Morning Update

Markets Weak as Yesterday's Confidence Wanes

Stocks are lower in early action as Detroit's struggling auto industry continues to dominate headlines. General Motors announced it has failed to win bondholder support for its restructuring plan, paving the way for bankruptcy unless a new plan can be drafted by next week. Meanwhile, Chrysler is reported to be much closer to exiting its bankruptcy than originally thought. In other equity news, Staples beat earnings expectations and two more stress-tested banks announced capital raising plans. Treasuries are higher after mortgage applications fell last week and traders are still waiting for today's existing home sales report. Overseas, markets are mixed after yesterday's strong rally in US markets spilled over to Asia while Europe is still trying to hold on to tentative gains.

As of 8:49 a.m. ET, the June S&P 500 Index Globex futures contract is 2 points below fair value, the Nasdaq 100 Index is 8 points below fair value, and the DJIA is 4 points below fair value. Crude oil is up $0.42 at $62.87 per barrel, and gold is down $1.90 at $950.10 per ounce.

Dow member General Motors(GM $1) announced that it has failed to attain the necessary approval of its bondholders by a deadline that expired at midnight last night, setting the stage for bankruptcy unless a new agreement can be found before the June 1 deadline being enforced by the government. GM had been seeking to convince its creditors to accept an equity stake of 10% in exchange for the $27 billion in unsecured bonds they hold. GM received "substantially less" than the 90% approval needed for the debt reduction requirement under its loan agreements with the US Treasury. An ad hoc committee of large GM bondholders has referred to GM's offer as "neither reasonable nor adequate" and proposed a 58% stake in the reorganized firm, in contrast to the 10% stake that GM offered them.

In related news, several media outlets are reporting that privately-held Chrysler is much closer to exiting bankruptcy than originally thought, possibly as early as next week, according to a person familiar with the matter. Although investors will see this as a positive sign for GM should it also be forced into bankruptcy, the source said that GM's bankruptcy would take longer than Chrysler's because it is more complex. When it emerges from bankruptcy, Chrysler will be 20% owned by the Italian company Fiat (FIADF $11) with Fiat CEO Sergio Marchionne as the new CEO of Chrysler.

Staples (SPLS $20), the world's largest office supply retailer, reported 1Q EPS ex-items of $0.22, above the Reuters estimate of $0.21. Revenues increased 19% to $5.8 billion but lower profitability resulted in profits falling approximately 30% on a year-over-year basis. Same-store-sales in the firm's North American retail operations declined 8%, while same-store-sales in Europe were 14% lower. Management reaffirmed its outlook for synergy benefits accruing from the recent Corporate Express acquisition of $300 million over three years.

PNC Financial Services (PNC $43), one of the 10 banks failing to pass the recent government stress test, has announced that it raised more than $600 million through a common stock offering. PNC said it plans to repay the $8 billion in government funding it has accepted "as soon as appropriate."

KeyCorp (KEY $5), another stress-tested bank, said today that it plans to exchange common stock for up to $1.7 billion of preferred shares. KEY had previously announced intentions to sell $750 million in common stock as the bank tries to fill the $1.8 billion capital shortfall mandated by the government.

Treasuries up as mortgage applications fall, home sales data still on tap

In economic news, The US MBA Mortgage Application Index fell 14.2% to 786 for the week ended May 22. This follows a 2.3% gain for the prior week, in an index that can be quite volatile on a week-to-week basis. The Refinance Index plummeted 19%, while the Purchase Index rose 1%. The Mortgage Bankers Association (MBA) said the average 30-year mortgage rate increased 12 basis points to 4.81% - the highest level in more than two months - although still not far off of the record low of 4.61% that was reached at the end of March

Existing home sales for April will be reported at 10:00 a.m. ET, and the forecast is for sales to rise 2.0% month-over-month (m/m) to an annual rate of 4.66 million units, after falling 3.0% in March and rising 4.9% in February. Pending home sales have risen two months in a row, and are a leading indicator for this data series. According to the National Association of Realtors (NAR), sales of lower-priced homes trended up in March, driven by the $8,000 tax credit for first time buyers, who accounted for 53% of March transactions.

Europe trying to hold weak gains

After encouraging consumer data in the US caused a late-day rally in European markets yesterday, stocks are clinging to tentative gains in afternoon action today with most indexes up less than 1%, while the UK's FTSE 100 has recently dipped slightly into negative territory. On the economic front, Germany released final 1Q GDP numbers confirming the largest slide on record with a 3.8% decline since December. Meanwhile, in France, a consumer spending report showed a 0.7% month-over-month gain in April while economists had been expecting a 0.3% decline. In equity news, Arcandor (ACAGF $3) is rallying after Germany's Finance Minister said the German retailer's request for state aid should be "seriously pondered" by government authorities. Elsewhere, Praktiker (PKKRF $8) is up after Germany's second largest home improvement retailer said its business is showing signs of life. Speaking at the company's annual shareholder meeting today, CEO Wolfgang Werner said "there are signs which show that we already reached (the) bottom of the recession and that it will go up again soon."

American confidence carries over to Asia

A stronger-than-expected consumer confidence report yesterday in the US resulted in renewed economic enthusiasm that spilled over to Asia and drove stocks higher last night. Hong Kong's Hang Seng Index was the biggest gainer, rising 5.3% after a report showed that the city's exports only fell 18% year-over-year, much better than the 24% drop that had been expected. Hong Kong also unveiled a further $2.2 billion package to spur growth, pushing the government's total stimulus spending since 2008 to over 5% of GDP. MTR Corp (MTRJF $2), Hong Kong's government-controlled subway operator, was up over 5% after it was awarded a $1.6 billion grant from the city for a line extension. In other equity news in the region, Nikon Corp(NINOF $15), the world's second largest camera manufacturer, rose after announcing restructuring plans involving approximately 1,000 job cuts. Toshiba Corp (TOSBF $4) also rose after completing a $3 billion stock offering, the largest such sale in Japan by a non-financial company in eight years. The shares were sold at a 3% discount to yesterday's closing price and proceeds will be used to invest in manufacturing plants as Toshiba attempts to compete against Samsung Electronics (SSNLF $441) in making semiconductor chips that store data in cameras and mobile phones.