Today’s Top Stories; Bank financial regulatory reform update;German bund auction comes in on the weak side $MSFT $BAC $DB

Today’s Top Stories

· German bund auction comes in on the weak side - this is being taken as a positive for risk sentiment (similar to the tepid 2yr TSY auction in the US on Tues); weak demand at these risk-free auctions (TSYs and Bunds have been among the best performing assets in the last few weeks as risk assets came for sale) is signaling to the market that the risk aversion trade may have become a bit too popular.  Bunds fell on the news and equities ticked higher.  German auction specifics: "The sale of 5.445 billion euros of 2.25 pct Bobl attracted bids worth 1.1 times the amount on offer, below the 1.5 cover at the previous auction".  One of the reasons US stocks rallied into the close was in part b/c of the tepid demand at Tues' 2yr auction.  Reuters/DJ/Bloomberg 

· The Fed could consider cutting the rate it charges on US$ loans made through the ECB; currently, this rate is 100bp ahead of OIS (Overnight Indexed Swaps, which tracks the expected path of the Fed Funds); some think cutting the rate wouldn’t do much as its currently not onerous; however, there has only been ~$9B drawn under the swaps since they were re-opened a few weeks ago – WSJ 

· Europe Sentiment – Another May sentiment number hit this morning (French Business Sentiment) and while stable m/m came in weaker than St. estimates. This follows a weaker May Consumer Confidence reading out of Italy yesterday.

· OECD Headlines – The OECD is holding a meeting that wraps up Fri. and a number of headlines out of the meeting have been hitting throughout the morning. The most significant likely being an increase to its global economic growth forecast. The OECD now sees global growth of 4.6% in 2010 and 4.5% in 2011 vs. prev. +3.4% and +3.7%. The Nikkei reports however that the OECD communiqué will caution investors to expect a tepid recovery. The OECD’s chief economist also said that a return to recession in Europe is unlikely and that the recent drop in the euro could provide a boost to exports (Reuters).

· Italy – this hit late in NY trading on Tues and helped contribute to the equity rally – the Italian gov’t approved EU24B in budget cuts. The cuts are aimed at bringing the deficit within the EU limit of 3% of GDP in ’12; like other countries that pushed through cuts, Italian unions this morning are threatening to strike.  Bloomberg 

· C, BAC, and DB – these banks were some of the most active “window dressers” of their balance sheets according to the WSJ

· BBVA – one of Spain’s largest banks has been unable to renew ~$1B of short-term funding in the US CP market since the start of May according to the WSJ. 

· European credit markets – Treasurers at some US companies are telling money-market managers to stay out of troubled sovereigns such as Spain; meanwhile, some large US banks have also scaled back their short-term lending to European banks (WSJ)

· Bank financial regulatory reform update – research from JPMorgan’s V Juneja; we assess the impact on bank earnings from passage of reform; we are upgrading USB; Pulling it all together, we expect the Senate reform bill will initially have significant earnings impact before banks can start to offset some of the measures. The impact is likely to be tri-modal: greatest impact on money center banks followed by mid-sized regionals and the least impact on super regionals. 

· Bank financial regulatory reform update – research from JPMorgan’s K Caprihan (credit) – “S&P does a 180: Removes an immediate overhang, positive for sector; Broker/Dealers look cheap” - The tone and wording in S&P’s latest update on the potential impact of financial reform was decidedly benign, and in our view was a complete 180-degree turn from its earlier update. S&P states that it might not complete its review until the end of 2010 or 2011, which implies that we don’t have to worry about impact on short-term ratings or the repo books for several quarters.

· Hedge funds – the FT Alphaville notes that HFs have seen losses in May – across strategies, asset classes, and managers. 

· TOL - Mixed result here as the earnings miss, revenue miss, gross margin miss, higher charges, and lower closings; however, The new orders number was well ahead of the street and the company's outlook was pretty upbeat.  

· MSFT - Chief Executive Steve Ballmer said on Wednesday there are concerns that a debt crisis in the eurozone will not remain restricted to the region.  Reuters 

· PEP – CEO Nooyi in a CNBC interview said that the euro zone's debt crisis does not appear to have a direct impact on its European operations.      

· Credit Update – from E Beinstein - We have a positive view on US bond spreads at current levels, in contrast to our collegues in Europe who have a negative view on HG spreads in that region. The difference arises primarily from a difference in perceptions of the technical positions in the two regions. In a note published this morning my colleague Steve Dulake in Europe highlights that both investors and banks hold more bonds than they would like given the now higher perceived risk on those bonds.