Thursday Watch

Evening Headlines 
Bloomberg:

• World Bank Cuts Global Outlook as China Slows, Europe Contracts. The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction. The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent growth and slower than last year’s 2.3 percent, the bank said in a report released today in Washington. It lowered its prediction for developing economies and sees the euro region’s gross domestic product shrinking 0.6 percent. In contrast, forecasts were raised for the U.S. and Japan, which was helped by fiscal and monetary stimulus. 

• Hollande to Ask French to Work More as Pension Deficit Balloons. President Francois Hollande has an unpalatable message for the French: they need to work more. Thirty-two years after France’s first Socialist President Francois Mitterrand cut the retirement age by five years, his party’s successor at the Elysee Palace is telling the French preserving their way of life means staying in jobs longer. Hollande’s government tomorrow kicks off three-month long talks with employer and employee groups to save a state pension system that last year lost 14 billion euros ($18 billion).

• EU Rights Official Asks Holder to Clarify Prism Program. European Union Commissioner Viviane Reding asked U.S. Attorney General Eric Holder for more information on the U.S. surveillance program Prism and its consequences for the rights of EU citizens. “Given the gravity of the situation and the serious concerns expressed in public opinion on this side of the Atlantic, you will understand that I will expect swift and concrete answers to these questions,” Reding said, according to a copy of a June 10 letter to Holder obtained by Bloomberg News. Reding, the European Commission’s vice president for justice, fundamental rights and citizenship, said she has serious concerns about reports that the U.S. is accessing and processing data of EU citizens who are using U.S. online service providers. 

• Japanese Stocks Tumble as Nikkei 225 Nears Bear Market. Japan’s Nikkei 225 Stock Average (NKY) plunged, falling more than 19 percent from a recent high and close to entering a bear market, as the yen rose to its strongest against the dollar in more than two months. The Nikkei 225 slumped 5.3 percent to 12,587.40 at the trading break in Tokyo, its third fall of more than 5 percent in the past month. The gauge dropped as much 6.6 percent today, the biggest loss since shares in Japan plummeted on May 23. “Selling breeds selling and it’s snowballing,” said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages $126 billion.

• Yen Surges Past 95 Per Dollar to 2-Month High on Japan Flow Data. The yen surged, jumping to the strongest level in two months against the dollar, after government data showed Japanese investors were net sellers of overseas bonds and stocks for a fourth-straight week.

• China Stocks Drop to 5-Month Low on Economic Data After Holiday. China’s stocks fell after a three-day holiday, dragging the benchmark index to a five-month low, after government reports showed industrial production and exports trailed estimates. SAIC Motor Corp. led declines for automakers after growth in industrial output slowed to 9.2 percent last month from 9.3 percent in April. Baoshan Iron & Steel Co. (600019), the listed unit of China’s second-biggest steelmaker, lost 1.9 percent after it cut product prices. Sany Heavy Industry Co., the biggest Chinese machinery maker, tumbled 6.2 percent. The Shanghai Composite Index (SHCOMP) dropped 2.2 percent to 2,162.44 as of 9:38 a.m., heading for the lowest close since Dec. 24 and extending losses since a Feb. 6 high to 11 percent.

• Bank of Korea Holds Rate After Cut in May to Fight Yen Fall. The Bank of Korea left its interest rate unchanged after a surprise cut in May aimed at boosting an economy hit by a yen drop that gives Japanese companies an edge over Korean exporters. Governor Kim Choong Soo and his board kept the benchmark seven-day repurchase rate at 2.5 percent, the central bank said in a statement in Seoul today. All 15 economists surveyed by Bloomberg News predicted the move. 

• Prada Plummets Most in a Year on Slower Growth. Prada SpA (1913), the Italian luxury-goods maker, fell the most in almost 12 months in Hong Kong trading after reporting first-quarter profit growth that decelerated to the slowest pace in at least a year. Prada dropped 6.6 percent, headed for the biggest drop since June 21, to HK$68.40 as of 10:01 a.m., compared with a 3.2 percent decline in the city’s benchmark Hang Seng Index.

• Hong Kong Democracy May Lead to Conflict With China, Leung Says. Increased democracy in Hong Kong may lead to China’s refusal to appoint a leader elected by the city’s people, Chief Executive Leung Chun-ying said. China occasionally has declined to accept officials chosen by the city, which suggests it reserves the same right over the chief executive position, Leung said yesterday in an interview in New York. “The possibility exists for Beijing and Hong Kong people not seeing eye-to-eye on the best candidate to lead Hong Kong,” Leung said. “This is another issue we need to tackle under One Country, Two Systems.” 

• Hopewell Hong Kong Pulls $780 Million IPO as Stocks Slide. Hopewell Hong Kong Properties Ltd., the owner of buildings in the Wan Chai business area including Hopewell Centre, scrapped a $780 million initial public offering in the city after stock markets tumbled.

• Hong Kong Chief Executive Pledges Property Curbs to Stay. Hong Kong, the world’s most expensive home market, will not ease its real-estate curbs until there’s a steady supply of new properties as the government seeks to address concerns that it favors developers. Earlier actions have brought down prices and rents, and the government can do more if needed, Chief Executive Leung Chun-ying, 58, said in an interview in New York. 

• Asian Stocks Slip on World Bank as Kiwi Drops; Yen Gains. Asian equities dropped, with the region’s benchmark index headed toward a correction, and the yen rose to the strongest in two months against the dollar after the World Bank cut its global growth forecast amid concern central banks may pare monetary stimulus. New Zealand’s currency weakened. The MSCI Asia Pacific Index tumbled 2.6 percent at 11:16 a.m. in Tokyo, erasing this year’s gains. Japan’s Topix Index sank 4.1 percent and the Shanghai Composite Index declined 3.1 percent after a three-day break.

• Rubber Falls to Nine-Month Low on Stronger Yen, Demand Concerns. Rubber retreated to a nine-month low as a strengthening Japanese currency reduced the appeal of yen-based contracts and a downward growth revision by the World Bank raised concern that demand is weakening. The contract for delivery in November fell as much as 4 percent to 230.5 yen a kilogram ($2,435 a metric ton), the lowest level since Sept. 10, on the Tokyo Commodity Exchange, and was at 231.5 yen at 11:01 a.m. local time. Futures have plunged 23 percent this year. 

• Rebar Trades Near 9-Month Low on Signs of Slowing Chinese Growth. Steel reinforcement-bar futures in Shanghai traded near the lowest level in nine months as investors returning from a three-day holiday remained concerned that economic growth shows signs of slowing in the world’s biggest steel consumer. Rebar for delivery in October on the Shanghai Futures Exchange fell as much as 1 percent to 3,386 yuan ($552) a metric ton, the cheapest since Sept. 7, and was at 3,426 yuan at 11:09 a.m. local time. Futures have dropped 14 percent this year.

• Individuals Pull Most Money From Bond Mutual Funds Since 2008. Investors pulled $10.9 billion from U.S. bond mutual funds in the past week, the biggest redemption since October 2008, after speculation that the Federal Reserve may scale back its bond buying sent fixed-income markets lower. Taxable bond funds suffered withdrawals of $8.7 billion and municipal bond funds lost $2.3 billion in the week ended June 5, according to an e-mailed statement from the Investment Company Institute, a Washington-based trade group. Investors withdrew $942 million from stock funds, the ICI reported.

Wall Street Journal: 

• Traders Pay for an Early Peek at Key Data. On the morning of March 15, stocks stumbled on news that a key reading of consumer confidence was unexpectedly low. One group of investors already knew that. They got the University of Michigan's consumer report two seconds before everyone else.

• Debt Makes Comeback In Buyouts. Shareholders in BMC Software Inc. will receive $6.9 billion to sell the corporate-software developer to a group of private-equity firms. But the buyers, led by Bain Capital LLC and Golden Gate Capital, only intend to pay $1.25 billion in cash out of their own pockets. The rest will come from debt raised by BMC to finance its takeover. The little-noticed acquisition is another milestone in the return of cheap debt and higher-risk deals to Wall Street: The cash put down by BMC's private-equity buyers is the lowest as a percentage of the purchase price of any buyout with loans exceeding $500 million since 2008, according to data-provider Thomson Reuters LPC.

• Regulators Question Banks on Business Lending Risks. U.S. regulators are grilling banks over lending standards and warning them about mounting risks in business loans. Lending to companies has been a bright spot for banks searching for revenue amid slow economic growth and historically low interest rates. But regulators worry that banks have sweetened loan terms too much, which could put them in jeopardy if corporate borrowers can't repay.

• Credit Helps Drive Americans to the Mall. Experian Automotive reported that the percentage of cars leased rose during the first quarter, to the highest level since it began tracking that statistic in 2006. The recent interest-rate spike is unlikely to derail a credit revival. It may even be outweighed by easier lending standards. But in the longer run, borrowing alone provides a shaky foundation for sales growth. Cumulative growth in income has been far slower than in any postwar recovery, while savings has only been lower during asset bubbles. It's nice to see more Americans shopping, but not to the point that they drop.

• Henninger: The Sum of All Fears. The IRS audits and NSA surveillance flow into the same national anxieties.

Fox News: 

• Fox News poll: Voters oppose NSA program, most lack trust in government. Most Americans find it unacceptable for the National Security Agency to collect the phone records of millions of U.S. citizens. In addition, a majority lacks trust in the federal government, and an increasing number of people say it’s too big. These are just some of the findings of a Fox News poll released Wednesday. Sixty-two percent of voters say the government secretly collecting the phone records of millions of Americans is an “unacceptable and alarming invasion of privacy rights.” That’s nearly twice as many as think it’s an “acceptable government action to help prevent terrorism” (32 percent). Republicans (by 74-18 percent) and independents (by 67-26 percent) think the NSA surveillance of Americans is unacceptable.  Democrats split: 48 percent say it’s acceptable, while 46 percent say unacceptable.  

MarketWatch.com:

• H&R Block(HRB) misses earnings estimates.

• Martin Fridson: The junk bond market ‘hasn’t come down to earth’. High-yield bond guru Marty Fridson still thinks his sector is overpriced. The rigorous researcher of junk bonds said as much to a cohort of high-yield research analysts from hedge funds, banks, and asset managers during the New York Society of Security Analysts’ 23^rd Annual High Yield Bond Conference.

• There’s more than one way to leave the euro. Commentary: Millions fleeing Greece, Spain, Ireland, Italy, Portugal.

CNBC:

• Why Bullish BofA(BAC) Thinks Market Gains Might Be Over. Savita Subramanian looked overly optimistic when she picked her 2013 stock market price target last year—and pessimistic now that she's holding to that prediction.

Zero Hedge: 

• Monkeyhammered Nikkei Plummets 6% On Risk Exodus. (graphs)

• Government Celebrates Austerity With Fourth Largest Spending Month Ever. (graph)

• Santelli Schools Cramer & Co. On The High Freaks. (video)

• Buy (Bonds) In June, After The Swoon? (graphs)

• Bank Of England's Haldane: "We've Intentionally Blown The Biggest Bond Bubble In History".

• "Tapering" From Currency-Wars To Interest-Rate-Wars.

• Goldman(GS) Harakiris Muppets On Long Nikkei Reco Stop Loss. (graphs)

Business Insider:

• In One Chart, You'll See Why This Japan Situation Is Putting Speculators In A Whole World Of Hurt.

• BP: US Recorded Largest-Ever Gain In Oil Production in 2012, And Coal Is Still King Of The World. 

• FORMER MERRILL LYNCH CEO JOHN THAIN: The Financial Crisis Can 'Absolutely' Happen Again.

Reuters:

• BOJ official: inflation caused solely by weak yen could hurt economy. A senior Bank of Japan official said on Thursday that price hikes caused solely by a weak yen could hurt economic recovery, stressing the need for inflation to accompany balanced growth. "If price hikes are caused solely by a weak yen, that would be cost-push (inflation) and thus could negatively affect a steady economic recovery," BOJ Executive Director Masayoshi Amamiya said at a parliamentary committee session.

• S&P cuts Detroit rating to CCC- as city strives to avoid bankruptcy.

• Emerging markets at risk when loose policies end -World Bank. The World Bank said eventual monetary tightening in advanced economies could crimp growth in emerging markets as interest rates rise, lowering the nations' potential output by as much as 12 percent. That long-term risk is likely greater than the short-term impact from volatility in emerging market currency and bond markets, as traders try to position themselves for when the U.S. Federal Reserve begins its exit from ultra-loose monetary policies, said Kaushik Basu, the World Bank's chief economist. 

• Coty prices IPO at midpoint of expected range. Beauty company Coty priced its initial public offering at $17.50 a share on Wednesday, in the middle of the expected range, according to a source briefed on the matter. 

• Greeks strike over state TV closure as backlash grows. Greek workers stage a nationwide strike on Thursday, forcing hospitals to work on emergency staff and disrupting transport, in protest against the "sudden death" of state broadcaster ERT, switched off in the middle of the night by the government. 

• EMERGING MARKETS-Latam stocks continue decline to long unseen lows. 

• Analysis: After emerging corporate bond boom, default risks on rise. The $1 trillion market in emerging corporate bonds could be headed for a surge in defaults if company earnings in swiftly depreciating roubles or pesos fail to keep pace with dollar-based debt repayments.

Financial Times:

• US debt auction raises hopes over repo failures. Some so-called “fails” are expected in the repo market, where investors come to borrow short-term funds using low-risk collateral such as Treasury debt, but large numbers of fails have alarmed policy makers in the past because of potential systemic risk.

China Securities Journal:

• China Growth Slowdown May Last Into 3Q. Slowdown in China's economic growth may last into 3Q. China's inflation will be moderate this year, the newspaper said. Uncertainties on investment growth will increase as China's urbanization may be slower than expected. China won't ease its monetary policy, the newspaper said.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -3.50% to -1.0% on average.

• Asia Ex-Japan Investment Grade CDS Index 142.50 +1.5 basis points.

• Asia Pacific Sovereign CDS Index 119.0 +1.5 basis points.

• FTSE-100 futures -1.09%.

• S&P 500 futures -.37%.

• NASDAQ 100 futures -.31%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (CASY)/.62

• (RH)/.04

Economic Releases
8:30 am EST

• Advance Retail Sales for May are estimated to rise +.4% versus a +.1% gain in April.

• Retail Sales Less Autos for May are estimated to rise +.3% versus a -.1% decline in April.

• Retail Sales Ex Auto & Gas for May are estimated to rise +.3% versus a +6% gain in April.

• Initial Jobless Claims are estimated at 346K versus 346K the prior week.

• Continuing Claims are estimated to rise to 2978K versus 2952K prior.

• The Import Prices Index for May is estimated unch. versus a -.5% decline in April.
  

10:00 am EST

• Business Inventories for April are estimated to rise +.3% versus unch. in May.

Upcoming Splits

• (SAIA) 3-for-2

Other Potential Market Movers

• The Italian 10Y Bond auction, ECB Monthly Report, 30Y T-Bond auction, BoJ Minutes, China FDI data, Bloomberg US Economic Survey for June, weekly EIA natural gas inventory report and thee weekly Bloomberg Consumer Comfort Index could also impact trading today.

BOTTOM LINE: Asian indices are sharply lower, weighed down by technology and financial shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 25% net long heading into the day.