- Office Vacancy Rate in U.S. Climbs to 17-Year High, Reis Says. Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report. The vacancy rate climbed to 17.4 percent from 16 percent a year earlier and 17.3 percent in the first quarter, the New York-based research company said today in a statement. Effective rents, the amount tenants actually pay landlords, fell 5.7 percent from a year earlier and 0.9 percent from the previous three months, according to Reis. Private employers made fewer hires in June than economists had forecast, reinforcing concerns the recovery will weaken, the Labor Department said July 2. Washington, D.C., remained the city with the lowest office vacancy rate, at 10 percent, according to the firm. New York vacancies stayed at 11.7 percent. Detroit had the highest vacancy rate, at 26.3 percent, amid declining employment in the auto industry, Reis said.
- Service Industries in U.S. Expand Less Than Forecast. Service industries in the U.S. expanded in June at a slower pace than forecast, indicating the economy was beginning to cool entering the second half. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, fell to a four-month low of 53.8 from 55.4 in May. The June figure was less than the median forecast of 55 in a Bloomberg News survey. The group’s index of new orders for non-manufacturing industries declined to 54.4 in June, the lowest this year, from 57.1 a month earlier. The employment gauge fell to 49.7 last month from 50.4. Export orders dropped to 48 in June, the lowest since February, from 53.5. A gauge of prices-paid fell to 53.8 from 60.6.
- U.S. Banks Risk 'Untold Problem' as Muni Debt Holdings Swell. Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion, the most since the start of the recession. Commercial lenders added more than $84 billion to their holdings since 2003, according to the Federal Reserve, pushing total investments to $216.2 billion at the end of the first quarter. Bank regulators and ratings companies are ramping up scrutiny of banks most at risk of being forced to raise more capital should debt prices slide. “There is a huge untold problem here,” said Walter J. Mix III, a former commissioner of the California Department of Financial Institutions who closed 30 banks during the last banking crisis in the 1990s. “The economics lead to the conclusion that there will be downward pressure on these bonds.” At Cullen/Frost Bankers Inc., the biggest Texas lender, holdings of municipal debt exceeded Tier 1 capital, a key measure of a bank’s ability to absorb losses, by $491 million at the end of the first quarter, data compiled by Bloomberg show. For State Street, based in Boston, the holdings make up 50 percent of Tier 1 capital. U.S. Bancorp, the Minneapolis lender, has a ratio of 28 percent. It’s 11 percent at Citigroup, the data show. Default speculation drove municipal bond yields to a 13- month high relative to U.S. Treasuries in the first half of the year. Now, the Federal Deposit Insurance Corp. has asked analysts to look into the issue, according to spokeswoman Michele Heller. Citigroup had the largest municipal holdings among the biggest banks, with $13.4 billion of state and local government bonds, according to FDIC call reports. Bank of America Corp. held $8.5 billion, Wells Fargo & Co. owned $7.6 billion and JPMorgan Chase & Co. held $4.5 billion. Each accounted for less than 8 percent of Tier 1 capital, according to the FDIC. U.S. states are likely to face $140 billion in cumulative budget gaps in the coming year, according to the Center on Budget and Policy Priorities. Last year, 187 tax-exempt issuers defaulted on $6.4 billion of securities, the most since 1992, according to data from Distressed Debt Securities in Miami Lakes, Florida. “It’s a market where it’s clear that the underlying fundamentals are lousy,” said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., a New York- based brokerage. “People can say fundamentals don’t matter but I’ve been doing this for 32 years. They do.”
- Sovereign Default Risk Climbs Average 30%, CMA Says. The cost of insuring sovereign debt against default climbed 30 percent on average last quarter amid Europe’s escalating fiscal crisis, according to CMA DataVision. Credit-default swaps on 93 percent of the 70 governments tracked by CMA rose, with Greece temporarily overtaking Venezuela as the country with the world’s highest bond risk, the CME Group Inc. unit said in a report published today. “The major widening action in European sovereign credits indicates that the eurozone remains the hub and focus of the global debt crisis,” according to CMA’s Global Sovereign Credit Risk report. “None of the Western European sovereign credit- default swaps tightened.” Protection costs for the quarter’s worst European performers more than doubled, with swaps on Greece soaring 190 percent, Belgium climbing 168 percent, Spain 129 percent and Portugal 127 percent, the report said. Swaps on South Korea climbed 65 percent as tensions with neighboring North Korea mounted when a warship sank, making it Asia’s worst-performing sovereign. With a 2 percent increase Vietnam was Asia’s best performer. The cost of insuring Australia’s debt increased 52 percent after a new mining tax was levied on resource companies. The U.S. was one of eight nations whose default swaps showed improvement in the quarter, falling 2.4 percent, according to CMA.
- Commodity prices are tracking swings in equities more closely than at any time on record, undermining the traditional role of investments in raw materials as a hedge against financial-market volatility, Commerzbank AG said. Inflows into structured notes, and exchange-traded and commodity-index-linked funds reached $8.6 billion in May, the second-highest on record, taking assets under management to $291 billion, Barclays Capital said. "Investors are looking to diversify their holdings and are likely to trim their investments in commodities should the strong correlation between commodities and equities continue," Commerzbank analyst Eugen Weinberg said. As of July 2, the correlation between weekly percentage changes in the S&P 500 and CRB was .73, from as low as minus .35 in August 2008.
- BNP Says Europe Should Be Ready to Break From U.S. Over Rules. BNP Paribas SA Chairman Michel Pebereau said European countries should be prepared to break from the U.S. on bank capital requirements and bonus rules if such regulations risk harming their economies. “There is a necessity, which is not to overreact at the level of regulation,” Pebereau said at the Europlace conference in Paris today. “At this period of time, it is clear we have a different situation if we compare the U.S. and Europe. The priorities are not the same.” His remarks reflect concern on the part of banking executives across Europe that Group of 20 plans to raise capital requirements risk choking off growth in the region, which is more dependent on banks for financing than the U.S. Within the G-20, the U.S. is pushing for faster implementation of new rules while European governments want a phasing-in period. “If we overreact on the field of banking regulation, we’re going to have a problem on the level of financing the economy in Europe,” Pebereau said. “The future of growth in Europe is totally dependent on that. It would be better to have good regulation in Europe than to try to have global regulation in which Europe will not be able to have growth.” He also expressed concern that stricter application of rules on banker pay than elsewhere risks driving business away. “We’re not on a level playing field,” Pebereau said, speaking in English. “In the U.S., there is a very low level of regulation for compensation. If in Europe we have very high level of regulation, you will have a situation in which it is no more possible for European banks to be competitive.”
Wall Street Journal:
- BP(BP) Won't Issue New Equity to Cover Spill Costs. BP PLC killed speculation Tuesday that it was looking for a white knight investor to take a large equity stake in the company by saying it won't issue new equity to raise money to cover the costs of the oil spill in the Gulf of Mexico.
- U.S. to Challenge Arizona Immigration Law. The Justice Department is expected later Tuesday to file its long-expected challenge to an Arizona state law intended to crack down on illegal immigration, two administration officials said. The law passed in April and set to take effect later this month makes illegal immigration a state crime and requires police to verify the immigration status of people stopped for other alleged crimes.
- Crude is Poised to Test New Lows This Year: Technical Analysis. Crude oil is poised to resume its decline and test new lows for the year in the weeks ahead, according to a technical analysis by Barclays Capital. Crude futures are “heading to the lows last seen in July 2009,” MacNeil Curry, a Barclays analyst in New York, said in a telephone interview. “The bigger picture includes a trend in risk aversion, and we are seeing equities and risk assets breaking down pretty hard.” “Volume is picking up as we break down and volume tends to go with the trend, so it all points to further weakness,” Curry said. “Other commodities are trending down. The S&P is breaking down and risk assets will remain under pressure.”
- Italy Is the Ticking Time Bomb: Economist. As Silvio Berlusconi’s government calls for a vote of confidence over his unpopular €25 billion ($31.45 billion) austerity package, Roger Bootle and his team over at Capital Economics are questioning whether the country holds great danger for the euro zone.
- A Closer Look at the Structural and Demographic Headwinds That Could Derail China's Rise.
- Illinois Construction Workers Make $50-68 Hour, Strike for 15% More. Illinois construction workers live in fantasy land of business-as-usual.
- Shell to Award Deals to Develop Iraq's Oil Field. Shell and its Iraqi state partner are in the process of awarding a deal to drill new oil wells at Iraq's super giant Majnoon oil field in southern Iraq, the head of Iraq's state-run South Oil Co. Dhiaa Jaafar said Tuesday. Shell, which partnered Malaysia's state-run Petronas to develop Majnoon, will also award engineering, procurement and construction deal to build various production installations at the field, an Iraqi oil industry source familiar with the project said. Separately, the Iraqi oil industry source said that firms including Halliburton, Weatherford International, and Petrofac have been invited to submit bids for these two tenders. Shell said earlier that it was planning to drill 15 new wells over the next two years at Majnoon, that would help lift production to 175,000 barrels a day by 2012 from current 45,000 barrels a day. The Anglo-Dutch super major and Petronas were awarded a contract in December to develop the Majnoon field, which is located in Basra governorate and holds some 12.6 billion barrels of proven oil reserves. Shell owns 45% of the venture and Petronas 30%, with Iraq's state-run Missan Oil holding 25%.
- EBay(EBAY) Opposes Delahunt Bill That Would Expand States' Reach on Online Sales Tax. EBay is opposing federal legislation that would allow states to collect more sales taxes from online purchases. The legislation, introduced last week by Rep. William Delahunt (D-Mass.), would allow states to collect online sales taxes from all retailers, and not just those with a “physical presence” in the state. While supporters have argued it would level the playing field among businesses, eBay said the bill would stunt economic growth. “Year after year supporters of increased Internet sales taxes recommend legislation that would impose significant new costs on hundreds of thousands of online small businesses and e-commerce entrepreneurs, which is sure to harm the economy and kill small business jobs,” the company’s vice president for government relations, Tod Cohen, said in a statement. “At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small internet retailers and the consumers they serve from another Internet tax scheme.”
- CMBS Delinquency Rate Slowing. In another sign that the commercial real estate market is reaching bottom, the delinquency rate on commercial mortgage-backed securities (CMBS) increased in June by the smallest amount in the past 12 months. According to a new report from New York-based researcher Trepp, the CMBS delinquency rate, defined as loans that are 30 days or more past due, climbed just 17 basis points in June to 8.59%. Still, that’s no cause to break out the bubbly just yet. The June delinquency level is, once again, the highest in the history of the CMBS industry. In fact, if defeased loans were taken out of the equation, the overall delinquency rate would be 9.15% - breaking the 9% threshold for the first time. It is also more than double the rate of 4.07% in June 2009.
- Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Tuesday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-three percent (43%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -17 (see trends).
- Sub-50% Chance of Double-Dip Recession - Fitch. The risk of a double-dip recession is less than 50 percent, Brian Coulton, managing director of European ratings at Fitch Ratings told Reuters Insider Television in an interview on Tuesday. "We still think it's a long way below 50 percent, it's not our central forecast at all," Coulton said of the risk of a double-dip recession. "We do think there are problems in certain sector in particular the Spanish saving sector, but by and large, the major Spanish banks look pretty strong to us," he said. Asked about stress tests gauging the health of the banking sector, Coulton said large Spanish banks looked "pretty strong to us."
- Europe to Outline Bank Test Methods Wednesday - Sources.
- Global Annual Chip Sales Up 47.6% - SIA.
- Global PMI Sags in June as New Order Growth Tapers Off. The pace of global expansion in the private sector sagged in June to a four-month low, according to a survey on Tuesday that pointed to slowing growth in order books and employment. The Global Total Output index, produced by JPMorgan with research and supply management organisations, fell to 55.4 in June from 57.0 in May
- Spanish lenders increased their net investment in the country's treasury debt in May to a record 153.3 billion euros from 147.5 billion euros in April. Spanish banks and savings banks therefore covered 84% of Spain's net state debt in May, citing data from the treasury. The net amount of debt in the hands of investors outside Spain fell by 2.2 billion euros to 206.4 billion euros.
- BYD Co.'s China vehicle sales in June fell 21% to 35,356 units from May, citing the company. June sales rose 3% from a year earlier.