- A big disappointment in the June Empire Manufacturing index spooked investors before the open this morning, as the survey of manufacturing conditions in the North East indicated much steeper declines than expected instead of another sign of moderation. Major US indices opened slightly to the downside and have headed steadily downwards in mid morning trading. With things looking shaky, mid-morning comments from Fed Governor Evans that there is a risk US unemployment could get close to 10% added to the downward momentum. The ECB's Papademos, Meredith Whitney, and NYU's Nouriel Roubini have added to the steady chorus of cautious commentary as well. Equity weakness and the stronger dollar have pushed front-month crude to session lows below $70. Bond markets are bid up after TICS data that showed foreign countries have yet moved to substantially cut US Treasury holdings. The US 10-year yield is back below 3.75% while the benchmark spread has narrowed back below 250 basis points.

- Treasury Secretary Geithner and White House advisor Larry Summers filled in more details on the Obama Administration's proposals to regulate derivatives and securitized products in this morning's Washington Post. According to the piece, the administration will propose that all derivatives contracts and dealers be regulated and require originators to retain interests in asset-backed securities. Systemically important firms will face "stringent" supervision by Federal Reserve and a new Council of Regulators with broader responsibility across the system. President Obama is scheduled to announce a major overhaul of financial sector regulations on Wednesday morning.

- Bank of America and Morgan Stanley are notable laggards this morning, with both down 2.5% or so in early trading. Overnight Rochdale's Dick Bove said BoA would suffer "horrific" loan losses, while the bank's May Master Trust data showed net charge offs jumping to 12.50%, versus 10.47% in April. Capital One's May Master Trust charge offs rose nearly 1% over April levels. Master Trust data from the other leading credit card issuers is expected throughout the day.

- Illinois Tool Works revised its Q2 earnings guidance slightly upwards and reaffirms its revenue growth target after deciding to keep a business segment that had been slated for divestiture.. Shares of the company are off nearly 3%, weighing down competitors Snap-On, Stanley Works and Black & Decker as well. Small semi manufacturer O2Micro joined the competition in raising guidance, citing increased demand for LCD TVs. Shares of OIIM rose 10% in the pre-market and have sustained gains in early trading. Struggling retailer Limited Brands reduced the lower end of its 2009 earnings range and predicted same-store sales would down 5% to 10% for the year. Note also that Canaccord Adams has soured on all the smartphone exuberance, downgrading AAPL, NOK and RIMM this morning.

- In currencies, the greenback has firmed up on weekend comments out of Russia to the effect that there were no plans to discuss the reserve currency issue at tomorrow's meeting of BRIC nations (Brazil, Russia, India and China). Note also that French President Sarkozy said the G20 would have to address the currency issue at some point. IMF's Lipsky commented that the USD would remain the world's reserve currency for the foreseeable future. European currencies were hampered by continued concern regarding the Continent's banking sector. EUR/USD remains in the lower quarter of its session range throughout the NY morning. Dealers are discussing the technical importance of 1.3800 in the pair, with chatter circulating of euro sell stops building up below 1.3800 down through the 1.3720 area.

- Not all the news was rosy for dollars, however. The April TIC data showed global demand for US financial assets, with China, Japan, Brazil and Russia trimming treasury holdings in a shift that may reinforce concerns that demand for American debt will wane amid record deficits and the decline of the dollar's reserve status. Risk aversion helped the JPY firm against the majors, with EUR/JPY off 200 pips at 135.50, while GBP/JPY was lower by 150 pips to test below the 160 handle during the New York session. CAD and AUD were softer as the stronger USD weighed upon most energy and metal markets. Additional weight hit USD/CAD, sending the cross below the 1.13 level after the Bank of Canada said significant stresses remain in financial markets and that risks to household balance sheets have increased since December. AUD/USD is moving back below the 0.80 handle.

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