Business Blog Posts

With Ainslie's Maverick Capital, Altman's Owl Creek Asset Management and other major funds backing away from the banking sector in the first quarter, financials suffered the biggest decrease in sector holdings among the Smart Money 30, a group of some of the largest stock-picking hedge funds.

Ainslie, Altman and Stephen Cucchiaro's Windhaven Investment Management dumped their entire holdings in Citigroup and Bank of America during the quarter, according to data compiled by Thomson Reuters.

Eric Mindich's Eton Park Capital, Philippe Laffont's Coatue Capital and Andreas Halvorsen's Viking Global Investors also rushed for the Citigroup exits.

Citigroup, the third-largest U.S. bank, was the top decrease in existing positions by the Smart Money 30.

After making a killing buying the big banks at their nadir, savvy investors are moving on. Bank stocks are still cheap, but investors expect lackluster revenue growth and new regulations to keep prices depressed for some time.

"Financials have become hated in recent months," said Alan Villalon, a senior bank analyst at Chicago-based Nuveen Investments, which owns bank stocks.

The move to sell may be early, but it is no easy task to unwind such huge positions, even for some of the largest hedge funds.

Citigroup remained the top holding of the Smart Money funds even as they sold off almost 29 percent of their combined stake in the company in the first quarter. Bank of America and regional bank Huntington Bancshares Inc were also among the top decreases in existing positions.

Investors even shied away from stronger banks. Appaloosa manager David Tepper sold off his stakes in JPMorgan Chase & Co and Wells Fargo & Co at the same time that he dumped some of his shares of Bank of America and Citigroup. Lone Pine Capital also reduced its stake in JPMorgan Chase and Citigroup.

SOFTER ECONOMY

U.S. banks have largely recovered from the worst losses of the financial crisis. But their profits over the past year have come largely from releasing reserves they once set aside to cover bad loans.

Citigroup, Bank of America and even JPMorgan Chase all reported year-over-year declines in revenues in the first quarter as a volatile trading environment hit investment banking results and loan books shrank.

The broader economy also suffered during the quarter as political turmoil in the Middle East and the earthquake and tsunami in Japan roiled global markets.

"Banks are macro plays on the economy," said Jason Ware, a senior analyst with wealth management firm Albion Financial. "As the economy starts to hit a softer patch, those types of investments become less attractive."

To be sure, not everyone in the Smart Money 30 group was selling the big banks.

John Paulson made only small trims to his huge stakes in Citigroup and Bank of America. And Brookside Capital Investors bought into Citigroup and increased its stake in Bank of America. Glenview Capital also increased its Citigroup stake while buying into JPMorgan Chase.

Both Bank of America and Citigroup are relatively cheap compared to bank stocks in general, Ware said, calculating that both companies are trading under their tangible book value while banks in general are trading slightly above tangible book value.

NEW RULES

Bank investors are also worried about the increased impact of regulation. The U.S. Dodd-Frank financial reform law passed last year will restrict banks' profits from a host of businesses, from trading to debit card processing.

But the industry is still awaiting a slew of rulemaking and in many instances does not yet know exactly how deeply the law will cut into revenues.

Bank of America, the country's largest bank, is particularly vulnerable to increasing regulation of the financial sector. The bank has estimated that it could lose $2 billion in annual revenues from Dodd-Frank's restrictions on debit card processing fees.

Citigroup has a relatively smaller U.S. business and less exposure to Dodd-Frank. But its international focus and dependence on growth in emerging markets means it was particularly vulnerable to global instability in the first quarter, including the Middle East upheaval.

"There's been concern about the tightening we've seen in emerging markets and debt issues in Europe. There are some questions about international growth and a bit of softening in U.S. growth," said Timothy Ghriskey, co-founder of Solaris Group, which owns Citigroup shares.

The banking sector is also facing government scrutiny beyond Dodd-Frank. Investors were reminded of that in March, when the Federal Reserve concluded a second round of bank stress tests and allowed only some of the largest U.S. banks to raise their dividends.

"They don't have control of their own destiny at this point," Ghriskey said.

Even though Citigroup and Bank of America have shed U.S. government ownership, the March dividend increases also highlighted their continuing weakness compared to stronger rivals.

JPMorgan Chase raised its dividend to 25 cents a share from 5 cents with the Fed's blessing, but the regulator rejected Bank of America's bid to boost its own payout later this year.

Citigroup had to make do with reinstating a one-penny dividend, which it could only afford after shrinking its outstanding share count with a reverse stock split. Investors have not looked kindly upon the split, which was seen as largely cosmetic; Citigroup shares have fallen about 9 percent since the reverse split took effect in early May.

"There's almost going to be a have and have-not environment -- those banks that return capital to shareholders are going to do well, those that can't, are not," said Ware.

"The interest in owning some of these names is squarely looked upon as, 'How much cash are they going to return to me as a shareholder?'" he said.

(Reporting by Maria Aspan; editing by Aaron Pressman and John Wallace)

By a vote of 318-97, the chamber overwhelmingly rejected President Barack Obama's call to increase the $14.3 trillion debt limit without conditions. Even some Democrats supporting Obama's position voted against it.

"I'm going to advise my members that they not subject themselves to the demagoguery that is sure to follow" if they vote for the measure, chief Democratic vote-counter Steny Hoyer said before the vote.

Polls show the public does not support a further increase in borrowing authority even as the Treasury Department scrambles to avoid a default that could push the country back into recession and rattle markets across the globe.

The Treasury Department has been tapping alternate funding sources, such as federal employee pensions, to cover its obligations since the debt limit was reached on May 16, but has warned it will run out of options if Congress does not act by August 2.

For now, markets are little concerned by the possibility of default on what is viewed as one of the world's safest investments. Yields on the benchmark 10-year Treasury bond reached a new 2011 low earlier in the day and traders predicted even lower yields later in the week.

"If we were having this conversation at the end of July it would be a different story. If the vote fails tonight, I don't think it impacts prices," said Christian Cooper, head of U.S. dollar derivatives trading at Jeffries & Co. in New York.

House Republicans held the vote in the late afternoon, well after markets had closed.

WHITE HOUSE MEETING ON WEDNESDAY

Obama will press the case on why the debt limit should be raised when he meets with House Republicans at 10 a.m. on Wednesday, the White House said.

Republicans say they will not back an increase in the country's borrowing authority that does not include deep spending cuts to ensure that debt remains at a manageable level relative to the economy.

"This vote makes clear that deficit reduction will be part of any bill to increase the debt limit," said Republican Representative Dave Camp, who sponsored the bill even though he does not support it.

In talks led by Vice President Joe Biden, Republicans and Democrats have identified hundreds of billions of dollars in possible spending cuts, and both sides say they could ultimately find more than a trillion dollars in deficit savings.

But they must resolve a dispute over the biggest-ticket items. Democrats say they will not consider cuts to popular health benefits until Republicans consider tax increases.

Tuesday's vote came after the Senate defeated three separate Republican budget plans in largely symbolic votes last week. The Senate also voted down Obama's budget proposal, which was considered to be irrelevant after he unveiled a more aggressive plan.

Democrats were split on the House bill, with 97 voting for a "clean" increase and 82 voting against it. No Republicans voted for the measure.

The vote could clear the way for a compromise by allowing lawmakers to say they voted against an increase that did not reduce deficits, but one analyst warned it did not guarantee support from conservative Republicans affiliated with the Tea Party movement.

"Some representatives would vote against it just because it would increase the government's borrowing limit, others would oppose it because of the specific spending cuts and revenue increases, and others would vote 'no' because they want deeper deficit reduction," Stan Collender, a budget analyst with Qorvis Communications, wrote in Roll Call, a congressional newspaper.

(Additional reporting by Thomas Ferraro and Caren Bohan in Washington and Emily Flitter in New York; Editing by Peter Cooney)

"The question is, 'Is the softer data we're seeing transitory, or is it likely to persist throughout the remainder of 2011?' Right now, that's an open question that investors are trying to figure out," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

The U.S. economy grew at a tepid 1.8 percent annual rate in the first three months of the year, and these fresh signs suggest the recovery is still struggling to gain momentum.

The consumer also appears to be struggling, with data last week showing consumer spending was crimped by high gasoline prices in April. Consumer spending makes up more than two-thirds of economic activity.

A drop in a gauge of business activity in the Midwest added to other regional reports that have pointed to slower growth in manufacturing this month amid supply chain disruptions from the major earthquake in Japan in March.

It also boded poorly for a national factory report due on Wednesday, which is expected to slow, and casts a cloud ahead of a report on national employment on Friday.

"While weakness in manufacturing may simply reflect auto parts shortages, this is the fifth regional manufacturing index to fall sharply in May," wrote Chris Low, chief economist at FTN Financial.

"(It) reinforces the general sense the economy is losing steam," he added.

U.S. stocks trimmed gains after the consumer confidence and manufacturing data, but Wall Street was higher in late day trading as the data was outweighed by optimism that new financial aid for debt-laden Greece was on the horizon.

HOUSING DOUBLE-DIP

Single-family home prices dropped in March to fall below the low hit in April 2009 during the financial crisis, a closely watched survey showed.

The S&P/Case-Shiller composite index of 20 metropolitan areas declined 0.2 percent from February on a seasonally adjusted basis, in line with economists' expectations.

A glut of houses for sale along with foreclosures, tight credit and weak demand have kept the housing market on the ropes even as other areas of the economy start to recover.

Home prices had been supported last spring by a tax credit, but the housing market has struggled since the credit expired. Prices in the 20 cities fell 3.6 percent year over year, worse than expectations for a decline of 3.3 percent.

"The declines sustained in the last 12 months have almost erased the gains of the previous 12 months," said Cary Leahey, managing director at Decision Economics in New York. "The housing market is treading backward but not drowning."

The Conference Board, an industry group, said its index of consumer attitudes fell to 60.8 in May from a revised 66.0 in April, well below a median forecast of 66.5.

Consumers took a more negative view of business and labor market conditions, while inflation expectations jumped after easing in April.

The Institute for Supply Management-Chicago business barometer dropped to 56.6 in May from 67.6 in April, its lowest reading since November 2009 and missing forecasts for a reading of 62.6.

The index of new orders sank to 53.5 from 66.3, while the employment component fell to 60.8 from 63.7.

Economists expect Wednesday's larger ISM manufacturing survey to ease to 57.7 in May from 60.4 the month before. Friday's payrolls data is forecast to show the economy added 180,000 jobs in May, easing from 244,000 in April.

(Additional reporting by Ellen Freilich and Caroline Valetkevitch in New York and Ann Saphir in Chicago; Editing by Kenneth Barry)

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.2 percent in March from February on a seasonally adjusted basis, in line with economists' expectations.

The price index was below the low seen in April 2009 during the financial crisis. The glut of houses for sale, foreclosures, tight credit and weak demand have kept the housing market on the ropes even as other areas of the economy start to recover.

The 20-city composite index was at 138.16, falling below the 2009 low of 139.26.

"This month's report is marked by the confirmation of a double-dip in home prices across much of the nation," David Blitzer, chairman of the index committee at S&P Indices, said in a statement. "Home prices continue on their downward spiral with no relief in sight."

Eight cities fell 1 percent or more in March, while Washington was the only city where prices increased on both a monthly and yearly basis. Prices in the 20 cities fell 3.6 percent year over year, topping expectations for a decline of 3.3 percent.

"The declines sustained in the last 12 months have almost erased the gains of the previous 12 months. The housing market is treading backward, but not drowning," said Cary Leahey, economist and managing director at Decision Economics in New York.

In the first quarter, the national index fell 1.9 percent on a seasonally adjusted basis, compared to a decline of 1.8 percent in the previous quarter. On a non-adjusted basis, they fell by 4.2 percent in the quarter. Nationally, home prices are back to their mid-2002 levels, the report said.

Financial markets saw little reaction to the data, with U.S. stock index futures pointing to a higher open on optimism that new aid for Greece from the European Union was on the horizon.

(Reporting by Leah Schnurr, additional reporting by Ellen Freilich, editing by W Simon )

Europe stepped up efforts to draft a second bailout package for Greece, with private sector participation still an option to help relieve the country of its massive debt burden.

Rising expectations of a second aid package for Greece sent U.S. crude futures up 1.5 percent to $102.13 a barrel. Exxon Mobil Corp (XOM.N) added 1 percent to $83.49, and Chevron Corp (CVX.N) gained 0.6 percent to $103.85 in light premarket trade.

The firming of the euro helped boost metals prices, with copper rising to a four-week high. Mining company Freeport-McMoRan Copper & Gold Inc (FCX.N) advanced 1.5 percent to $52.50.

"The news out of Europe is propelling the market higher in pretrading, following the rest of the global markets. News regarding a Greece bailout is basically fueling the optimism," said Peter Cardillo, chief market economist at Avalon Partners in New York.

"It is causing the dollar to go back down, strengthening the euro, so that is inviting risk back into the marketplace."

S&P 500 futures rose 10.9 points and were well above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures jumped 100 points, and Nasdaq 100 futures climbed 24.5 points.

On the economic front, Standard & Poor's releases its S&P/Case-Shiller Home Price Index for March at 9 a.m. (1300 GMT). Economists expect a fall of 0.2 percent, a repeat of the February decline.

The Federal Reserve Bank of Chicago releases its Chicago Fed Midwest Manufacturing Index for April at 8:30 a.m. (1230 GMT). The index read 85.0 in the prior month.

The Institute of Supply Management Chicago reports its May index of manufacturing activity at 9:45 a.m. <1345 GMT>. Economists forecast a reading of 62.6 in the month, compared with 67.6 in April.

At 10 a.m. (1400 GMT), the Conference Board reports May consumer confidence. Economists expect a reading of 66.5, compared with 65.4 in April.

U.S. chemicals maker Ashland Inc (ASH.N) said it will buy privately held International Specialty Products for about $3.2 billion in cash to expand in high-growth markets such as personal care, pharmaceutical and energy.

European shares rose 1 percent on optimism over a possible Greece deal, with banks among the biggest gainers. .EU

Asian stocks were mostly higher Tuesday, with the Nikkei lifted 2 percent by an upbeat outlook from Japan's manufacturers and a weaker yen, while regional solar stocks gained after Germany said it would phase out nuclear power by 2022.

The Dow and S&P 500 suffered their fourth week of losses despite a small gain on Friday.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

Senior EU finance officials gathered in Vienna to prepare the ground for more high-level talks on the Greek debt crisis. Sources said a range of policy steps were on the table, including a "Vienna Initiative"-style debt rollover and bond maturity extensions.

Greece faces a funding gap of over 60 billion euros in 2012 and 2013. Any private sector involvement is likely to form part of a broader package of measures to fill that hole, including aggressive privatisations, fresh austerity pledges from Athens and new aid from the European Union and the IMF.

Ratings agency Fitch said in a report on Tuesday that Greece's official lenders needed to put up 90-100 billion euros to give it sufficient time to implement reforms and cut debt.

It said Greece's ability to deliver on its fiscal promises in the face of rising opposition from the public and political opposition was "increasingly in doubt.

Underscoring the domestic obstacles, Greece's conservative opposition said a deal between the government and visiting European and IMF inspectors to cut value-added taxes in a bid to win their support was "not good enough.

Greece's conservative opposition have demanded lower taxes as a condition for reaching a consensus with the Socialist government on further austerity measures, which Brussels says is essential to secure any further assistance.

The euro rose above $1.44 to reach its highest level in over two weeks on growing confidence that a deal for Greece would be sealed, before dipping slightly on reports that Germany and other countries were sticking to their insistence on private sector involvement.

Markets have grown increasingly skeptical in recent weeks about the ability of policymakers to solve Greece's debt woes because of rising reluctance from countries like Germany, Finland and the Netherlands to provide more aid, as well as new demands by the IMF that Europe commit to long-term guarantees for Greece before it releases more funds.

Late on Monday, however, the chairman of euro zone finance ministers, Jean-Claude Juncker, expressed optimism that a new package was coming together.

"A LA CARTE"

Two European sources involved in the negotiations said the Economic and Financial Committee (EFC) of senior EU finance ministry officials was meeting in Vienna on Tuesday to thrash out options for private sector involvement in a new Greek deal.

They stressed the meeting was preparing the ingredients for a political decision -- a sort of "a la carte menu," where ministers would remain free to choose only dishes they liked.

A summit of EU leaders, preceded by a meeting of euro zone finance ministers, are scheduled for late June.

The range of options under discussion were loosely based on the January 2009 Vienna Initiative on financial stability in central and eastern Europe, agreed by international financial institutions, the European Commission and ECB, key EU governments and commercial bankers.

Under that pact, the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development all agreed to boost credit to the region, the EU agreed to double its balance-of-payments facility for non-euro zone member states, and crucially the main commercial banks agreed to maintain their CEE exposure and roll over credit lines.

The Vienna Initiative was widely credited with preventing a financial meltdown around the region after Hungary took an IMF-led bailout, at a time when western banks faced pressure to repatriate capital to cover losses incurred in the wake of the sub-prime crisis and the collapse of Lehman Brothers.

"There might be a component of a Vienna Initiative type," one source involved in the EFC talks said. "There is no agreed definition yet of what that would mean, but there is discussion of what it would take."

PRIVATE SECTOR OPTIONS

The second source said the options included a voluntary agreement by banks to maintain their exposure to Greece for the duration of a new three-year adjustment program, to extend the maturities of existing bonds or roll over maturing debt.

The source suggested the ECB could live with such a "voluntary" involvement of the private sector without refusing Greek bonds as collateral, but said it was only likely to give its assent at the last minute having seen the entire package.

Greece took a 110 billion euro ($158 billion) rescue package from the EU and IMF last May, but has struggled to meet most of the fiscal goals set out for it as part of that deal.

With a debt mountain of nearly 330 billion euros at the end of last year, many economists believe it will be difficult for it to avoid a restructuring at some point in the future.

But the ECB has warned against any form of restructuring, a message reinforced by Executive Board Member Gertrude Tumpel-Gugerell on Tuesday.

Inspectors from the so-called "troika" are in Athens to decide whether to release a tranche of 12 billion euros that Athens needs next month to avoid an immediate default. In part due to IMF demands, discussions on a new package that would meet Greece's needs through 2014 are taking place in the background.

EU officials said that package, expected to total around 65 billion euros, could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatization program.

(Writing by Noah Barkin, editing by Mike Peacock)

When the fund, controlled by Col. Muammar Gaddafi, made huge losses Goldman offered Libya the chance to become one of its biggest shareholders, the Journal said, citing people familiar with the matter.

Goldman Sachs was not available for comment, outside of normal U.S. business hours.

Among the different proposals put forward by Goldman Sachs to recoup the losses was one in which Libya would get $5 billion in preferred Goldman shares in return for investing $3.7 billion into the securities firm, the paper added.

The documents also show that company Chief Executive Lloyd Blankfein, its finance chief David Viniar and top executive Michael Sherwood were involved in discussions in this regard, the Journal reported.

The Libyan fund had apparently paid $1.3 billion for options on a basket of currencies and on six stocks - Citigroup Inc (C.N), Italian bank UniCredit SpA (CRDI.MI), Spanish bank Banco Santander, German insurance giant Allianz (ALVG.DE), French energy company Électricité de France (EDF.PA) and Italian energy company Eni SpA (ENI.MI), the paper said.

(Reporting by Rachel Chitra in Bangalore; Editing by David Cowell)

(This story was corrected in paragraph two to change the spelling of Muammar Gaddafi)

Even as the upbeat outlook spurred some talk of a possible "V shaped" recovery for the world's third-largest economy and room for the central bank to hold off with any more policy easing, rating agency Moody's Investors Service flagged its concerns over the weak policy response to the crisis.

Moody's moved one step closer to downgrading the country's debt ratings, putting it on review for a possible downgrade and highlighting its concerns over the policy response to "faltering economic growth prospects."

Data on Tuesday showed output rose 1.0 percent in April, short of economists' median 2.8 percent forecast, but firms' plans for the following two months suggested a brisk recovery from a record 15.5 percent slump in the immediate aftermath of the March 11 disaster.

Manufacturers predicted an 8.0 percent rise in their May output and a similar 7.7 percent increase in June, Ministry of Economy, Trade and Industry data showed on Tuesday.

However, optimism about longer-term outlook was tempered by lingering fears of power outages during the summer peak period and concerns that political infighting may delay reconstruction spending.

"From May a V-shaped recovery may start and it (output) may keep rising through July and August at a similar pace to what is forecast for May and June," said Kyohei Morita, chief economist at Barclays Capital Japan.

He said reduced electricity supplies might dampen output in July-September, but the economy should regain steam later on, provided that extra reconstruction spending kicks in by then.

"One risk is what politicians do in June. If they end up holding a snap election, that will delay the second extra budget," Morita said.

Prime Minister Naoto Kan faces a no-confidence vote as soon as this week and even though most political analysts think Kan will survive, the looming face-off bodes ill for cooperation with opposition needed to get spending through a divided parliament.

The 9.0 magnitude quake and a deadly tsunami that lashed Japan's northeast left around 24,000 dead or presumed dead and triggered the world's worst nuclear crisis in 25 years, knocking Japan back into a second recession in less than three years.

The immediate blow from the disaster proved more violent than many had initially thought, shaving 0.9 percent off the first-quarter economic output.

Most economists expect the economy to shrink further in the second quarter before gradually starting to recover some time in the second half of the year with the help of Japan's biggest reconstruction effort since the post-World War Two era.

The Bank of Japan eased monetary policy just days after the March earthquake, but it has stood pat on policy since then on the view that the economy will resume a moderate recovery before the end of the year. It has signaled, however, that it stands ready to loosen policy further if the damage from the quake proves bigger than expected.

The latest data and news from individual companies, however suggested manufacturers were making good progress in restoring supply networks torn apart by the disaster and managing their energy needs in the face of possible electricity shortages.

A separate private Purchasing Managers' survey for May confirmed the improving outlook with manufacturing activity rebounding from a two-year low and expanding for the first time in three months this month.

Economists pointed to a still subdued consumer demand as another reason for caution about the economy's longer-term prospects.

Underscoring lingering weakness in consumption, household spending fell 3.0 percent in April from a year earlier, after a record 8.5 percent annual drop seen the previous month and against a median forecast for a 2.9 percent annual decline, government data showed. Separate data showed wage earnings fell in the year to April 1.4 percent, the sharpest decline since 2009.

The jobless rate inched up to 4.7 percent from 4.6 percent seen in March, as expected, while the availability of jobs fell to 0.61 from 0.63 in March, below 0.62 expected by economists, meaning that there were more than three jobs available for every five job seekers.

(Additional reporting by Kaori Kaneko; Writing by Tomasz Janowski; Editing by Edmund Klamann and Vidya Ranganathan)

The euro rose to $1.4354, its highest in three weeks, supported by a Wall Street Journal report that Germany is considering dropping its demand for an early rescheduling of Greek bonds in order to facilitate a new package of aid loans for heavily-indebted Greece.

The European Union wants to draft a second bailout package for Greece to release vital loans next month and avert the risk of the euro zone country defaulting, EU officials said on Monday.

"The euro zone problems appear to be subsiding for now. Or putting it another way, the market appears to have stopped looking at them as a factor for now," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ, adding the market could focus on upcoming U.S. data releases. Key numbers including ISM manufacturing and payroll data are due this week.

In Japan, the Nikkei average rose more than 1 percent to 9615.54, boosted by industrial output figures.

Though an output increase of 1 percent in April was below expectations, manufacturers sharply increased their forecasts for May, predicting output will rise 8.0 percent compared with the previous 2.7 percent forecast, data from the Ministry of Economy, Trade and Industry showed.

Companies expect the recovery to continue in June, a sign they are making progress in recovering from the March earthquake.

"Investors got past the weak data in April and cheered the strong outlook by buying futures," said Tsuyoshi Segawa, an equity strategist at Mizuho Securities.

Big gainers on the Nikkei included solar power firms, expected to win business as a result of Germany's decision to shut all its nuclear reactors by 2022, a switch in policy prompted by the Fukushima radiation scare in Japan.

Panel-maker Sharp Corp rose 3.0 percent to 762 yen and panel equipment manufacturer Ulvac surged 2.9 percent to 2,073 yen.

MSCI's index of Asia-Pacific stocks outside Japan was up 1.2 percent.

Brent crude oil for July delivery rose 97 cents to $115.65 a barrel, having slipped below $115 on Monday, when markets were closed in the United States and Britain. Prices are down around 9 percent in May, the biggest drop since May last year.

Gold ticked up to $1,538.80 per ounce by 0209 GMT, after closing at $1,597.95 on Monday in trade drastically thinned by market holidays in the U.S. and Britain.

Gold, one of the chief beneficiaries of worries about the security of currencies and other assets, set a record high of $1,575.79 per ounce in early May.

Greece's conservative opposition meanwhile demanded lower taxes as a condition for reaching a political consensus with the Socialist government on further austerity measures, which Brussels says is needed to secure any further assistance.

Moves to plug a looming funding gap for 2012 and 2013 were accelerated after the International Monetary Fund said last week it would withhold the next tranche of aid due on June 29 unless the EU guarantees to meet Athens' funding needs for next year.

Senior EU officials held unannounced emergency talks with the Greek government over the weekend, an EU source said.

Greece took a 110 billion euros ($158 billion) rescue package from the EU and IMF last May but has since fallen short of its deficit reduction commitments, raising the risk of a default on its 327 billion euro debt -- equivalent to 150 percent of its economic output.

The tax cuts sought by conservative New Democracy leader Antonis Samaras could aggravate the revenue shortfall, but he argues they are essential to revive economic growth.

EU officials said a new 65 billion euro package could involve a mixture of collateralized loans from the EU and IMF, and additional revenue measures, with unprecedented intrusive external supervision of Greece's privatisation program. "It would require collateral for new loans and EU technical assistance -- EU involvement in the privatisation process," one senior EU official said, speaking on condition of anonymity.

Extra funding for Greece faces fierce political resistance from fiscal conservatives and nationalists in key north European creditor countries -- Germany, the Netherlands and Finland -- complicating EU governments' task.

Greek daily Kathimerini said finance ministers of the 17-nation single currency area may hold a special meeting next Monday on a new package. European Commission spokesman Amadeu Altafaj dismissed the report as "unfounded rumours, once again."

The next scheduled meeting of euro zone finance ministers is on June 20 in Luxembourg, having been pushed back a week from its original date. It will be followed three days later by a summit of EU leaders to assess the 18-month-long debt crisis.

MARKETS RATTLED

Mass unemployment and wage and benefit cuts due to the EU/IMF austerity plan have triggered spontaneous youth protests in Greece as well as a series of one-day strikes by powerful trade unions.

Weekend comments by an Irish minister that Dublin too may need a second rescue package may also fuel opposition to further bailouts among lawmakers in Berlin, the Hague and Helsinki.

Transport Minister Leo Varadkar told The Sunday Times newspaper that Ireland was unlikely to be able to return to capital markets next year as foreseen in its EU/IMF program.

"It would mean a second program (of emergency loans)," he was quoted as saying.

Irish central bank governor Patrick Honohan acknowledged at a news conference on Monday that debt market conditions were worse now than when Ireland took an 85 billion euro bailout last November but said they would improve.

Uncertainty over whether Greece will receive the next 12 billion euro aid tranche required to meet 13.4 billion euros in funding needs in July continued to rattle financial markets.

The Greek 10-year bond spread over safe haven German Bunds rose by 20 basis points to 1,387. Two-year yields were up 58 bps to 26.23 percent.

The European Central Bank maintained a drumbeat of pressure against any attempt by EU politicians to restructure Greece's debt mountain, even by asking investors to accept a voluntary extension of bond maturities.

ECB board member Lorenzo Bini Smaghi said in an interview published on Monday the idea that debt restructuring could be carried out in an orderly way was a "fairytale," saying it was the equivalent of the death penalty.

"If you look at financial markets, every time there is mention of a word like 'restructuring' or 'soft restructuring' they go crazy -- which proves that this could not happen in an orderly way, in this environment at least," Bini Smaghi told the Financial Times.

He also warned against a debt 'reprofiling', or voluntary extension of Greek bond maturities, saying it would be hard to get investors to agree to such a deal without the use of force.

Euro zone governments are actively studying options for changing the maturities on Greek debt, officials say, although German Finance Minister Wolfgang Schaeuble acknowledged in an interview last week that it was very high risk.

"The Eurogroup is doing research for reprofiling -- what can you do on reprofiling? Is it possible without a credit event?" Dutch Finance Minister Jan Kees De Jager told reporters on Saturday in Cyprus. "It's an investigation, and we have to wait for the outcome of it.

EU officials contend that Greece could do much more to help itself by selling off a treasure trove of state assets.

ECB executive board member Juergen Stark told Welt am Sonntag newspaper that Athens could raise as much as 300 billion euros from privatising state property.

Greece currently aims to raise 50 billion euros from privatisations by 2015 to help stave off a fiscal meltdown, but the country lacks a proper land registry and ownership of many potentially lucrative assets is legally uncertain.

Athens is setting up a sovereign wealth fund to pool real estate assets and state stakes in companies such as telecom company OTE, Post Savings Bank and ports.

Top EU officials have asked Greece to step up privatisations urgently and suggested creating a trustee institution to help the process similar to the body that privatised East German firms after the fall of communism.

(Additional reporting by Angeliki Koutantou and Ingrid Melander in Athens, Marius Zaharia in London, Luke Baker in Brussels; writing by Paul Taylor, editing by Mike Peacock)

European stocks were also set to dip, tracking weakness in Asia, but trading was expected to be thin with holidays in the United States and the UK.

European Union and IMF officials are likely to deliver their verdict this week on Greece's faltering drive to bring its budget deficit under control.

Compounding euro zone debt woes, a government minister in Ireland said it may have to ask for another loan from the EU and IMF because it will struggle to return to debt markets to raise funds next year.

The euro fell to $1.4263, having pulled back from resistance near $1.4327, its 55-day moving average.

The single currency, which has bounced off of a two-month low of $1.3968 hit a week ago on trading platform EBS, also faces resistance near $1.4369, the top of the cloud on the daily Ichimoku chart, a technical analysis tool popular among traders.

Against a basket of currencies .DXY, the dollar was trading near the 75 line, just shy of a two-week trough hit in the previous session.

A batch of weak data has also raised questions on whether the U.S. economic recovery is faltering, raising expectations that authorities may keep interest rates at zero well into 2012, undermining the dollar's appeal.

Traders are also awaiting global manufacturing data on Wednesday for any signs of a slowdown in the world economy.

While Asian stocks have floundered in recent months, the appeal of fixed income assets has grown as regional central banks look set to keep raising interest rates to tackle inflation.

Year-to-date volumes of $47.4 billion in bonds sold in dollars, euros and yen from Asia ex-Japan, ex-Australia is already more than half of $83.6 billion transacted in all of 2010. Morgan Stanley projected that at the current pace the annual tally could end up in excess of $100 billion.

London-listed Indian mining company Vedanta Resources (VED.L) last week priced $1.65 billion worth of five- and 10-year bonds, which marked the largest high-yield bond out of Asia.

That bullishness hasn't been restricted to such bonds only.

Local currency debt have also emerged as a favorite for after January's selloff with net foreign ownership in Indonesian rupiah bonds rising to a record.

Measured in dollar-adjusted terms, total returns for HSBC Asia's U.S. dollar bond index is three percent on a year-to-date basis, according to Thomson Reuters data.

Its local currency bond index counterpart has delivered 2.5 percent while MSCI's index of Asia-Pacific shares outside Japan is up about 1.5 percent.

SOUTHEAST ASIA BENEFITS

While credits had yet another roaring month, equity indices across the region were mostly down in May, led by Chinese shares .SSEC which are set to post a 7 percent drop.

For the day, Japan's Nikkei .N225 and Australia .AXJO ended down 0.2 percent and 0.4 percent, respectively, while the MSCI index of Asia Pacific stocks outside Japan bounced slightly after falling for five consecutive weeks.

Southeast Asian markets were the clear outperformers with Malaysia and Indonesia among the leaders, posting marginal gains for the month, as authorities demonstrated a greater urgency to tackle rising prices after an inflation scare in January.

"In the past these (Southeast Asian) markets were very susceptible to inflationary pressures, but due to better economic management, they are not so much of a hot potato for investors nowadays," said Khiem Do, chairman of Asia multi-asset team at Barings Asset Management in Hong Kong.

"As long as North Asia continues to trade in a range and is dogged by inflationary pressures, these markets will continue to benefit," he said.

Elsewhere in markets, U.S. Treasury bond yields held near six-month lows, with 10-year yields at 3.07 percent compared to 3.29 percent at the start of the month.

In commodity markets, U.S. crude futures was broadly stable around the $100.30 per barrel mark.

The New Zealand dollar extended its gains to hit its highest in 26 years of $0.8218, the kiwi's loftiest level since it was floated in March 1985.

France was careful not to speak out about Lagarde's candidacy during a Group of Eight summit in Deauville last week but Juppe said all eight nations were firmly behind Lagarde.

"Among the eight heads of state and government, plus the president of the European Commission and the president of the European Council who were there, there was unanimous support for Christine Lagarde," Juppe said on Canal+ television.

The top IMF job is vacant after Dominique Strauss-Kahn quit over attempted rape charges in New York, which he has vowed to fight.

The United States on Sunday stuck with its policy of not announcing support for a specific candidate.

"I won't go beyond what we've said which is that we support the process that's been set up by the IMF to find a successor and we support a process that produces the best possible candidate," said Jay Carney, spokesman for President Barack Obama.

The main obstacle in Lagarde's way is the possibility of an inquiry into her role in a 2008 legal settlement involving paying 285 million euros ($408.2 million) to businessman Bernard Tapie, an ally of French President Nicolas Sarkozy.

Opposition Socialist Party politicians have accused Lagarde of abusing her authority when she awarded the money to Tapie.

Lagarde, who flies to Brazil Sunday to drum up key emerging economy support for her IMF bid, questioned the legal and factual basis of the public prosecutor's call for a formal inquiry into her role in the Tapie case, saying some aspects were false in an interview with Europe 1 radio.

She has said her conscience is clear over the case.

Tapie, a former left-wing government minister who switched sides to support Sarkozy's 2007 presidential campaign, was paid to settle a legal dispute with a state-owned bank.

He had accused former state-owned bank Credit Lyonnais of defrauding him during the sale of his stake in sports giant Adidas in 1993 because the final sale price was higher than he had been led to believe.

A French court initially ruled against Tapie in 2006 but the case was still open when Sarkozy won office in 2007.

Bringing the saga to a close, Lagarde agreed to drop the judicial proceedings and submit the case to a private three-member arbitration panel, overruling some in her ministry who argued that it should remain in court.

Lagarde needs support for her IMF candidature from emerging economies which have criticised EU officials for suggesting the new head must be a European.

The only other declared candidate is Mexican Central Bank Governor Agustin Carstens.

(Reporting by Yves Clarisse and Helen Massy-Beresford; Editing by Louise Ireland)

High input prices, supply chain disruptions from the tsunami disaster in Japan and slowing demand from China have combined to brake manufacturing momentum in Europe, the United States and Asia in recent months following a steady run of robust growth.

Just how sharp the slowdown is will become clearer this week with the release of data from factory purchasing managers in major economies across the globe.

In the euro zone, where divergence between core and peripheral countries has been the story for months, signs of more broad-based trouble emerged last week. A preliminary manufacturing index for May posted its biggest one-month fall since the collapse of Lehman Brothers in 2008.

That reading is expected to be confirmed on Wednesday, as are factory slowdowns in the United States and China, where curbs on bank credit and power shortages have slowed growth, adding to worries about the world's second-largest economy.

Driven by higher energy prices, costs for the U.S. manufacturing sector rose to their highest level in nearly three years last month. A nascent slowdown in the sector, due in part to poor weather, has been blamed for an uneven labor market recovery.

U.S. companies created jobs at their fastest pace in five years in April. But May non-farm payrolls data due on Friday risks disappointing after a surprise rise in U.S. jobless claims last week highlighted persistent hurdles in the labor market.

Economists polled by Reuters expect U.S. payrolls to rise by 185,000 in May, down from April's 244,000 expansion, with the unemployment rate edging down to 8.9 percent from 9.0 percent.

That compares unfavorably with the labor market in Germany, where the unemployment rate is forecast to dip to a post-reunification low of 7.0 percent this week.

DELICATE MOMENT

"This is a delicate moment for the global economy, and the crisis is not over until our economies are creating enough jobs again," said Angel Gurria, secretary general of the Paris-based Organization for Economic Cooperation and Development.

"There is also some concern that if downside risks reinforce each other, their cumulative impact could weaken the recovery significantly, possibly triggering stagflation in some advanced economies."

The OECD raised its 2011 growth forecasts for the United States and Germany last week but slashed its forecasts for Japan to reflect the devastation from its earthquake-tsunami-nuclear triple disaster.

It now expects economic contraction of 0.9 percent this year and has warned that a slow recovery in Japan could threaten its partners if global supply chains remained disrupted.

In Europe, the focus remains on Greece's woes after Prime Minister George Papandreou's government failed to forge a consensus on austerity measures with opposition parties.

European governments are reluctant to pledge additional aid to Greece without broader political backing for reforms, which include aggressive privatizations to meet fiscal targets set in the EU/IMF bailout Athens secured one year ago.

Without more European money, the IMF has said it will not release its portion of a June aid tranche that Greece desperately needs to avoid a debt default.

"The stand-off highlights once again the continued lack of a cohesive policy response to the region's crisis," Capital Economics said in a research note.

"Meanwhile, the latest batch of euro-zone business surveys brought the strongest signs yet that growth in the core economies may be starting to slow. With the periphery still struggling, the second half of 2011 could prove pretty tough for the region as a whole."

(Writing by Noah Barkin; Editing by Dan Grebler)

With important manufacturing and jobs data due this week, it could start to get even riskier.

That means nervous investors are likely to keep a lid on equity prices this year as they grapple with slowing global growth and a host of geopolitical risks from the Arab Spring to debt defaults in the euro zone.

The actions of some big Wall Street banks best show the shift in the risk-reward nexus. Over the last two weeks, UBS, Citigroup and Goldman Sachs have effectively lowered their view of what investors will be willing to pay for a dollar of corporate earnings this year.

Jonathan Golub, chief U.S. equity strategist at UBS in New York, made the decision to keep his S&P 500 Index target on hold, even though he increased his expectations of what S&P 500 companies would likely earn this year and next.

"Earnings are going to continue to surprise to the upside, but investors will continue to be reluctant to believe in the sustainability of earnings and, therefore, not give full credit to that," Golub said.

Golub raised his average S&P 500 earnings estimate to $101 from $96 for this year, but left his year-end S&P 500 target at 1,425. By doing that, Golub has effectively lowered his price-to-earnings (P/E) ratio -- the amount investors are willing to pay for a dollar of earnings -- to 14.1 from 14.8.

That amounts to an increase in the expected equity yield -- a measure of the return investors want -- to 7.1 percent from 6.8 percent.

That is significant because the expected price-to-earnings ratio was already below what investors have historically been willing to pay for S&P 500 earnings. The average trailing P/E ratio is 15.6 over the last five years and 19.2 since 1988, according to Standard & Poor's.

Golub argues that a batch of weak economic data pointing to slowing manufacturing, a weak housing market and stubbornly high unemployment is weighing on investor sentiment. Weakness in commodity markets and rotation into defensive sectors of the stock market testify to that shift.

SOFT JOBS DATA MAY HIT S&P

With this week's ISM national manufacturing survey for May expected to show more weakness and payroll data tipped to show fewer than 200,000 jobs added during the month, risk aversion -- driven by fear about the economy -- could get worse before it gets better.

Goldman Sachs economist Zach Pandl said his firm is predicting 150,000 jobs were added in May, compared with a Reuters consensus of 185,000.

An ISM reading below 60 on Wednesday would show "the strongest period of growth has passed and investors may need to adjust their expectations going forward," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

Economists in a Reuters poll expect the ISM reading to fall to 58 in May from 60.4 in April.

Goldman Sachs has also been tweaking its stocks outlook. It cut its year-end S&P 500 target, one of the highest on the Street, to 1,450 from 1,500, and lowered its 2012 earnings outlook to $104 to $106, citing lower global growth, higher commodity prices and slightly higher inflation.

Goldman analyst David Kostin, who is responsible for the S&P 500 target, was unavailable for an interview.

However Goldman's analysts wrote: "As we transition into the late expansion phase of the cycle later this year, the risk-reward balance for the S&P 500 is likely to become slightly less attractive."

Citigroup also slightly increased its earnings estimates for S&P 500 companies, lifting its 2011 forecast to $98 from $96.50. Although that is admittedly only a small increase in the earnings estimate, Citigroup chose to leave its S&P 500 target at 1,400.

Tobias Levkovich, Citigroup's chief U.S. equity strategist, could not be reached for a comment.

The targets for all three banks are still at the upper end of analysts' estimates and are 5 percent to 8 percent above current levels.

Even if the index does get up to those levels later this year, those gains are slight compared with the nearly 80 percent run the S&P 500 has experienced since hitting a bear market low in March 2009.

For people like Bill Strazzullo, partner and chief investment strategist at Bell Curve Trading in Boston, that means the risks are firmly on the downside.

"The good news is there's some upside. The bad news is that you've probably made about 80 (percent) to 90 percent of this rally," Strazzullo said. "From a 'bigger picture' standpoint, the risk-reward really doesn't make sense."

Strazzullo believes the S&P 500 will revert toward fair value, which he places at 1,100, based on where most of the money in the S&P 500 is invested. He is looking at some longer-term bearish options trades to capitalize on the end of the March 2009 rally.

"I'm not saying we'll go all the way back there, but the point is, you could drop a lot further than most people anticipate."

(Wall St Week Ahead appears every Sunday. Questions or comments on this column can be e-mailed to: edward.krudy(at)thomsonreuters.com)

(Reporting by Edward Krudy; Additional reporting by Rodrigo Campos; Editing by Jan Paschal)

In comments to The Sunday Times newspaper, Transport Minister Leo Varadkar became the first cabinet member to cast doubt in public on Ireland's ability to raise cash on the bond market because of punishing yields demanded by investors.

"I think it's very unlikely we'll be able to go back next year. I think it might take a bit longer ... 2013 might be possible but who knows?" Varadkar was quoted as saying.

"It would mean a second program (of loans from the EU/IMF)," he said. "Either an extension of the existing program or a second program. I think that would generally be most people's view."

Deputy Prime Minister Eamon Gilmore told broadcaster RTE that fears of a domino effect from Greece's problems were overblown. The possibility of a Greek default has sent bond yields rocketing for indebted Ireland, Portugal and Spain.

"It's not a situation that if Greece defaults then there are immediately implications for Ireland," Gilmore said.

"If Greece defaults there are implications for the wider euro zone and obviously we are part of that."

"It is wrong to put Ireland in the same basket as Greece."

PRIVATISATION AMBITIONS

Greece's hopes of averting default dimmed over the weekend amid fears the country, whose debt burden stands at around 330 billion euros, may have missed fiscal targets set by its creditors.

The IMF has dismissed reports that an international inspection team had found that Greece had missed all its fiscal targets. But the current mission to Athens has stayed far longer than on previous occasions and is locked in talks with the government to get economic reforms on track.

Athens' creditors are increasingly focused on the possibility of raising more funds from privatizations and a poll on Sunday showed that an overwhelming majority of Greeks are in favor of selling and developing state assets to raise 50 billion euros.

The European Central Bank and the IMF, however, don't believe the privatization program is ambitious enough. ECB board member Juergen Stark said Greece could raise six times more than the 50 billion euros planned from asset sales, echoing earlier views from the IMF.

A Greek paper reported on Sunday that the government was considering setting up a Spanish-style "bad bank" to clean up its lenders' accounts from "toxic" Greek bonds and make them more attractive to potential buyers.

Athens is in a race against time to secure political consensus on fiscal reforms before the EU and the IMF will free up more cash to plug funding gaps in the next two years.

Ireland, meanwhile, wants to tap investors for funding in 2012 before its 85 billion euros EU-IMF bailout runs out the following year.

But investors believe Ireland will be unable to return to the market and instead will have to tap the European Union's permanent rescue fund in 2013, which might require some restructuring of privately held sovereign debt.

Reflecting this medium-term risk, Ireland's two-year and five-year paper are yielding close to 12 percent, more than its 10-year bonds on the secondary market.

Some 50 billion euros of the existing EU-IMF bailout has been earmarked for sovereign funding requirements with the remainder set aside to prop up the country's ailing banks.

Earlier this month, the IMF said whatever was left over after recapitalizing the banks could be channeled to the sovereign if there was a delay in returning to markets.

At the end of March, the Irish government said the banks needed 24 billion euros to bulletproof their balance sheets but Dublin hopes some five billion euros can be raised from imposing losses on junior bondholders and asset sales, meaning that 19 billion euros of the 35 billion would be tapped.

With important manufacturing and jobs data due next week, it could start to get even riskier.

That means nervous investors are likely to keep a lid on equity prices this year as they grapple with slowing global growth and a host of geopolitical risks from the Arab Spring to debt defaults in the euro zone.

The actions of some big Wall Street banks best show the shift in the risk-reward nexus. Over the last two weeks, UBS, Citigroup and Goldman Sachs have effectively lowered their view of what investors will be willing to pay for a dollar of corporate earnings this year.

Jonathan Golub, chief U.S. equity strategist at UBS in New York, made the decision to keep his S&P 500 Index target on hold, even though he increased his expectations of what S&P 500 companies would likely earn this year and next.

"Earnings are going to continue to surprise to the upside, but investors will continue to be reluctant to believe in the sustainability of earnings and, therefore, not give full credit to that," Golub said.

Golub raised his average S&P 500 earnings estimate to $101 from $96 for this year, but he left his year-end S&P 500target at 1,425. By doing that, Golub has effectively lowered his price-to-earnings (P/E) ratio -- the amount investors are willing to pay for a dollar of earnings -- to 14.1 from 14.8.

That amounts to an increase in the expected equity yield -- a measure of the return investors want -- to 7.1 percent from 6.8 percent.

That is significant because the expected price-to-earnings ratio was already below what investors have historically been willing to pay for S&P 500 earnings. The average trailing P/E ratio is 15.6 over the last five years and 19.2 since 1988, according to Standard & Poor's.

Golub argues that a batch of weak economic data pointing to slowing manufacturing, a weak housing market and stubbornly high unemployment is weighing on investor sentiment. Weakness in commodity markets and rotation into defensive sectors of the stock market testify to that shift.

SOFT JOBS DATA MAY HIT S&P

With next week's ISM national manufacturing survey for May expected to show more weakness and payroll data tipped to show under 200,000 jobs added during the month, risk aversion -- driven by fear about the economy -- could get worse before it gets better.

Goldman Sachs economist Zach Pandl said his firm is predicting 150,000 jobs were added in May, compared with a Reuters consensus of 185,000.

An ISM reading below 60 next Wednesday would show "the strongest period of growth has passed and investors may need to adjust their expectations going forward," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

Economists in a Reuters poll expect the ISM reading to fall to 58 in May from 60.4 in April.

Goldman Sachs has also been tweaking its stocks outlook. It cut its year-end S&P 500 target, one of the highest on the Street, to 1,450 from 1,500, and lowered its 2012 earnings outlook to $104 to $106, citing lower global growth, higher commodity prices and slightly higher inflation.

Goldman analyst David Kostin, who is responsible for the S&P 500 target, was unavailable for an interview.

However Goldman's analysts wrote: "As we transition into the late expansion phase of the cycle later this year, the risk-reward balance for the S&P 500 is likely to become slightly less attractive."

Citigroup also slightly increased its earnings estimates for S&P 500 companies, lifting its 2011 forecast to $98 from $96.50. Although admittedly only a small increase, it chose to leave its S&P 500 target at 1,400.

Tobias Levkovich, Citigroup's chief U.S. equity strategist, could not be reached for comment.

The targets for all three banks are still at the upper end of analysts' estimates and are 5 percent to 8 percent above current levels.

Even if the index does get up to those levels later this year, those gains are slight compared to the near 80 percent run the S&P 500 has experienced since hitting a bear market low in March 2009.

For people like Bill Strazzullo, partner and chief investment strategist at Bell Curve Trading in Boston, that means the risks are firmly on the downside.

"The good news is there's some upside. The bad news is that you've probably made about 80 (percent) to 90 percent of this rally," Strazullo said. "From a 'bigger picture' standpoint, the risk-reward really doesn't make sense."

Strazullo believes the S&P 500 will revert toward fair value, which he places at 1,100, based on where most of the money in the S&P 500 is invested. He is looking at some longer-term bearish options trades to capitalize on the end of the March 2009 rally.

"I'm not saying we'll go all the way back there, but the point is, you could drop a lot further than most people anticipate."

(Reporting by Edward Krudy; Additional reporting by Rodrigo Campos; Editing by Jan Paschal)

The Commerce Department said on Friday consumer spending increased 0.4 percent, rising for a 10th straight month, after a 0.5 percent gain in March. It also said annual inflation rose at its fastest pace in 12 months.

Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent last month.

When adjusted for inflation, spending nudged up 0.1 percent last month after gaining 0.1 percent in March.

"This shows that the trend going in the second quarter is weaker than what people had thought. This promotes caution about projecting faster growth in the second quarter," said Pierre Ellis, a senior global economist at Decision Economics in New York.

Consumer spending rose at a 2.2 percent annual rate in the first quarter, braking sharply from a 4 percent pace in the October-December period. That contributed to holding back growth to a 1.8 percent pace during the quarter.

But a recent cooling in gasoline prices should ease some of the pressure on households and boost spending in the months ahead.

The national price for regular unleaded gasoline prices slipped to $3.90 a gallon in the week through Monday, according to the Energy Information Administration, after peaking just above $4 a gallon early in the month.

Government bond prices extended losses on the data, while stock index futures were little changed.

High food and energy prices in April kept inflation elevated last month, with the personal consumption expenditures price (PCE) index rising 0.3 percent after advancing 0.4 percent in March.

Compared to April last year, the index was up 2.2 percent, the biggest rise in a year, after increasing 1.8 percent in March.

The core PCE index -- excluding food and energy - increased 0.2 percent on month after rising 0.1 percent in March.

The core index, which is closely watched by Federal Reserve officials, increased 1.0 percent in the 12 months through April, the largest gain since September. The index rose 0.9 percent year-on-year in March and the Fed would like to see it closer to 2 percent.

Incomes rose 0.4 percent last month, in line with expectations and after a 0.4 percent increase in March. Disposable incomes adjusted for inflation were flat and savings fell to an annual rate of $570.6 billion, the lowest since August 2009, from $576.7 billion in March.

(Reporting by Lucia Mutikani, Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)

This has been a choppy week for equities, with steep losses early offset by a rally in the past two days. The S&P 500 is down 0.6 percent for the week. Trading volume could be anemic on Friday ahead of Monday's Memorial Day holiday.

The losses early in the week came on worries about euro-zone sovereign debt, as well as concerns that global demand was slowing. While there are few catalysts seen for strong positive advances, technical support suggests there is a floor for stocks.

The Group of Eight leaders agreed on Friday that the global economic recovery was becoming more "self-sustained," though higher commodity prices were hampering further growth.

"Stocks are sitting on a well-balanced seesaw right now and there's not much that will make us go one way or the other," said Christian Wagner, chief executive officer at Longview Capital Management in Wilmington, Delaware.

"The G8 news was good, and we're sitting on major support levels, but people are always cautious going into a long weekend."

April pending home sales will be released at 10 a.m. (1400 GMT). Economists see a 1 percent decline compared with a 5.1 percent increase in the previous month. The final May Thomson Reuters/University of Michigan Surveys of Consumers is seen essentially holding steady from the preliminary May level.

Personal income and consumption data will be released earlier on Friday.

S&P 500 futures rose 0.8 point and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 4 points and Nasdaq 100 futures rose 0.5 point.

EBay (EBAY.O) and its online payment unit, PayPal Inc, on Thursday sued Google Inc (GOOG.O) and two executives, claiming they stole trade secrets.

Google, MasterCard (MA.N), Citigroup (C.N), Sprint (S.N) and transaction processing company First Data unveiled a system that will allow shoppers to use mobile phones to pay for items at the checkout counter.

Macau casino operator MGM China raised $1.5 billion from its Hong Kong initial public offering after pricing it at the top of its indicated range. The firm is co-owned by MGM Resorts International (MGM.N), shares of which rose 1 percent to $15.88 in light premarket trading.

The $7.1 billion merger of coal miners Massey Energy Co (MEE.N) and Alpha Natural Resources Inc (ANR.N) should be blocked or Massey's board will avoid responsibility for their reckless management, a shareholder attorney told a court late Thursday.

(Editing by Kenneth Barry)

(This article has been modified to correct the reference to the previous sentiment figure in paragraph 7)

Noting the chunky gains in Asian stocks, European stock index futures pointed to early gains while the S&P e-mini futures rose 0.1 percent, suggesting a higher start on Wall Street later in the day. .N

While the euro enjoyed a brief respite versus the U.S. dollar due to thinning yield differentials, it plumbed to a record low against the Swiss franc in a sign that traders remain focused on the rapidly escalating situation in the euro zone.

Jean-Claude Juncker, the head of euro zone finance ministers rattled markets when he said the International Monetary Fund could withhold the next slice of aid to Greece due next month, raising the specter of default, though his spokesman later softened some of his comments.

While markets have been under pressure in recent weeks due to a steady stream of bad news from the euro zone, Asian stocks and bonds have held up fairly well as recent data prints and positioning comforted investors on the region's growth outlook.

Korea .KS11 was among the top gainers as foreign investors trooped back, snapping a long selling streak. Solid current account surplus numbers in April too played its part.

Stocks outside Japan were up 0.7 percent on Friday even though the index is set for a fifth consecutive week of losses -- its longest string of losses since October 2008.

"Downside risks for large caps are capped by its increasingly attractive valuations," said Wang Aochao, an analyst with UOB Kay Hian in Shanghai. "So with small caps looking overvalued, it looks like investors will continue to switch out of them and into large caps in the near term."

Japanese shares were among the exceptions to the gainers, with the benchmark Nikkei average .N225 down 0.42 percent and the Topix index .TOPX down 0.3 percent on the day.

While concerns of a Greek restructuring kept investors cautious about adding big positions in stocks, they had no such qualms toward fixed-income assets as Asian policymakers stepped up their battle to fight inflation by tightening policy.

Latest data from Thomson Reuters Lipper showed net inflows of $94 million into high yield funds and a $1 billion inflow into corporate investment grade funds in the week of May 25.

DESPERATELY SEEKING CONFIDENCE

In currency markets, the euro turned higher after its drop this week stalled right near its 100-day moving average and also the bottom of the cloud on daily Ichimoku charts, a form of Japanese technical analysis popular among market players.

Still, it is expected to stay within recent established trading ranges until confidence is restored on the Greek debt crisis and the market refocuses on the outlook for euro zone interest rates, which would be supportive for the single currency, Brown Brothers Harriman strategists said in a note.

For now though, the double whammy of weak U.S. economic data and falling U.S. Treasury yields offered support to the euro.

In another sign that the U.S. economy has hit a soft patch, jobless claims for last week unexpectedly rose while annual GDP growth came in lower than analysts had expected.

The weak data took the wind out of commodity markets, particularly oil, which dropped more than 1 percent overnight, but recovered to hold above the $100 per barrel line.

In bond markets, U.S. Treasuries rallied and benchmark yields fell to new six-month lows with ten-year note yields breaking below their 200-day moving average. They were last at 3.06 percent, their lowest level since early December.

Other safe-haven assets like gold and silver received a boost from the Greece situation. Silver recovered after falling in the previous session while gold inched higher.