PREVIEW….
 
Uncertainty breeds discontent. Investor worries on China slowing and on potential capital flight from European periphery, if Greece were to leave the euro, is causing investors to shy away from stocks. ISI's poll of investors published yesterday found 54% of investors believe Greece will exit the euro by the end of this year (I responded with a 70% probability)
 
European markets are generally lower in choppy trading. Q1 Spanish GDP data confirmed the country had fallen back into recession and offset upbeat Q1 Japanese GDP data and FED comments of further easing if required. Peripheral debt remains pressured, though constructive demand for Spain's debt auction (yields were higher vs prior auction) help stabilize the trend. Investors assessed ECB confirmation that it had temporarily stopped providing liquidity to some Greek banks to limit its risk. 

 
UK
 
David Cameron is set to warn today that the single European currency could unravel in a way that "carries huge risks for everyone" unless the eurozone's 17 members move rapidly towards full fiscal and political union. He is expected to tell a business audience that the eurozone is at a crossroads and it either has to make up or it is looking at a potential break-up. His stark warning reinforces comments made on Wednesday by the governor of the Bank of England, who said the eurozone was "tearing itself apart without any obvious solution", threatening the British economy and banking sector. (FT) 

 •Figures from the Council of Mortgage Lenders showed that there was a 57% y/y increase in lending to first-time buyers in March. More than six out of 10 of these loans were to buy a property valued between £125,000 and £250,000 - so exempt from stamp duty under a tax holiday that expired at the end of March. (Telegraph)
 
 
 •The prime minister will tell business leaders that Britain is "moving in the right direction" and insist he will not "blow the budget on more spending" in an attempt to stimulate the economy. (FT)
 

Spain
 
Spain's GDP contracted by 0.3% q/q in Q1 2012 (-0.4% y/y), the same as Q4 2011. Overall, expectations are for the economy to continue shrinking through 2012, as domestic demand remains weak, bank credit will continue contracting, and unemployment is increasing (likely to peak in 2013 at c.26%). Forecasts: Spanish MoF, -1.7%; European Commission, -1.8%; Consensus, -1.6%.
 
Greece:  

EC President Barroso sent a clear message to Greek politicians that if Greece wants to continue receiving financial help from the EU they would have to stick to the commitments of the program signed with the troika in February. He indicated that "there is no other alternative that has less pain and less difficulties. (FT)

ECB stops funding of selected Greek banks, switches funding to ELA for several Greek banks, amid frustration about progress on bank recapitalization

According to German newspaper Die Welt, the ECB announced yesterday evening in an emailed statement that it will cease to supply selected Greek banks with funds through their standard open market refinancing operations until these banks have been sufficiently recapitalised. Earlier yesterday, ECB President Draghi stated "While the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet, I want to state that our strong preference is that Greece will continue to stay in the euro area," Draghi said. (Die Welt) 

Reuters noted that the basis for this was that the ECB considered the banks (reported to be the four largest Greek banks are waiting for EU approval to receive EUR18bn of EFSF bonds for their recapitalization, according to an Imerisia report yesterday.) to be insolvent, while Bloomberg cited an ECB spokesman saying that "once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Euro system refinancing operations".
 
At a conference, yesterday, ECB President Draghi stated "While the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet, I want to state that our strong preference is that Greece will continue to stay in the euro area".

 
Comments from Barclay’s on the Greek situation 

 
Technically speaking, Greece would be forced to print its own currency and thus exit the euro area if its banking sector were cut off from euro funding by the ECB. The provision of ELA by the Eurosystem requires that the national central bank of the member state where the bank receiving ELA is located absorbs any potential losses if the bank may fail to repay ELA. The national central bank, in turn, usually consults with its banking supervisors and the Ministry of Finance that has the final say for large banks as it eventually has to stand behind its central bank and recapitalize it in case of a large loss if ELA is not repaid.
  
In the case of Greece, the problem is that the Ministry of Finance and the Greek sovereign may go bankrupt and into full-fledged default if Greece is cut off from IMF-EU funding. In this scenario, neither the Greek government nor its central bank would still be in a position to cover any potential losses, which would fall on to the rest of the Euro system.
    
A decision by euro area governments, the EU and the IMF to stop funding Greece implies that the ECB would not be able to continue the provision of ELA to Greek banks (unless some specific guarantee were made by the Eurogroup, using the EFSF). The ECB may hold the key to a Greek exit from the euro area but it will be its capital shareholders (euro area governments) that have to make the final decision if Greece is to be locked out from the Eurosystem and exit EMU. Such a decision is not imminent but may have to be taken if it becomes clear that a new Greek government following elections on June 17 will not agree with the thrust of reforms agreed under the EU-IMF programme.
 
 
 
 Japan: Q1 GDP beats expectations
Real GDP grew 4.1% q/q in Jan-Mar, beating  forecasts of 3.5% and marking a third consecutive quarterly increase with upward revisions to the data for Q3 (to 7.6% q/q from 7.1%) and Q4 (to 0.1% from -0.7%). Notably, the Japanese economy accelerated from Q4 to Q1 despite a slowdown in China and in the US, Japan's two major export destinations. 
 
For Q1, the upside surprise came mainly from stronger-than-expected private consumption and public investment. While real exports also beat our expectations, this was offset by imports, especially of energy such as LNG, resulting in a negative net contribution to GDP. 
 
US
 
Unemployment claims release suggests moderate job growth.   The four-week moving average is down to 375,000.  Jobs growth is improving; however concerns will escalate because unemployment claims have stopped falling since the end of March. 

Unemployment claims were unchanged at 370,000 for the week ending May 12.   Continuing claims also edged up for the week ending May 5.  The insured unemployment rate was unchanged.

There were no special factors in this report and no one state had their claims estimated.  
 
Philly Fed and LEI come out at 10 am EDT.