Today's Headlines

Bloomberg:

• Asian Currencies Tumble Most in 21 Months. India’s rupee touched a record low and Malaysia’s ringgit had its worst week in three years after Bernanke said June 19 that $85 billion a month of debt purchases, known as quantitative easing, may be trimmed this year and ended in 2014 as long as the U.S. economy performs in line with Fed estimates. The Bloomberg-JPMorgan Asia Dollar Index (ADXY), which tracks the region’s 10 most-active currencies, dropped 1.1 percent since June 14 to 115.51 as of 5 p.m. in Hong Kong, the biggest decline since Sept. 23, 2011. The rupee retreated 3.1 percent to 59.3600 per dollar, the ringgit fell 2.7 percent to 3.2 and the Philippine peso lost 2.1 percent to 43.735. 

• Japan Government Pension Fund Says Holdings Close to Target. Fund President Takahiro Mitani spoke in a Tokyo interview. "Very difficult" for Japan to reach 2% inflation target. Doesn't plan to change allocation of foreign currencies. No further discussions this year on allocations, MItani said. 

• Minsky Moment Alarm Sounded in China: Cutting Research. China may be approaching a “Minsky moment” -- a sudden fall in asset values bloated by credit. Credit growth in the world’s most populous country has outstripped economic expansion for five quarters, raising the question of where the money has gone, Societe Generale SA (GLE) economist Yao Wei wrote in two recent reports. In the first quarter, for example, bank loans, shadow banking credit and corporate bonds together accelerated more than 20 percent year-over-year, while gross domestic product grew less than half that much. The gap has been widening since early 2012. Yao says the answer to where the money is going is a growing “debt snowball” which doesn’t contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses.

• Stress Test for Banks Inflicting Collateral Damage: China Credit. China’s decision to tolerate the worst cash crunch on record is evolving from a stress test of banks into a threat to the ability of companies to raise funds. As their overnight borrowing costs neared 13 percent, banks switched focus toward shoring up their own finances and slashed investments in the bond market they dominate. The one-year yield on AAA corporate debt jumped a record 121 basis points this month to 5.15 percent, ChinaBond indexes show. Bond sales slumped to 157.9 billion yuan ($26 billion) in June, the least in 17 months and down 57 percent from May, data compiled by Bloomberg show. 

• EU Battles Over Rules on Investor Losses When Banks Fail. European Union finance ministers are battling in Luxembourg over how they’ll set rules for assigning losses when banks fail. The new rules will set standards for how to prop up or shut down failing banks, along with requirements for the kind of backstops each country must have in place. During staff-level talks this afternoon, nations were considering requiring a certain level of losses on bank creditors before they could shield specific investors from writedowns, according to two EU officials.

• Credit Risk Rises for Fifth Week in Europe. The cost of insuring European company bonds against losses headed for a fifth weekly increase as the Federal Reserve confirmed it will slow asset purchases if the economy continues to strengthen. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings climbed 13 basis points to 123, the longest rising streak since the week ending Aug. 26, 2011, according to data compiled by Bloomberg. The average yield investors demand to hold European corporate bonds rose 15 basis points to a four-month high of 2.19 percent, Bank of America Merrill Lynch index data show. “The market has been addicted to liquidity injections through quantitative easing,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London which oversees $55 billion. “Just the mere thought of reducing the dose makes people feel a bit sick. We are seeing withdrawal symptoms.” The Markit iTraxx Crossover Index of default swaps on 50 high-yield companies also rose for a fifth week, climbing 45 basis points to 496, the biggest weekly increase since March 22. An increase signals deterioration in perceptions of credit quality. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 20 basis points to 179, while the subordinated index climbed 35 basis points to 271. 

• Brazilian Revolt Claims Second Life as Violence Erupts. (video) Brazil’s swelling street rebellion claimed its second fatality in the largest and most violent protests yet, as 1 million demonstrators rallied for better public services and an end to corruption. Marches took place in hundreds of cities across Brazil last night in what began as a peaceful protest. Violence later erupted with police battling mobs trying to storm the Foreign Relations Ministry in Brasilia and Rio de Janeiro’s city hall.

• Emerging Stocks Set for Biggest Weekly Loss in 13 Months. Emerging-market stocks were poised for the steepest weekly tumble in 13 months, bonds retreated and South Korea’s won led declines in currencies amid speculation the Federal Reserve will pare economic stimulus. The MSCI Emerging Markets Index fell 0.9 percent to 900.06 at 1:25 p.m. in New York, extending its weekly drop to 5.6 percent. It’s down 17 percent from its Jan. 3 high. Poland’s WIG20 index sank to the lowest since Aug. 30, while Brazil’s Ibovespa (IBOV) was set for a four-year low. The won posted the biggest weekly slump in 21 months. The extra yield investors demand to own emerging-market debt over U.S. Treasuries rose 0.3 percentage point this week to 347 basis points, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

• Singaporeans Leave City as Worst Fire Haze Sparks Health Worries.

• Crude Falls for Third Day as Dollar Rises on Fed. West Texas Intermediate crude fell to a two-week low as the dollar rose on expectations the Federal Reserve will trim its monthly bond purchases in September and on concern that China’s cash squeeze may curb its economic growth. “The dollar strength is definitely weighing on prices,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Crude oil is coming down because the Fed is reducing its support. There is a lot of concern over the situation in China and this potential disruption within China’s banking system.” WTI for August delivery dropped $1.91, or 2 percent, to $93.

CNBC: 

• What's Really Behind China's Cash Crunch. When it comes to the economy, China's policy makers have often been criticized for a heavy-handed approach, stepping in at the first signs of trouble. That makes the reluctance by the central bank to pump in cash and alleviate a credit squeeze for local lenders highly significant, analysts say. "There is a sea change taking place in China," said David Mann, the head of regional research for Asia at Standard Chartered Bank in Singapore. "The reluctance to intervene in the money markets, the tolerance of a lower rate of growth, it's all part of the same story of China trying to secure a better long-term outlook for the economy."

Zero Hedge:

• Bridgewater "Pure Alpha" Global FX Exposure Summary.

• "ETF Losses Today Were Far Beyond What The Most Sophisticated Risk Models Could Have Predicted".

• Greek Bonds Plunge As Ruling Coalition Partner Pulls Out, Withdraws Ministers. (graph)

• The Party Is Over. The Fed came out and said as clearly as any Fed has ever said; "We are going to unwind the trade." 

• Why Spain And Italy Are Like Cyprus, Slovenia, And Greece. (graph)

• European Stocks Plunge To Worst Week In 13 Months. (graphs)

Business Insider:

• Another Brutal Day In Brazil: Stocks Down After A Million Protestors Take To The Streets.

• The ETF Market Kind Of Broke Yesterday. Kauffman said that the problem with ETFs was that they end up driving the price of the underlying assets that make them up. The actual value of the asset ceases to matter as the activity of the ETF takes it over. That, Kauffman said, could cause what we saw yesterday — "failure to settle" (market participants freaking completely out because they can't get their money). Investors are starting to talk about this too.

ValueWalk: 

• CTAs Suffer one of The Worst Months in Recorded History. Directional strategies are found at the bottom of the ranking. The massive underperformance of CTAs (-5%, i.e. one of the 10 worst months recorded since 1999) suggests that the trend reversal in Japan, especially in the bond market, took these managers by surprise. Global Macro suffered as a result of their long exposure to US Treasuries and posted a very slightly negative performance (-0.05%).

Real Clear Politics:

• Krauthammer: "I Would Oppose The Bill" If Border Security Is Just A Goal And Not A Requirement. (video)

Reuters:

• Rupee weakness affects India credit profile: Moody's. The rupee's weakness reflects domestic economic challenges, primarily a high current account deficit and lower capital flows, but does not significantly impact India's foreign debt repayment capacity, Moody's told Reuters on Friday. "Given the very low level of foreign currency debt owed by the Indian government, rupee depreciation does not significantly affect sovereign debt repayment capacity," said Atsi Sheth, vice-president of the sovereign risk group at Moody's Investors Service, in an e-mailed response. "However, it is a reflection of macro-economic challenges, which do affect the country's credit profile."

• Investors poured $4.5 bln into stock funds ahead of Fed -BofA. Investors worldwide poured $4.5 billion into stock funds in the latest week, reversing the prior week's outflows on expectations that the U.S. Federal Reserve would keep its bond-buying steady, data from Bank of America Merrill Lynch showed on Friday. 

• Losses loom for investors enmeshed in U.S. mortgage chaos. Since the financial crash, banks have been accused of wrongfully foreclosing on homeowners because they failed to create and maintain proper mortgage paperwork. Now, there are signs that chaotic document management is harming investors in mortgage bonds, too. 

• EMERGING MARKETS-Brazil stocks fall as Fed continues to weigh.

MNI:

• China PBOC Tells Banks It Won't Help With Liquidity: Press. The People's Bank of China met with lenders earlier this week to tell them it won't help ease liquidity conditions, the official Shanghai Securities News reported Friday. The report, which cited sources from leading brokerage Shenyin Wanguo Securities, said 18 big banks were told at a meeting Tuesday to reduce their leverage ratios and not expect the PBOC to step in with liquidity. Money market rates have shot up to record levels in recent days amid a cash squeeze that's being engineered by the PBOC to force banks to lend responsibly. Analysts believe the central bank will have to step in before long or risk generating the kind of financial crisis that regulators say they are committed to avoiding. Notes of the meeting, which was reported by MNI on Thursday, said lenders must cut their leverage ratios, curb bill financing activities and reduce their loans to industries facing overcapacity. "Banks shouldn't hope that the PBOC will ease liquidity," the notes said. The newspaper also said the current interbank liquidity shortage is temporary and structural and that a recent State Council meeting, as well as the PBOC, underlined the government's resolve not to ease liquidity.

Telegraph:

• European Markets Fall on Greece in Fresh Turmoil as Coalition Breaks Up. Greece has been thrown into fresh uncertainty after a junior coalition partner confirmed its withdrawal from government.

Xinhua:

• China Vice Premier Warns Against Intl Liquidity Overflow. Countries should improve co-ordination of macro-economic policies to avoid global overflow of liquidity, inflation, citing Zhang Gaoli's address to forum in St. Petersburg, Russia.

Bear Radar

Style Underperformer:

• Mid-Cap Growth -.31%

Sector Underperformers:

• 1) Education -2.70% 2) Software -2.30% 3) Gaming -1.92%

Stocks Falling on Unusual Volume:

• ORCL, RBS, IOC, REN, C, STT, IRE, ELP, ENOC, SLF, CLMT, ING, TOT, ACRE, AHT, HLSS, AGN, KMR, KMX, PMC, LL, MGLN, VR, LZB, SGEN, BLK, SFI, WHR, C, CM, TLLP, TREX, CLFD, FBHS, WTR, PENN, CAR, DRI, WMGI, EAT, AB, ROC, MGLN, NSM, BGFV, TEX and AHT

Stocks With Unusual Put Option Activity:

• 1) AVP 2) WNR 3) WHR 4) ORCL 5) OIH
  

Stocks With Most Negative News Mentions:

• 1) AGN 2) ANF 3) WHR 4) SWK 5) ESI
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value -.22%

Sector Outperformers:

• HMOs +.98% 2) Tobacco +.85% 3) Telecom +.41%
  

Stocks Rising on Unusual Volume:

• RXN, SPRD, THRX and FRAN

Stocks With Unusual Call Option Activity:

• 1) WU 2) SVU 3) ATML 4) DFS 5) AMGN
  

Stocks With Most Positive News Mentions:

• 1) LMT 2) FRX 3) SO 4) BWA 5) MS
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Friday Watch

Evening Headlines 
Bloomberg: 

• China Money-Market Turmoil Poses Test for New Leaders: Economy. China’s cash squeeze over the past two weeks is testing the management skills of new Communist Party leaders saddled with risks from a record credit expansion under their predecessors. The one-day repurchase rate touched an unprecedented high of 13.91 percent yesterday, prompting speculation the central bank was forced to pump liquidity, before diving today by the most since 2007. Premier Li Keqiang signaled determination to stamp out speculation funded by cheap money with a June 19 State Council statement saying banks must make better use of existing credit and step up efforts to contain financial risks. Any prolonged constriction of interbank liquidity risks triggering a broader credit crunch, further depressing an economy that’s already slowing. The dangers add to burdens on a global recovery contending with the prospect of reduced Federal Reserve stimulus in coming months. “It’s really hard to deflate these things in an orderly way,” said Michael Pettis, a finance professor at Peking University in Beijing. “The problem is that when debt levels have got so high, and it’s more debt that keeps the existing debt afloat, you absolutely have to stop the process but it’s very difficult to stop the process in an orderly way.”

• Stress Test for Banks Inflicting Collateral Damage: China Credit. China's decision to tolerate the worst cash crunch on record is evolving from a stress test of banks into a threat to the ability of companies to raise funds. As their overnight borrowing costs neared 13%, banks switched focus toward shoring up their own finances and slashed investments in the bond market they dominate. The one-year yield on AAA corporate debt jumped a record 121 basis points this month to 5.15%, ChinaBond indexes show. Bond sales slumped to $26 billion in June, the least in 17 months and down 57% from May, Bloomberg data show.

• China Grain Policies Stock Imports, Inflation: Chart of the Day. China's effort to boost grain output by raising guaranteed prices and stockpiling harvests has inadvertently turned the world's biggest producer into a net importer while fueling inflation, according to research by the Chinese Academy of Social Sciences.

• China Funds Lose in Fifth Week of Asian Outflows, Citigroup Says. International money managers pulled a combined $1.2 billion from Asian funds this past week, a fifth straight week of outflows, according to Citigroup Inc. (C) China funds posted the biggest losses with $558 million of net withdrawals in the week ended June 19, followed by regional funds at $521 million, Citigroup’s Hong-Kong based chief Asian strategist Markus Rosgen wrote in a note to clients today. Foreigners net sold Asia by $3.6 billion in the week, with South Korea and Taiwan taking up the largest shares, he wrote.

• Minsky Moment Alarm Sounded in China by SocGen: Cutting Research. Credit growth in the world's most populous country has outstripped economic expansion for five quarters, raising the question of where the money has gone, Societe Generale SA economist Yao Wei wrote in two recent reports. In the first quarter, for example, bank loans, shadow banking credit and corporate bonds together accelerated more than 20 percent year-over-year, while gdp grew less than half that much. The gap has been widening since early 2012. Yao says the answer to where the money is going is a growing "debt snowball" which doesn't contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses. This fits with the theory first put forward by economist Hyman Minsky of Washington University in St. Louis. His financial instability hypothesis showed how markets create waves of credit expansion and asset inflation, followed by periods of contraction and deflation.

• Bond Auctions Fail From Russia to Korea as Brazil Protests Rage. Developing nations around the world are scaling back or canceling billions of dollars of bond sales as borrowing costs climb the most since 2008, just as spending needs increase amid slowing economic growth. Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales. The tumble in bonds, stocks and currencies, spurred by investors’ biggest retreat from emerging markets in two years, is tightening credit as the Federal Reserve says it may end cheap money that had made investment plentiful. Yields on local-currency emerging nation bonds surged 74 basis points this month to 6.5 percent, the biggest increase in five years. In Turkey and Brazil, anti-government protests are challenging development plans that require additional funding. 

• Abe’s Arrows of Growth Dulled by Japan’s Three Principles.

• Asian Stocks Decline on Fed Stimulus, China Concerns. Asian stocks fell, with the regional benchmark index heading for its biggest two-day decline since September 2011, amid concern the Federal Reserve will reduce stimulus and China’s economic slowdown may deepen as a cash crunch worsens. Jiangxi Copper Co. (358), China’s biggest producer of the metal, sank 2 percent in Hong Kong as copper futures fell. Newcrest Mining Ltd., Australia’s No. 1 gold producer, slumped 6.7 percent as the bullion touched a September 2010 low. Mitsubishi UFJ Financial Group. Inc., Japan’s largest lender, fell 2.6 percent after a unit agreed to settle claims in New York that it transferred billion of dollars for countries facing sanctions including Iran, Sudan and Myanmar. The MSCI Asia Pacific Index slid 0.9 percent to 126.45 as of 11:02 a.m. in Tokyo, with about 12 shares falling for each that rose. 

• Rubber Tumbles to Nine-Month Low on Concern China Demand to Slow. Rubber declined to a nine-month low amid concerns that an economic slowdown in China, the biggest buyer, will reduce demand for the commodity used in tires. The contract for delivery in November on the Tokyo Commodity Exchange plunged as much as 4.2 percent to 228 yen a kilogram ($2,345 a metric ton), the lowest level since September, at 10:06 a.m. local time. Futures are heading for a sixth weekly fall and have lost 24 percent this year. 

• Gold Rebounds With Silver After Slumping to Cheapest Since 2010.

• Copper Pares Third Weekly Decline After 20-Month Low.

• U.S. Said to Consider Doubling Leverage Standard for Big Banks. U.S. regulators are considering doubling a minimum capital requirement for the largest banks, which could force some of them to halt dividend payments. The standard would increase the amount of capital the lenders must hold to 6 percent of total assets, regardless of their risk, according to four people with knowledge of the talks. That’s twice the level set by global banking supervisors. U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private. “The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.”

• Debt Sales Halted in U.S. as Companies Weigh Fed Taper Prospect. Corporate bond sales in the U.S. have all but halted after the Federal Reserve said this week that it’s prepared to taper its stimulus program later this year, prompting the biggest increase in investment-grade yields in 21 months. Solar Star Inc. was the only borrower said to be marketing bonds yesterday, with a $1 billion issue, following $330 million in offerings June 19. The slowdown is trimming a daily average of $7 billion as of June 18 that put 2013 on pace for a record year, according to data compiled by Bloomberg.

Wall Street Journal:  

• Turmoil Exposes Global Risks. The turmoil exposed vulnerabilities in the financial markets and the world economy that had been mostly ignored because central banks were willing to ride to the rescue with huge amounts of money.

• Greece Faces Fresh Threats. Greece's shaky coalition government was hit Thursday with a double blow as talks over the shutdown of the state broadcasting company threatened to fracture the government and new worries over the financing of the country's bailout program emerged. The breakdown in the talks sparked a threat from the junior partner in the three-party coalition to withdraw its support from the government, representing the coalition's gravest internal crisis to date. "No agreement has been reached," Democratic Left's leader, Fotis Kouvelis, said after a two-hour meeting—the third in a week—of the three party chiefs. A meeting of his parliamentary deputies is scheduled for Friday morning to decide the party's future in the coalition government.

• As Belts Tighten, Darden(DRI) Feels Squeeze. Since the recession ended, Americans' disposable personal income has risen by 3.1% at a compound annual rate. At the same point after the previous two recessions ended in 1991 and 2001, annualized growth was 5.5% and 4.8%, respectively. The payroll-tax increase this year has recently pushed year-over-year growth down to one of the lowest levels of the expansion.

• Case Closed? Far From It. The FBI seems blasé about the IRS investigation, so it's crucial Congress make it a priority.

• John Kerry's ObamaCare Boondoggle. A backroom deal he cut for Massachusetts hospitals has caused a bipartisan uproar in Congress. A bipartisan backlash is growing against another section of President Obama's health-care law. The president can blame this latest embarrassment on none other than Secretary of State John Kerry.

CNBC:

• Hedge Funds' Emerging Growth Pains. (video)

• Oracle's(ORCL) Cloud Subscriptions Disappoint; Shares Dive. Oracle missed expectations for software sales and subscriptions for the second straight quarter, sending its shares plunging as investors worried CEO Larry Ellison may have trouble getting the technology giant back on track. On Thursday, Oracle executives forecast new software sales and subscriptions will rise 0 percent to 8 percent this quarter, blaming weakness in the past quarter on disappointing sales in Asia and Latin America.

Zero Hedge: 

• Which Chinese Banks Have The Biggest Default Risk? (graphs) 

• Is This Why The PBOC Is Not Coming To The Rescue? (graphs)

• NSA Secret Warrantless Spying Rules Revealed.

• Market Tops Form "At The Margin".

• The Wealth Effect Shifts Into Reverse.

Business Insider: 

• TRADER: Here Are 8 Things I Just Learned While Staring At The Bloomberg Terminal While The Market Was Getting Smoked.

• Demonstrators Just Completely Took Over A Side Of A Highway In Brazil. (pic)

• Is This The Emerging Market Debt Blowup? The Race For The Exits Accelerates Again. (graph)

• The Chinese Interest Rate Chart That Has The Entire World On Edge. (graph)

New York Times: 

• U.S. Approves a Label for Meat From Animals Fed a Diet Free of Gene-Modified Products. The Agriculture Department has approved a label for meat and liquid egg products that includes a claim about the absence of genetically engineered products. It is the first time that the department, which regulates meat and poultry processing, has approved a non-G.M.O. label claim, which attests that meat certified by the Non-GMO Project came from animals that never ate feed containing genetically engineered ingredients like corn, soy and alfalfa.

ValueWalk:

• China’s Looming Crisis Hurts Hedge Funds Betting on Abenomics.

AP:

• 1M Brazilians fill streets with protest, violence. More than a million Brazilians poured into the streets of at least 80 cities Thursday in this week's largest anti-government demonstrations yet, protests that saw violent clashes break out in several cities as people demanding improved public services and an end to corruption faced tear gas, pepper spray and rubber bullets. In Rio de Janeiro, where an estimated 300,000 demonstrators swarmed into the seaside city's central area, running clashes played out between riot police and clusters of mostly young men, their T-shirts wrapped around their faces. But several peaceful protesters were up in the crackdown, too, as police fired tear gas canisters into their midst and at times indiscriminately used pepper spray. Thundering booms echoed off stately colonial buildings as rubber bullets and the gas were fired at fleeing crowds. At least 40 people were injured in Rio.

Reuters:

• Illinois' finances worst ever in FY 2012: auditor. Illinois' finances sank deeper into the red in fiscal 2012, with the general revenue fund deficit hitting a record $9.1 billion as increased spending outran a jump in revenue, according to a report released on Thursday by the state auditor general. The deficit for the fiscal year that ended June 30, 2012, was up $1.1 billion from fiscal 2011 when measured by generally accepted accounting principles, according to the comprehensive annual financial report. The bigger deficit was driven by a nearly $4.7 billion increase in spending that eclipsed revenue growth of $3.7 billion, the audit said.

• Euro bailout fund conditions complicate efforts to separate bad banks and sovereigns. Euro zone finance ministers on Thursday agreed on how its bailout fund can invest in troubled banks, but imposed so many conditions that they may not completely succeed in their goal of separating problem banks from their indebted home countries. The 500 billion-euro bailout fund was originally set up to help struggling governments and was later expanded to include banks in an effort to restore confidence in the financial markets, ravaged by three years of debt and financial crisis.

• U.S. senators urge inclusion of food safety in Smithfield(SFD) review. A bipartisan group of 15 U.S. senators urged the Obama administration on Thursday to consider whether the proposed sale of Smithfield Foods Inc to the Chinese meat company Shuanghui International posed a threat to the U.S. food supply that could justify blocking the deal. "We believe that our food supply is critical infrastructure that should be included in any reasonable person's definition of national security," the senators said in a letter to Treasury Secretary Jack Lew, whose department chairs the interagency panel that reviews foreign investment for national security threats.

• China's c.bank inflicts pain on banks to rein in credit.

• EMERGING MARKETS-Latin American stocks tumble to four-year low.

• Pipeline foes say Obama's climate plan no tradeoff for Keystone. Foes of the proposed Keystone XL pipeline, which would carry oil from Canada to Texas, said on Thursday that an expected White House package of proposals to combat climate change was not an adequate trade-off for approval of the controversial project. 

• U.S. Fed balance sheet grows in latest week. The U.S. Federal Reserve's balance sheet grew in the latest week on increased holdings of U.S. Treasuries and mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which is a broad gauge of its lending to the financial system, stood at $3.427 trillion on June 19, compared with $3.367 trillion on June 12.

Telegraph:

• Emerging markets crushed by double squeeze in China and America. Short-term borrowing rates in China have soared to record highs as credit seizes up, prompting fears that the country’s liquidity squeeze may be spinning out of control.

• French economy to contract by 0.1pc this year, says INSEE. The French economy will contract by 0.1pc this year and the unemployment rate climb to 10.7pc, the national statistics agency INSEE said.

Financial News:

• PBOC Unlikely to Loosen Monetary Policy Greatly. PBOC may increase open market adjustments to keep "reasonable and stable" inter-bank liquidity, citing a market analyst. China's economic slowdown risks may rise in the short-term as policymakers may keep prudent policy to control financial risks.

South China Morning Post:

• Bad loans rise sharply in Shanghai bank sector. Mid-sized lenders pressured amid slump as regulator urges tighter risk controls. The Shanghai branches of several mid-sized mainland banks have seen rapid increases in bad loans this year as private companies feel the pinch of the nationwide economic slowdown. At the Shanghai branch of Beijing-headquartered China Citic Bank - listed in Shanghai and Hong Kong - the non-performing loan (NPL) ratio jumped to about 5 per cent of total outstanding loans this month, far higher than the national average of about 1 per cent, according to sources familiar with the matter. A 5 per cent NPL ratio translates into about six billion yuan (HK$7.5 billion) of bad loans, the sources added. "It's not just Citic Bank. Other banks' Shanghai branches are also facing trouble and could wind up with similarly huge bad loans on their books," one of the sources said. Bad loans began to increase rapidly since the third quarter of last year. It worsened in the first half of this year, in particular among many small- and medium-sized enterprises in the wealthy Yangtze River Delta economic zone in the east, including Shanghai city and Zhejiang and Jiangsu provinces.

China Daily:

• State Researcher Says China 2H Growth to Slow From 1H. Chen Dongqi, deputy director of the National Development and Reform Commission's Academy of Macro Economic Research, says China's economic growth in the second half will be slower than the first half.

Evening Recommendations 
Wells Fargo:

• Rated (CVX) Outperform.

Night Trading

• Asian equity indices are -2.25% to -.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 166.0 +7.0 basis points.

• Asia Pacific Sovereign CDS Index 134.25 +19.0 basis points.

• FTSE-100 futures -.45%.

• S&P 500 futures +.21%.

• NASDAQ 100 futures +.09%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (KMX)/.57

• (DRI)/1.05

Economic Releases

• None of note

Upcoming Splits

• None of note

Other Potential Market Movers

• The BoJ's Kuorda speaking could also impact trading today.

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

Stocks Dropping into Final Hour on Rising Global Growth Fears, China Credit Crunch, Technical Selling, Homebuilding/REIT Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Substantially Lower
  

• Sector Performance: Every Sector Declining
  

• Volume: Around Average

• Market Leading Stocks: Underperforming

Equity Investor Angst:

• Volatility(VIX) 20.44 +22.8%
• Euro/Yen Carry Return Index 134.32 +.49%
• Emerging Markets Currency Volatility(VXY) 12.0 +8.70%
• S&P 500 Implied Correlation 60.87 +8.81%

• ISE Sentiment Index 42.0 -55.32%

• Total Put/Call 1.31 +20.18%

• NYSE Arms .61 -72.51% 

Credit Investor Angst:

• North American Investment Grade CDS Index 93.80 +9.44%

• European Financial Sector CDS Index 173.57 +13.10%

• Western Europe Sovereign Debt CDS Index 94.0 +4.44%

• Emerging Market CDS Index 378.18 +8.30%

• 2-Year Swap Spread 18.25 +2.25 bps

• TED Spread 23.25 +.75 bp

• 3-Month EUR/USD Cross-Currency Basis Swap -12.50 -.5 bp

Economic Gauges:

• 3-Month T-Bill Yield .04% unch.

• Yield Curve 206.0 +3 bps

• China Import Iron Ore Spot $120.60/Metric Tonne +.5%

• Citi US Economic Surprise Index -12.90 +1.2 points
• Citi Emerging Markets Economic Surprise Index -44.80 +.6 point 

• 10-Year TIPS Spread 1.97 -7 bps

Overseas Futures:

• Nikkei Futures: Indicating -75 open in Japan

• DAX Futures: Indicating -41 open in Germany

Portfolio: 

• Slightly Higher: On gains in my index hedges and emerging markets shorts 
• Disclosed Trades: None
• Market Exposure: 25% Net Long

Today's Headlines

Bloomberg:

• Equity Volatility Surges Globally Amid Record Futures. Stock volatility jumped around the world, with the U.S. benchmark gauge surging the most in two months, after speculation the Federal Reserve will cut stimulus sent futures trading to an all-time high. The Chicago Board Options Exchange Volatility Index, which tracks options on the Standard & Poor’s 500 Index, climbed 9.1 percent to 18.15 at 12:38 p.m. in New York today. Europe’s VStoxx Index, a gauge of Euro Stoxx 50 Index derivatives, gained 16 percent to 23.61, and Hong Kong’s HSI Volatility Index, based on Hang Seng Index contracts, rose 7.7 percent to 22.72, near a one-year high. About 218,000 futures tracking the U.S. VIX changed hands each day on average in June, 49 percent more than the previous month, data compiled by Bloomberg show.

• Corporate Credit-Default Swap Indexes Rise in Europe. Markit iTraxx Europe index rises 11 bps to 118, highest since April 4 and biggest jump since Nov. 1, 2011. • Markit iTraxx Crossover index rises 44 bps to 487 bps, highest since March 27 • Markit iTraxx Senior Financial index rises 17 bps to 170 bps • Markit iTraxx Sub Financial index rises 24 bps to 250 bps.

• Dollar Debt in Asia at Risk of More Falls After Fed, Nomura Says. Dollar-denominated bonds in Asia have room to drop further, Nomura Holdings Inc. said, after Federal Reserve Chairman Ben S. Bernanke discussed the prospect of phasing out unprecedented stimulus. The cost of protecting Asian debt against default rose to a 10-month high. Increasing losses in emerging markets combined with a worsening economic outlook for the region may prompt institutional investors to pull money out, spurring an additional widening of credit spreads for U.S. currency debt in Asia, said Nomura analyst Pradeep Mohinani. "It's certainly not a buying opportunity at the moment," said Mohinani, who heads Nomura's corporate credit analysis for Asia excluding Japan. 

• Rupee Plunge Prompts RBI Intervention; Bonds, Stocks Tumble. India’s rupee tumbled to a record, prompting the central bank to intervene to support the currency, after the U.S. signaled it will phase out a stimulus program. Stocks and bonds plunged the most in at least a year. “There will be pain due to the current-account deficit and as leveraged investors are pulling money from Indian debt,” said N. Srinivasan Venkatesh, Mumbai-based head of treasury at IDBI Bank Ltd. “Policy makers will now have to put their heads together to think about more structural, long-term fixes.” The rupee weakened 1.4 percent to 59.5750 per dollar at the 5 p.m. close in Mumbai, after earlier dropping to an all-time low of 59.9800, data compiled by Bloomberg show. The currency has plunged 8.9 percent this quarter, Asia’s worst performance. The S&P BSE Sensex (SENSEX) plunged 2.7 percent to 18,719.29, the most since Sept. 22, 2011. Volume was 49 percent more than the 30-day average.

• Turkish Stocks Enter Bear Market as Lira Sinks to Record on Fed. Turkey’s main stock index sank more than 20 percent from its May peak into a so-called bear market while the lira tumbled to a record against the dollar after the U.S. Federal Reserve signaled it may scale back monetary stimulus. Turkish bonds fell the most in emerging markets. The Borsa Istanbul National 100 index slumped 6.8 percent to 73,461.89 at the close in Istanbul, down 21 percent from the May 22 high. The lira depreciated for a fourth day, falling as much as 1.8 percent to 1.9363 a dollar as the central bank held six currency auctions to support it. The currency was at 1.9334 a dollar at 5:44 p.m. in Istanbul, taking this month’s drop to 2.9 percent. 

• Egypt Violence Builds After Mursi Names Islamist Governors. Employees of an Egyptian tourism trade group threatened to resign in protest amid renewed clashes in parts of the country today over President Mohamed Mursi's latest appointment of Islamists to key positions. Discontent with Mursi, who marks a year in power at the end of the month, is building up as critics plan protests on June 30 to call for early elections. They accuse him of failing to revive the economy while putting the interests of his Muslim Brotherhood allies ahead of the nation’s good. Mursi’s appointment of eight Islamists as provincial governors touched off a wave of protests, with violence erupting earlier this week in some provinces. Tourism Minister Hisham Zaazou resigned because one of the new governors belongs to a group linked to a deadly attack on a main tourist site. 

• Emerging Markets Era of Outperformance Is Ending, Goldman Says. The decade-long outperformance of developing-nation assets has ended, according to the Goldman Sachs Group Inc. economist who predicted the rise of the biggest emerging markets in 2003. The five trends that spurred outsized gains during the past 10 years -- surging growth in the so-called BRIC nations, higher commodities, improved government finances, slower inflation and lower U.S. bond yields -- are halting and in some cases reversing, Dominic Wilson, the chief markets economist at New York-based Goldman Sachs, wrote in a report dated yesterday. 

• Emerging Markets Crack as $3.9 Trillion Funds Unwind: Currencies. Investors are pulling money from emerging markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil. More than $19 billion left funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to EPFR Global. Foreign investors dumped an unprecedented $5.6 billion of Brazilian stocks and $3.2 billion of Indian bonds this month, exchange data show. JPMorgan Chase & Co.’s emerging-currency index is down 1.4 percent this quarter, while the rupee and Turkish lira hit record lows and the real reached its weakest level since 2009.

• Emerging-Market Stocks Fall Most Since 2011 as Currencies Tumble. Emerging-market stocks dropped the most in almost 21 months, currencies weakened and government borrowing costs rose after China’s cash crunch worsened and the Federal Reserve said it may reduce monetary stimulus this year. The MSCI Emerging Markets Index slid 4 percent to 909.04 at 10:04 a.m. in New York, set for the biggest drop since September 2011. Turkey’s (XU100) benchmark stock index lost 5.6 percent, the most among major developing nations, as the lira and India’s rupee hit record lows. BYD Co. (1211) slumped 9.3 percent in Hong Kong, while Brazil’s Ibovespa extended the worst decline among major emerging-market stock benchmarks this year. Yields on South Africa’s benchmark bonds jumped to the highest level in a year.

• Germany Said to Seek Cyprus-Style Wipeouts in ESM Bank Aid Rules. Germany is leading a push for all bank creditors except insured depositors to take losses before the euro area’s firewall fund could provide direct aid to troubled financial institutions, according to two European officials. 

• Europe Stocks Sink Most in 18 Months on Stimulus Outlook. European stocks sank the most in more than 18 months after Federal Reserve Chairman Ben S. Bernanke said the central bank may end bond purchases next year if the economy strengthens in line with forecasts. Rio Tinto Group and Renault SA led mining and automobile companies lower as a gauge of Chinese manufacturing fell. Swatch Group AG slid the most in almost 21 months after Swiss watch exports declined. Eurotunnel Group SA tumbled 12 percent after Les Echos reported the European Commission will demand a reduction in tolls to use the Channel Tunnel. The Stoxx Europe 600 Index (SXXP) plunged 3 percent to 283.68 at the close of trading, the biggest retreat since Nov. 21, 2011. The benchmark measure has declined 8.7 percent since May 22, when Bernanke indicated the central bank could pare stimulus measures as the economy grows.

• Fed Seen Tapering QE to $65 Billion at September Meeting. Federal Reserve Chairman Ben S. Bernanke will cut the Fed’s $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey. The survey of 54 economists followed Bernanke’s press conference yesterday, in which he mapped out a timetable for an end to one of the most aggressive easing strategies in Fed history. His remarks prompted economists to predict a faster reduction in purchases: in a June 4-5 survey, only 27 percent of economists forecast tapering would start in September.

• U.S. Credit Swaps Surge by Most in Year on Fed Paring Statement. Investor confidence in U.S. corporate credit is plunging the most in more than a year as investors speculate the Federal Reserve is preparing to slow down the pace of its bond purchases. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 5.7 basis points to a mid-price of 91.4 basis points at 11:02 a.m. in New York, after yesterday climbing 3.9 basis points, according to prices compiled by Bloomberg. That’s the biggest two-day jump on a closing basis since the measure rose 8.8 in the period ended May 14, 2012, excluding rolls into new series of the benchmark.

• Commodities From Gold to Oil Slump on Fed Outlook, China Crunch. Commodities tumbled by the most in six weeks as everything from gold to crude oil and copper dropped on concern that the Federal Reserve may phase out stimulus and as China’s cash crunch worsened. The Standard & Poor’s GSCI Index of 24 raw materials lost as much as 2 percent to 622.91, the biggest intraday loss since May 10, before reaching 625.31 as of 1:41 p.m. in London. Gold for immediate delivery fell below $1,300 an ounce to the lowest in more than 2 1/2 years and silver plunged 7.8 percent. West Texas Intermediate crude dropped 2.3 percent to $96 a barrel.

• Copper MACD, RSI Measures Signal 9% Drop: Technical Analysis. Copper on the London Metal Exchange will probably fall as much as 9 percent in the next two months, according to technical analysis from TransGraph Consulting Pvt. Metal for delivery in three months may decline to as low as $6,200 a metric ton, analyst Saumendra Satapathy said in an e-mail today. Copper, which entered a bear market in April, has slumped 14 percent to $6,827.75 a ton this year.

Wall Street Journal:

• Signs of China Weakness Mount. Mounting evidence of weakness in China's economy and increasing stress in its financial system are testing the government's determination to ride out a slowdown without resorting to stimulus measures.

• China’s Cash Crunch Smells Like a Lehman Moment.

MarketWatch: 

• IMF threatens to suspend Greece aid: report.

CNBC: 

• Underground Economy: How Shale Is ‘Fracking’ the Old Order.

• Rising Home Prices Are 'Unsustainable'—Realtors. (video)

• Boehner: Bernanke's Fed to Blame for Sell-Off. (video)

Zero Hedge: 

• Here Is What's Going On In China: The Bronze Swan Redux.

• Initial Claims Worse Than Expected, Rise By 18,000 To 354,000. (graph)

• Surveying The Global Damage. (graphs)

• Strongest Philly Fed Since April 2011. (graph)

• Collapse In Caterpillar North American Sales Not Helping Bernanke's "Recovery". (graph)

• European Markets Plunge Most In 20 Months. (graphs)

Business Insider: 

• Gary, Indiana Is Deteriorating So Badly That It's Considering Cutting Off Services To Nearly Half Its Land.

• Gold Now Down 6.4%.

• 5 Signs Brazil Is Not Ready For The World Cup.

• Market Bloodbath In Brazil.

• Government Bond Markets Around The World Are Burning.

• The LIBOR Of China Is Going Totally Ballistic.

ValueWalk: 

• Brevan Howard EM Fund Slides 5 Percent In June. The sell off in emerging markets has taken its toll on the Brevan Howard Emerging Market Fund. The world’s largest EM focused fund was not having a great year anyway, and the added volatility in June beat what was left of the $2.6 billion fund. In Tommy Wikes’ report for Reuters, the BH Emerging Markets Strategies Master Fund declined 4.8 percent for this month, taking the year to date performance to an abysmal -11.6 percent, as of June 14.

Reuters:

• Factories struggle in June, hiring slows: Markit. Manufacturing activity growth slowed slightly in June as the pace of hiring and overseas demand weakened, making the second quarter the weakest for the sector in the last four, a survey showed on Thursday. Financial data firm Markit said its "flash," or preliminary, U.S. Manufacturing Purchasing Managers Index fell to 52.2 in June from 52.3. A reading above 50 indicates expansion. June's 52.2 reading was also the average for the second quarter, behind the 54.9 average in the first three months of the year and the worst showing since the third quarter of 2012. Markit's output index rose to 53.9, a three-month high, from 52.7 in May while the gauge of new orders also rose to its highest level since March, offering some hope. But the pace of hiring slowed to 50.4 from 52.6, reflecting the weakest rate of job creation since January 2010. New export orders contracted for a second straight month, with overall demand from customers abroad at its weakest since October 2012.

• France, Spain take action against Google on privacy. France and Spain led a Europe-wide push on Thursday to get U.S. Internet giant Google to change its policies on collecting user data. 

• U.S. 30-year bond yield highest since Sept. 2011.

• Government intervention fails to boost Brazilian real.

• Copper falls to 20-month low on Fed, weak China data.

The Economist:

• The Shibor shock. China’s central bank allows a cash crunch to worsen.

Financial Times: 

• Echoes of Mao in China cash crunch. As China’s credit crunch takes a turn for the worse, the question of why the central bank has permitted market conditions to deteriorate so suddenly and so sharply looms ever larger. Short-term money market rates surged to more than 10 per cent on Thursday, a record high and nearly triple their level just two weeks ago, after the central bank refused to inject extra funds into the strained financial system.

China Daily: 

• Moody's warns on China's local govt debt. Local government debt poses a key risk for Chinese banks, Moody's said Wednesday, the latest warning amid growing jitters of financial risks in the world's second largest economy. The rating agency said in a report that many local government financing vehicles (LGFVs) have seen their cash flow stagnate or decline, while their debt levels have risen. Among 388 city construction companies Moody's surveyed, only 53 percent of them have sufficient cash to cover estimated debt and interest payments in 2013 without resorting to borrowing more. Meanwhile, the National Audit Office said on June 10 that the debt of 36 local governments had risen 12.9 percent to 3.85 trillion yuan ($627.93 billion) in the two years to the end of 2012. "The direct exposures of Chinese banks to LGFVs remain significant despite the central government's recent efforts to limit the growth of LGFV borrowing," the report said, adding that LGFV exposures accounted for 14 percent of total Chinese bank loans at the end of 2012.