA Peugeot Citroen (UG) and Renault SA (RNO) (RNO), Europe’s three largest carmakers, all dropped 5 percent or more after preliminary data showed Chinese manufacturing is unexpectedly contracting. Peugeot declined as much as 7.5 percent, VW fell as much as 5.3 percent and Renault lost as much as 5.1 percent after the figures indicated manufacturing in the country is shrinking in May for the first time in seven months. Europe’s automakers are banking on continued gains in China, the world’s biggest car market, to help offset plunging demand in their home region, where deliveries are at a 20-year low. The manufacturing drop adds to signs that economic growth in China is losing steam for a second straight quarter. “China economic data was weaker and raises concern about a possible slowdown in car demand,” said Juergen Pieper, a Frankfurt-based automotive analyst with Bankhaus Metzler. “Automakers have a lot to lose in China, not only from a sales volume perspective, but also because they earn above-average profit margins there.” Peugeot dropped as much as 55 cents to 6.83 euros and traded 5.9 percent lower as of 11:20 a.m. in Paris. Renault was down 4.3 percent and VW was 3.5 percent lower. Bayerische Motoren Werke AG (BMW) was down 3.5 percent and Daimler AG (DAI) was 4.7 percent lower.
• Credit Risk Surges From Three-Year Low on Slowing Growth Concern. The cost of insuring European corporate debt rose from a three-year low as disappointing Chinese manufacturing data triggered concern global economic growth will slow. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings rose seven basis points, or eight percent, to 94 basis points at 9:30 a.m. in London, the biggest increase in more than nine months. The Markit iTraxx Crossover Index of default swaps on 50 companies with high-yield credit ratings jumped 25.5 basis points to 392, the highest in a week and the biggest rise since March 20. An increase signals deterioration in perceptions of credit quality. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose eight basis points to 134, and the subordinated index climbed 13 basis points to 190. 
• Yen Jumps Most in 3 Months as Risk Appetite Shrinks. The yen climbed the most in almost three months versus the dollar as risk appetite shrank, with Japanese stocks tumbling after a technical signal that they had gained too much, too fast. Japan’s currency surged 2.7 percent versus South Korea’s won and 1.6 percent against the Mexican peso amid speculation the U.S. may reduce monetary easing that’s helped support global markets and as data showed China’s manufacturing contracted. The Swiss franc climbed the most against the euro since the nation’s central bank imposed a currency floor in 2011. The Dollar Index fell after reaching an almost three-year high. The yen strengthened 1.2 percent to 101.95 per dollar at 12:13 p.m. in New York after climbing as much as 2.3 percent, the most since Feb. 25. It slid to 103.74 yesterday, the weakest since October 2008. Japan’s currency rose 0.6 percent to 131.89 per euro. The dollar dropped 0.6 percent to $1.2938 per euro. 
• JPMorgan(JPM) to Daiwa See Rate Rise Amid Slower Growth: China Credit. Economists are forecasting that the People’s Bank of China is more likely to raise interest rates than cut them in the coming year, even as they slash growth projections for the world’s second-largest economy. Eight of 15 analysts surveyed by Bloomberg News this month project an increase in the benchmark deposit rate by the end of June 2014, compared with two who see a reduction.
• Bearish S&P 500 Bets Fall Most Ever After Stocks Record: Options. A record drop in the cost of bearish bets on U.S. stocks and surging call-option trading shows speculators grew in confidence after the S&P 500 Index climbed to a record. The Credit Suisse Fear Barometer, which measures the relative cost of S&P 500 bearish options over bullish ones three months from now, has plunged 35% in May, heading for the biggest monthly decline in data going back to 1994. More than 508,000 bullish options on the U.S. equity benchmark changed hands daily on average last week, the third-highest volume in 18 years, according to Bloomberg. Hedge funds are purchasing equity call options to make up for returns that have trailed the S&P 500 this year, said Peter Cecchini, global head of institutional equity derivatives at Cantor Fitzgerald LP. "The dominant fear in the market is the fear of missing out," Jason Thomas, chief investment officer of Aspiriant, said in an interview.
• Commodities Drop on Double Blow of China Data, Bernanke Remarks. Commodities fell for a third day, paced by declines in copper and oil, as manufacturing in China unexpectedly shrank for the first time in seven months and the head of the Federal Reserve hinted that stimulus may be tapered. The Standard & Poor’s GSCI Index (SPGSCI) of 24 commodities dropped as much as 1.2 percent to the lowest level in a week, and was 0.5 percent lower at 623.11 at 11:46 a.m. in London. 
• Copper Falls Most in Three Weeks as China Manufacturing Shrinks. Copper fell the most in three weeks in New York after manufacturing shrank for the first time in seven months in China, the world’s biggest user of the metal. A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics showed a preliminary reading today of 49.6 for May, below the level of 50 separating growth and contraction. The Standard & Poor’s GSCI Index of raw materials dropped for a third day and Japanese shares slid the most since the aftermath of the Fukushima disaster in 2011 as global equities plunged. Copper for delivery in July declined 2.8 percent to $3.286 a pound by 8:12 a.m. on the Comex in New York. Prices retreated as much as 2.9 percent, the most since May 1. Copper for delivery in three months fell 3 percent to $7,253 a metric ton on the London Metal Exchange and nickel, lead and zinc tumbled.
• Freddie Mac Begins Creating Bonds Backed by Modified Mortgages. Freddie Mac, the government-controlled mortgage financier, said that it’s begun packaging modified home loans into bonds that it guarantees, with $1 billion of securitizations already completed. The “vast majority” of the mortgages reworked to help homeowners had previously been contained in its bonds and were bought out after delinquencies, the McLean, Virginia-based company said today in an e-mailed statement. Since November 2011, the firm has been repackaging into bonds those loans that were once delinquent and began performing again without modifications, it said.

Wall Street Journal: 

• Obama Lays Out New Counterterrorism Plans. President Shifts Drone Policy and Makes Case for Closing Guantanamo Bay Prison.

Fox News:

• Two more arrested as London terror probe expands.

CNBC:

• Three Senior Executives at SAC Capital Subpoenaed to Testify: Report.
• Wagging the Dog: Why the Fed Fears Wall Street.

Zero Hedge: 

• Initial Claims In Line With Expectations. (graph)
• Did Corporate Buybacks Just Jump The Shark? (graph)
• The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?
• Spot The Bubble: Average New Home Price Soars By Most Ever In One Month To All Time High. (graph)
• European Stocks Dive Most In 10 Months. (graphs)
• Richard Koo Warns Of "Beginning Of The End" For Japanese Economy.
• UBS On Japan - Are You 'Abe'liever?

Business Insider: 

• The Muslim Brotherhood Has Turned Cairo Into A Dystopia [PHOTOS].
• ART CASHIN: 'Markets Fear Musical Chairs May Have Started'.
• Here Are Four Signs We're In A Dangerous Bubble.

The Bubble Bubble: 

• The Emerging Markets Bubble (or The “BRIC” Bubble). (graph) The Emerging Markets Bubble is a derivative of the bubbles in China and commodities and will pop when they inevitably do. Cheap credit and soaring real estate prices have led to rampant "bubble drunk" behavior in emerging market countries. Singapore seems hell-bent on repeating the mistakes [15] made by Dubai during its mid-2000s bubble as it builds extraordinarily opulent vanity projects such as the Marina Bay Sands, the world’s most expensive standalone resort that looks like a cruise ship (and has a massive pool on top of it) [16], and an artificial forest comprised of 150-foot tall biometric "supertrees." [17] Singapore’s bubble economy is fueled by interest rates that are linked to the U.S.’ ultra-low interest rates, which are far too low for Singapore’s fast-growing and inflation-prone economy [18].

Bespoke Investment Group:

• AAII Bullish Sentiment Approaches 50%. (graph) Investors sure picked a bad time to turn increasingly bullish this week. According to the weekly sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment increased by more than ten percentage points rising from 38.49% to 48.97%. This is the largest weekly increase since 3/14, and represents the highest weekly reading since 1/24.

CNNMoney:

• Watch out. The mortgage securities market is at it again.

Reuters:

• Exclusive :China urbanization plan hits roadblock over spending fears - sources. China's plan to spend $6.5 trillion on urbanization to bolster the economy is running into snags, sources close to the government said, as top leaders fear another spending binge could push up local debt levels and inflate a property bubble. Premier Li Keqiang has rejected an urbanization proposal drafted by the National Development and Reform Commission (NDRC), seeking changes to put more emphasis on economic reform, according to the sources, who are familiar with the matter. Many local authorities have already lobbied to get funding for projects, ringing alarm bells among top leaders in Beijing. "The leadership aims to jumpstart reforms, but local governments see this in a different perspective - they view this as the last opportunity to boost investment," said the economist who requested anonymity due to the sensitivity of the issue. 
• Fed's Williams: No 'autopilot' by Fed if tapering starts -Bloomberg. The Federal Reserve will maintain policy flexibility and respond to incoming economic data that theoretically could cause it to initially taper its pace of bond purchases and then adjust the purchases higher, the president of the San Francisco Fed, John Williams, said in an interview published by Bloomberg News on Thursday. 
• Mexico annual inflation rises more than expected in early May. Mexico's annual inflation rate rose more than expected in early May, holding well above the central bank's limit and hemming in policymakers' ability to lower interest rates in the coming months. Inflation in the 12 months through the first half of May rose to 4.72 percent, the national statistics agency said on Thursday, compared to 4.65 percent for the full month of April.
• Ralph Lauren(RL) sales miss estimates, but it sees a pick-up. Ralph Lauren Corp on Thursday reported sales that fell below its own projections, hurt by fewer deliveries to European department stores, but gave a fiscal year forecast that suggests it expects its overall business to pick up.

Moody's:

• Moody's: Looser Covenants Could Leave Investors Exposed in a Downturn. Robust issuance of covenant-lite loans and high-yield bonds with weak protections suggest a "covenant bubble" that could leave fixed-income investors exposed to losses in a credit cycle downturn, Moody's Investors Service says in a new report, "Signs of a 'Covenant Bubble' Suggest Future Risks for Investors." And in a distressed scenario, subordinated bondholders would suffer the brunt of losses. "Whether or not record bond and loan issuance points to a 'bubble' in the US corporate fixed-income markets, we do see evidence of a 'covenant bubble' driven by strong demand for higher-yielding instruments at a time of low interest rates," says Senior Vice President and author of the report, Christina Padgett. "Credit metrics of US speculative-grade companies have held relatively steady over the past five years, suggesting that the quest for yield, rather than changes in debt issuers' underlying credit quality, is a primary driver of looser covenant terms."

Financial Times:

• Spain’s banks face €10bn more provisions. Spanish banks will need to put aside extra provisions of up to €10bn to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain. According to recent data, Spanish banks rolled over more than €200bn of loans before they expired – often because corporate borrowers would be unable to repay their debt on time and in full. The €10bn estimate is the first official assessment of the likely impact of the central bank’s new approach towards these refinanced loans.

Telegraph: 

• As the market panic demonstrates, central banks are stuck on a treadmill of money printing.

Bild:

• CDU's Kauder Says ECB Shouldn't Print Money. ECB shouldn't follow Japanese policy of printing money, Chancellor Angela Merkel's CDU/CSU Caucus Leader Volker Kauder said. Says only structural reforms help to reach durable growth. Says doubling amount of money "problematic" causes only short-term success.