Today's Headlines

Bloomberg:

• German First-Quarter Growth Damped by Construction, Investment. The German economy’s return to growth in the first quarter was hampered by declines in construction activity and investment as a severe winter and a recession in Europe damped demand. Construction fell 2.1 percent from the fourth quarter and capital investment dropped 1.5 percent, the Federal Statistics Office in Wiesbaden said today. Gross domestic product increased 0.1 percent, the office said, confirming a May 15 estimate. From a year earlier, the economy shrank 0.2 percent when adjusted for working days.

• Corporate Bond Sales Slow in Europe on Fed Stimulus Speculation. Sales of corporate bonds in Europe fell to the lowest in nearly two months this week as concern the Federal Reserve will taper asset purchases roiled markets. U.K. tour operator Thomas Cook Group Plc (TCG) and French real estate investment company Gecina SA (GFC) were among companies that sold 8.4 billion euros ($10.9 billion) of bonds, down from 19.5 billion euros last week and the least since the week ending April 6, according to data compiled by Bloomberg. The cost of insuring the debt rose, with the Markit iTraxx Europe Index of credit-default swamps climbing 4.5 basis points to 96. 

• European Stocks Post Weekly Drop Amid Fed Stimulus Signs. European stocks posted their first weekly loss in more than a month as investors debated when the Federal Reserve will scale back momentary stimulus and Chinese manufacturing unexpectedly shrank.FirstGroup Plc tumbled 43 percent after the U.K. bus and rail company halted its dividend and announced a rights offer to avert a credit downgrade. SAP AG, the largest maker of enterprise-management software, dropped the most in 21 months after changing its board structure. Bankia SA (BKIA), the nationalized Spanish bank, sank 85 percent before a debt swap next week. The Stoxx Europe 600 Index fell 1.7 percent to 303.35 this week, including the worst drop in 10 months on May 23 after Fed Chairman Ben S. Bernanke said the central bank will consider paring its stimulus measures if the U.S. economy improves.

• Dollar Bond Sales Slump in Asia as Costs Leap on Stimulus Doubts. Sales of U.S. dollar-denominated bonds by Asian issuers slumped more than 70 percent this week as yields rose the most in almost four months. Vedanta Resources Plc, the miner controlled by billionaire Anil Agarwal, led $2.1 billion of new sales in the region outside Japan, the least since the week ending April 5 in which companies halted issuance through a holiday period in Hong Kong and China, data compiled by Bloomberg show. Yields climbed 13 basis points to 4.4 percent as of yesterday, on track for the biggest weekly rise since the start of February, according to JPMorgan Chase & Co. indexes. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped 1 basis point to 106 basis points as of 8:21 a.m. in Hong Kong, Australia & New Zealand Banking Group Ltd. prices show. The gauge is set for its biggest weekly increase in nine weeks, and yesterday rose to the highest since May 2, according to data provider CMA. The Markit iTraxx Japan index fell 3.5 basis points to 81.25 basis points as of 9:20 a.m. in Tokyo, according to Citigroup Inc. prices. The benchmark climbed 8.33 basis points yesterday to 82.33, the steepest increase this year, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market. The Markit iTraxx Australia index declined 0.5 basis point to 103.5 as of 11:07 a.m. in Sydney, according to Westpac Banking Corp. prices. The measure also touched a three-week high yesterday, CMA data show.

• HSBC Says ‘Worrying’ Countries Act Unilaterally on Rules. HSBC Holdings Plc (HSBA) Chairman Douglas Flint said it’s “worrying” that more countries are acting unilaterally on regulation as financial oversight undergoes its biggest change since the Great Depression of the 1930s. “This puts at risk globally consistent regulation and also risks ‘balkanizing’ firms’ capital and liquidity resources,” Flint told shareholders at the bank’s annual meeting in London today. “This risks a retreat from globalization and greater financial exclusion -- neither consistent with the pursuit of growth.” He didn’t mention specific countries. 

• Copper Declines for Second Straight Day on China Outlook. Copper futures declined for the second straight day on signs of slowing economic growth in China, the world’s biggest consumer of industrial metal. Yesterday, a Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics showed a preliminary reading of 49.6 for May, below the level of 50 separating growth and contraction, driving copper down 2.3 percent, the most in three weeks. “The weak Chinese numbers hung heavily over the metals group and seemed to be dwarfing concern about the legitimate supply bottlenecks that have cropped up in the copper complex the last few weeks,” Edward Meir, an analyst at INTL FCStone in New York, said in a report. “It remains to be seen if China will invest more in urbanization projects.” Copper futures for July delivery declined 0.5 percent to 3.288 a pound at 10:29 a.m. on the Comex in New York. The price headed for the second straight weekly drop.

• More Evidence Shows Teens Prefer Twitter, Reddit to Facebook(FB). Some of Facebook’s (FB) core users have told researchers that their enthusiasm is waning with each visit to the social network. They get increasingly annoyed when their friends share inane details or broadcast the trivial drama of their lives. Furthermore, keeping up with the daily discourse on Facebook is becoming a chore for some and a source of stress for others.

Wall Street Journal:

• Google(GOOG) Plans to Fund, Develop Wireless Networks in Emerging Markets.

Fox News:

• Obama Admin's Attempts to Intimidate Will Fail by Roger Ailes.

• Nearly 70 percent of adoption credit claims were audited by IRS, report finds.

CNBC:

• Nikkei Goes for Wild Ride for Second Day. Japan's stock market witnessed a second-straight day of heightened volatility on Friday, swinging from gains of 3 percent to deep losses before bouncing back again, leaving traders puzzled as to what was going on in Asia's biggest stock market. The Nikkei, which rose about 3 percent in early trade, fell more than 3 percent in the final hour of Tokyo trade before paring those losses. The Nikkei closed up 0.9 percent at14,612 points.

Zero Hedge:

• Why Italian Bonds Have A Long Way Down To Go. (graph)

• The Rout In Spain.

• The Housing UnRecovery Is Here: Architectural Billings Plunge Most Since 2008. (graph)

• Spot The Trend In US Durable Goods And CapEx Spending. (graph)

• The Two Charts That Keep Draghi Up At Night.

• European Bonds Plunge Most In 8 Months, Stocks Worst Week In 2 Months. (graphs)

• Europe Opens $80 Trillion Shadow Banking Pandora's Box: Will Seek To Collapse Repo "Collateral Chains".

Business Insider:

• This Week's Volatility Reflects A Major Change In The Market's Trend.

• Why Democrats Can't Be Trusted To Control Wall Street by Robert Reich. Who needs Republicans when Wall Street has the Democrats? With the help of congressional Democrats, the Street is rolling back financial reforms enacted after its near meltdown.

• Jon Stewart Hammers Obama And The Justice Department For Leak Investigations On Journalists. (video)

• 70 Out Of 85 Lines In A House Committee Financial Regulation Bill Were Written By Citigroup(C).

• There's No Magic Keynesian Bullet That'll Save Europe.

@RonnieSpence: 

• ALL YOU NEED TO KNOW ABOUT SENTIMENT:NYSE Margin Debt hit all time record highs in April. (graph)

NBC News:

• Holder OK'd search warrant for Fox News reporter's private emails, official says. Attorney General Eric Holder signed off on a controversial search warrant that identified Fox News reporter James Rosen as a “possible co-conspirator” in violations of the Espionage Act and authorized seizure of his private emails, a law enforcement official told NBC News on Thursday.

Reuters: 

• COMMENT: Nikkei nosedive not just a correction.

• Valeant Pharma(VRX) near deal to acquire Bausch & Lomb -source.

• Hedge funds bet on Aussie dollar slide. Hedge funds hungry for trade ideas after the success of their bets on Japan's recovery have been turning their attention to the Australian dollar, betting the end of the commodities boom will drive down the currency. 

• Brazil bank lending slows in April, sign of uneven economy. Growth in Brazil's bank lending slowed in April, the latest sign that an expansion in Latin America's largest economy remains uneven in the face of faster inflation and a robust job market. Outstanding bank loans in Brazil totaled a record 2.45 trillion reais ($1.2 trillion) at the end of April, while growth in bank lending slightly slowed to 16.4 percent in the 12 months through March, ther central bank said in a report on Friday.

Telegraph:

• Southern Europe slides back to 'analogue dark age'. A lack of digital investment and the shrinking number of local subsidiaries owned by large firms is sending Southern European states on a "backwards slide" to an analogue age, a new study has revealed.

Xinhua:

• China's Xi Vows Not to Sacrifice Environment for Growth. China to promote green, sustainable, low-carbon development pattern, citing President Xi Jinping's remarks to a study session. China to set, "strictly observe" environmental "red line" restricting industrial development to protect nature. Nature needs more space to restore itself, he said. China to set up evaluation system to cover waste of resources, environmental damage, ecological benefits.

Bear Radar

Style Underperformer:

• Mid-Cap Value -.78%

Sector Underperformers:

• 1) Retail -1.75% 2) Construction -1.31% 3) Computer Hardware -1.21%

Stocks Falling on Unusual Volume:

• PGI, IOC, TI, PTR, HBHC, USNA, SHLD, TITN, NDSN, ANF, FL, DF, CRM, GME, HIBB, IFGL, ARO, WSM, CRUS, LUX, SAP, IEP, NBL, ATW, NOAH, TM, PTR, OAK and CEO

Stocks With Unusual Put Option Activity:

• 1) XHB 2) SHLD 3) ANF 4) NKE 5) CRM
  

Stocks With Most Negative News Mentions:

• 1) TITN 2) CREE 3) VNQ 4) CNC 5) CBST
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Growth -.71%

Sector Outperformers:

• 1) Tobacco +.25% 2) Gold & Silver -.22% 3) Drugs -.32%
  

Stocks Rising on Unusual Volume:

• PG, BLOX, P, SCTY, VVUS and ISRG

Stocks With Unusual Call Option Activity:

• 1) ZIOP 2) ZTS 3) ISRG 4) P 5) LAMR
  

Stocks With Most Positive News Mentions:

• 1) WEN 2) TSH 3) SHW 4) HPQ 5) EEM
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Friday Watch

Evening Headlines 
Bloomberg:

• Kuroda Struggles With Communication as Japan Rates Rise: Economy. Haruhiko Kuroda may need to talk his way out of a paradox he helped create. Installed as head of the Bank of Japan in March, Kuroda aims to unlock borrowing and spending by lifting inflation expectations and wages after 15 years of deflation. Market volatility partly triggered by the BOJ’s record bond-buying now threatens to sap business and consumer confidence and weaken the campaign to reflate the world’s third-biggest economy. Kuroda next speaks at 11:55 a.m. at a conference in Tokyo. 

• Japan $314 Billion Rout Tests Topix Bulls Who Pushed Gain. The biggest drop in Japanese shares since the 2011 earthquake erased $314 billion in market value, shaking bulls who pushed the Topix Index to five-year highs and highlighting their vulnerability to shocks at home and abroad. This year’s best performing major equity gauge plunged 6.9 percent in record volume yesterday after government bond yields rose to the highest levels in a year and Chinese manufacturing missed estimates.

• Aussie Dollar Is Villain as Ford Ends Mad-Max Land Output. Ford Motor Co. (F) Falcons, driven by Mel Gibson in Australia’s 1979 movie “Mad Max,” have rolled off a Melbourne production line for 53 years. Now, like Max’s “last of the V-8s,” their days are numbered. Ford, in Australia since 1925, said yesterday it will close its local manufacturing plants in October 2016, resulting in 1,200 job losses. General Motors Co. (GM)’s Holden unit, which traces its roots to 1856 when it started as a saddler business, said on April 8 it will cut about 500 workers as currency devaluations overseas make its operations among the world’s costliest. 

• India’s Economic Recovery Seen Subdued as Risks Persist.

• Asia Stocks Rise as Japanese Shares Rebound From Slump. Asian stocks rose as Japanese shares rebounded from the biggest drop since 2011 amid optimism growth in company earnings and the economy are intact. Australian stocks headed for the largest weekly drop in a year. Shinsei Bank Ltd., which tumbled 15 percent yesterday for the biggest loss on the Nikkei 225 Stock Average, increased 6.1 percent today. Japanese wireless carrier SoftBank Corp. (9984) rose 3.8 percent after saying it will let the U.S. government have veto power over one nominee to Sprint Nextel Corp.’s board to ease security concerns if its $20.1 billion takeover bid succeeds. Echo Entertainment Group Ltd. (EGP) fell to a record low in Sydney after rival Crown Ltd. sold its 10 percent stake in Echo. The MSCI Asia Pacific Index gained 0.5 percent to 139.41 as of 11:25 a.m. in Tokyo.

• Bonds Rigged as Stocks Expensive for Scots Manager Doubling Fund. From his view of the world in Scotland, Bruce Stout says investors risk getting burned because optimism is too high for stocks and bond yields are too low. The markets might be proving him right. The MSCI World Index, a gauge of developed stock markets, sank by the most yesterday since April 15, while Japan’s Topix Index lost 6.9 percent. Stout, whose 1.5 billion-pound ($2.3 billion) Murray International Trust (MYI) at Aberdeen Asset Management Plc (ADN) posted triple-digit returns during the past four years, has been selling shares he reckons are now too expensive, while his fixed-income holdings are the lowest in 25 years. “The higher prices go the more short-term expectations can distort things and then you can lose your money,” Stout said at his office in Edinburgh. “That’s why we’re in a capital preservation mode to try and not lose money.” With economies in Europe yo-yoing in and out of recession, a slowdown in China and India, and central banks from the U.S. to Japan still printing money to revive growth, Stout is more pessimistic than some of the world’s biggest investors.

• WTI Crude Heads for Biggest Weekly Decline in More Than a Month. West Texas Intermediate crude headed for the biggest weekly drop in more than a month amid signs of rising U.S. fuel supplies and a global economic slowdown. Brent oil may fall below $95 a barrel, Bank of America Corp. said.

• Rebar Pares Weekly Drop as Rally in Stocks Counters Weak Demand. Steel reinforcement-bar futures pared a weekly loss as a rebound in China’s stock market from the biggest slump in a month countered weaker demand prospects. Rebar for delivery in October rose as much as 0.9 percent to 3,584 yuan ($585) a metric ton on the Shanghai Futures Exchange and was at 3,565 at 10:55 a.m. Futures lost 1.6 percent this week, a second weekly decline.

• Google(GOOG) Said to Consider Buying Waze Presaging Bidding War. Google Inc. (GOOG), maker of the Android operating system, is considering buying map-software provider Waze Inc., setting up a possible bidding war with Facebook Inc.(FB), people familiar with the matter said. Waze is fielding expressions of interest from multiple parties and is seeking more than $1 billion, said one of the people, who asked not to be identified because the talks are private. The Palo Alto, California-based startup might also remain independent, instead seeking to raise a round of venture capital financing, the people said.

Wall Street Journal: 

• Bridge Collapse in Washington State Sends People, Vehicles Into River. An Interstate 5 bridge over a river north of Seattle collapsed Thursday evening, dumping vehicles and people into the water, the Washington State Patrol said.

• Iran Hacks Energy Firms, U.S. Says. Oil-and-Gas, Power Companies' Control Systems Believed to Be Infiltrated; Fear of Sabotage Potential. Iranian-backed hackers have escalated a campaign of cyberassaults against U.S. corporations by launching infiltration and surveillance missions against the computer networks running energy companies, according to current and former U.S. officials.

• Asia Goes on a Debt Binge as Much of World Sobers Up. In the heart of Kuala Lumpur lies the abandoned foundation of Plaza Rakyat, a never-built skyscraper and shopping mall. Rusty rebar jutting from concrete pilings and fetid green pools of rainwater serve as an unintended monument to the debt crisis that ravaged Asia in the late 1990s. Today, less than a half mile from the abandoned project, the next boom is under way in the Malaysian metropolis. Construction has begun on a new subway line, and next to one station plans call for a 118-story zigzagging skyscraper that would be the third-tallest building in the world. Cheap credit is fueling the building spree.

• New Signs of China Flailing Cast Global Pall. Report of Contracting Factory Activity Hits Markets; Beijing Signals Acceptance as Hopes Fade for a Quick Growth Pickup. New data suggesting contraction in Chinese manufacturing cast further doubt about growth in the world's No. 2 economy, hitting markets as investors worry about the implications for the global outlook.

• Boy Scout Leaders Vote to Allow Gay Youth. The Boy Scouts of America decided to allow gay youth to openly join its ranks, reversing a long-standing ban.

• States' Rift on Taxes Widens. Minnesota, Others Move to Raise Revenue as Cuts Remain Popular Elsewhere. Minnesota's move to raise $2.1 billion in new taxes, largely from the wealthy, to fund government programs puts it among a handful of states controlled by Democrats that are adopting more liberal fiscal policies at a time when many Republican-dominated statehouses are pushing to cut taxes.

• Noonan: A Battering Ram Becomes a Stonewall. The IRS's leaders refuse to account for the agency's corruption and abuse. "I don't know." "I don't remember." "I'm not familiar with that detail." "It's not my precise area." "I'm not familiar with that letter." These are quotes from the Internal Revenue Service officials who testified this week before the House and Senate.

Fox News:

• IRS official on leave refused to resign, says GOP senator. First she refused to testify. Now Lois Lerner, the IRS official at the center of the tax agency scandal, is refusing to resign, according to a top Republican senator. Sources confirmed to Fox News earlier Thursday that Lerner, the head of the IRS division that oversaw the unit targeting conservative groups, had been placed on administrative leave, with pay. But Sen. Charles Grassley, R-Iowa, claimed she was only put in that status after refusing to step down. He said the commissioner was in his right to demand her resignation, and said taxpayers should not continue to pay her salary indefinitely.

CNBC: 

• Two Storms Brewing: One Political, the Other Economic. 

• Sears(SHLD) Shares Drop 13% After Bigger Loss Than Expected.

• Google(GOOG) Faces New Antitrust Probe of Ads: Report.

• Gap(GPS) Earnings and Revenue Top Expectations.

Zero Hedge: 

• Japan Has Officially Gone Insane.

• As Of This Moment Ben Bernanke Own 30.5% Of The US Treasury Market... And Will Own All By 2018.

• China's Bird Flu Goes Airborne.

• All I Want For Christmas Is The S&P (The Las Vegas Period).

• Chart Of The "Keynesian Normal": America's Tragic Divergence. (graph)

Business Insider: 

• O'ROURKE: The Last Two Days Have Shown That Central Banks Have Gotten Ridiculous And Have Blown Their Credibility.

• The New Bird Flu Will Spread More Easily Among Humans Than Other Bird Flu Strains.

• Why There Was An Insane Flash Crash In Utilities Stocks At The Opening Bell.

Reuters: 

• BOJ Kuroda says will strive to ensure JGB market stability. Bank of Japan Governor Haruhiko Kuroda said on Friday the central bank will make efforts to avert volatility in bond markets through flexible market operations and enhanced communication with market participants. "We don't have specific targets for stock prices or currency rates, and I won't comment on daily moves," Kuroda said at a seminar in Tokyo. "As for the bond market, where the BOJ is directly involved in through market operations, stability is extremely desirable," he said.

• Brazil to auction its biggest-ever oil find in October. Brazil plans to sell the right to explore and develop its largest-ever oil discovery in October, auctioning an offshore petroleum prospect that is expected to produce about 12 billion barrels of oil over 35 years. 

• Japan finmin: govt must always keeps fiscal discipline in mind. Japanese Finance Minister Taro Aso said on Friday that the government must always keep fiscal discipline in mind. He said the government has used stimulus spending to help the economy, but if it continues with big fiscal spending this could hurt trust in Japan's public finances. 

• Salesforce.com's(CRM) quarterly results disappoint Wall Street. Salesforce.com Inc's quarterly earnings and outlook disappointed investors as costs rise following a spree of acquisitions, sending its shares lower. 

• U.S. Fed balance sheet expands in latest week. The U.S. Federal Reserve's balance sheet expanded in the latest week on higher holdings of Treasuries and U.S. mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $3.356 trillion on May 22, up from $3.312 trillion on May 15.

Telegraph: 

• Veteran fears 'beginning of the end' for Japan as bond market buckles. Global markets face a witches’ brew of new risks as Japan’s monetary adventure wobbles, China slows further and the US Fed prepares to shut the spigot of dollar liquidity.

South China Morning Post:

• MNI index adds to fears China recovery losing momentum. China’s economic recovery may be losing momentum, as indicators for new orders and financial conditions worsened, according to the latest MNI China business sentiment indicator. The flash overall conditions index fell to 57.1 from 58.5 in April and 58.2 in March, MNI, a unit of Deutsche Boerse Group. It was the eighth straight month of expansion for the overall index, however, MNI said. The flash new orders indicator fell to 56.5, from 58.2 in April, and the financial positions indicator worsened to 52.0, from 54.6. The flash availability of credit index rose to 44.3 in May, from 42.9, MNI said. The flash production index fell to 54.3, from 57.3.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.50% to unch. on average.

• Asia Ex-Japan Investment Grade CDS Index 106.0 +3.0 basis points.

• Asia Pacific Sovereign CDS Index 91.75 +4.75 basis points.

• FTSE-100 futures +.09%.

• S&P 500 futures -.11%.

• NASDAQ 100 futures -.01%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (ANF)/-.05

• (FL)/.88

• (HIBB)/1.07 

Economic Releases
8:30 am EST

• Durable Goods Orders for April are estimated to rise +1.5% versus a -5.7% decline in March.

• Durables Ex Transports for April are estimated to rise +.5% verssu a -1.4% decline in March.

• Cap Goods Orders Non-Defense Ex Air for April are estimated to rise +.5% versus a +.2% gain in March.

Upcoming Splits

• None of note

Other Potential Market Movers

• The Eurozone GDP report and German IFO Index could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity shares in the region. I expect US stocks to open mixed and weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Slightly Lower into Final Hour on Rising Eurozone Debt Angst, Rising Global Growth Fears, Technical Selling, Financial/REIT Sector Weakness

Broad Market Tone:

• Advance/Decline Line: Modestly Lower
  

• Sector Performance: Mixed
  

• Volume: Below Average

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• VIX 14.08 +1.88%

• ISE Sentiment Index 95.0 -9.52%

• Total Put/Call .99 -2.94%

• NYSE Arms .91 -7.03%

Credit Investor Angst:

• North American Investment Grade CDS Index 72.98 +1.75%

• European Financial Sector CDS Index 135.96 +7.90%

• Western Europe Sovereign Debt CDS Index 79.66 +2.85%

• Emerging Market CDS Index 256.30 +3.1%

• 2-Year Swap Spread 15.50 +.75 bp

• TED Spread 23.75 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -14.50 +.75 bp

Economic Gauges:

• 3-Month T-Bill Yield .04% unch.

• Yield Curve 177.0 -1 bp

• China Import Iron Ore Spot $123.20/Metric Tonne unch.

• Citi US Economic Surprise Index -17.80 +1.6 points

• 10-Year TIPS Spread 2.25 -1 bp

Overseas Futures:

• Nikkei Futures: Indicating +290 open in Japan

• DAX Futures: Indicating +21 open in Germany

Portfolio: 

• Higher: On gains in my tech/biotech sector longs and emerging markets shorts

• Disclosed Trades: Covered some of my to (IWM)/(QQQ) hedges, then added them back

• Market Exposure: 50% Net Long

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.