Category: zerohedge

On Thursday Israeli troops have begun amassing at Gaza’s border amid widespread rumors of preparations for a ground invasion. It comes also as violence between Jewish and Arab communities inside Israel ratcheted further overnight, taking the form of mob riots and attacks on either mosques or synagogues. 

Overnight from Wednesday Israeli media estimates that 150 rockets and mortar shells were fired from the Gaza Strip into Thursday, bringing the total fired since fighting began early this week to around 1,500 total rockets.

Israel has in return continued to pound the densely packed Gaza Strip with airstrikes, with the death toll soaring to at least 83 Gazans killed, including 17 children, and and additional almost 500 wounded, according to Gaza’s health ministry on Thursday. At least seven Israelis have died, including a 5-year old boy, with dozens injured from the inbound rockets. 

Reuters is reporting that additional forces have arrived to Israel’s southern border after last night Israel’s Security Cabinet approved expanding operations in Gaza, especially the airstrikes which are expected to continue through the week.

“Israeli troops massed at Gaza’s border on Thursday and Palestinian militants pounded Israel with rockets in intense hostilities that have caused international concern and touched off clashes between Jews and Arabs in Israel,” Reuters details.

A number of social media videos in the past days have purported to capture large convoys of Israeli tanks headed toward Gaza.

The Israeli army gets ready – moves its tanks to the Gaza stripe region. pic.twitter.com/puteoc8UuZ

— Ali Özkök (@Ozkok_A) May 12, 2021

Further on Thursday Defense Minister Benny Gantz has called up extra Border Patrol reserves to help quell the ethnic attacks and chaos breaking out across multiple mixed Jewish-Arab towns and cities.

Gantz called in a “massive reinforcement” of reserve forces to help get control of the spiraling domestic situation which has seen Jewish mobs and Arab mobs clash and essentially hunt each other down in the streets, resulting in what many are calling lynching situations. 

Ground clashes between Israelis and Arabs #Israel pic.twitter.com/A96EPbc8fd

— Mehdi Tehrani (@mehditehrani81) May 11, 2021

“We are in an emergency situation due to the national violence and it is now necessary to have a massive reinforcement of forces on the ground, and they are to be sent immediately to enforce law and order,” Gantz announced, confirming the extra forces called up will be reservists. 

[Video] Israel’s Lod city witnessed fierce clashes during funeral for an Arab Israeli resident killed by an Israeli settler

Israeli officials announced state of emergency in Lod following clashes pic.twitter.com/UOiGJfM1uV

— ANADOLU AGENCY (@anadoluagency) May 12, 2021

Meanwhile a number of towns and cities in Israel are under curfews and states of emergency as mayors ask for help from the government in helping to quell the continuing escalating violence. 

US equity futures fluctuated – first rising then sliding for a 4th session – in a volatile overnight session which saw global stocks fall to a six-week low as inflation fears continued to depress investor sentiment. One day after the S&P suffered its biggest one-day percentage drop since February it feels almost impossible how quickly sentiment has shifted and that the S&P hit an all time high just 4 days ago on Monday. It’s been non-stop selling since then.

Losses this week have pulled the S&P 500 4% off its record closing high on Friday, while the tech-heavy Nasdaq is about 8% below its April 29 all-time high. At 700 a.m. ET, Dow e-minis were down 144 points, or 0.43%, S&P 500 e-minis were unchanged and Nasdaq 100 e-minis were up 40.25 points, or 0.29%.The dollar rose to a one-week high and yields were stable, as investors awaited producer prices data, another inflation gauge, to see if a rise in prices would be strong enough to prompt a sooner-than-expected increase in interest rates.  

Some notable premarket movers:

• Tesla rose to premarket highs after earlier falling as much as 3.1% earlier after CEO Elon Musk said the company is suspending purchases using Bitcoin, making a U-Turn from earlier this year, when the electric-vehicle maker said it planned to accept it as a payment.
• Cryptocurrency-exposed companies pared their losses in U.S. premarket as futures contracts on the Nasdaq 100 and S&P 500 erased their declines. Coinbase is now down only 2.2% after falling as much as 6% earlier, Marathon Digital -12% after dropping as much as 18% earlier, Riot Blockchain -8.8%, Bit Digital -5.3
• Shares in oil major Exxon Mobil and copper miner Freeport-McMoran dropped, tracking a fall in commodity prices, while lenders, including Bank of America and Goldman Sachs fell 0.8% and 1.7% in premarket trading.
• Dating app owner Bumble slipped 1% despite forecasting current-quarter revenue above estimates. The stock has shed about 19% of its value in the past three sessions.
• Walt Disney’s shares dropped 1.6% ahead of its second-quarter results due after the closing bell.

The MSCI World Index sank for a fourth day, losing 0.6% in the longest selloff since September. S&P 500 contracts dipped 0.4%, while Asian and European equities saw steeper losses. Asian stocks entered a technical correction after the MSCI Asia Pacific Index fell as much as 1.5%, extending losses from a Feb. 17 peak to 10%. Oil declined as the largest U.S. gasoline pipeline resumed service. Bitcoin dropped toward $50,000 as Tesla Inc. suspended purchases using the cryptocurrency.

European stocks slid on Thursday, tracking an overnight selloff on Wall Street, as a rapid rise in U.S. inflation spooked investors, while a drop in commodity prices weighed on heavyweight miners. The European STOXX 600 index fell 1.4%, drifting further away from an all-time high it hit earlier this month; it remains up almost 10% so far this year as economic recovery  prospects and strong earnings drew buyers of equities. Basic resources and oil and gas sectors, among recent market leaders on the back of a surge in commodity prices, fell about 3%. Automakers also shed more then 3%, while defensive names like healthcare and telecoms posted small losses. The Stoxx Europe 600 Basic Resources Index (SXPP) drops as much as 2.7%, as iron ore futures sink amid growing inflation concerns and on Chinese moves to try to control the surge in commodities prices.

“The debate as to what the Fed will do will continue, and we’ve seen in terms of the market that after economic growth peaks, there tends to be a lull for six months or so,” said Frederique Carrier, head of investment strategy at RBC Wealth Management. “We think that returns are going to be modest at best over the next six months. Market could go sideways and there could be more volatility.”

Here are some of the biggest European movers today:

• Telefonica shares jump as much as 4.6% after 1Q results with Citi highlighting that the operator benefited from price rises in Spain. The market may view the earnings with relief, though will likely remain concerned by weak fundamentals, broker says.
• Pirelli gains as much as 2% in Milan trading and is the day’s best performer on the FTSE MIB benchmark after 1Q revenue beat estimates. Mediobanca upgrades, noting limited downside risk.
• Burberry tumbles as much as 10% after FY22 margin guidance disappointed. The guidance suggests consensus estimates for operating margin will be cut by at least 50 bps, Morgan Stanley said.
• On The Beach slumps as much as 12% after the online seller of packaged vacations said it’s extending the off-sale period for holidays from June 30 to Aug. 31, following this week’s U.K. government announcement on the traffic-light system for leisure travel.
• BT drops as much as 5.9%, the worst day since last July, after the carrier’s results missed adjusted Ebitda estimates.
• Hargreaves Lansdown falls as much as 6% after a quarterly update that suggests normalizing trading volumes, according to Morgan Stanley.

The pain was even worse earlier in the session, when the MSCI Asia Pacific Index fell for a third day, wiping out this year’s gains; the index fell as much as 1.5%, extending losses from a Feb. 17 peak to 10%, and entering a technical correction. Technology, communication services were the biggest drags on the Asian benchmark.

China stocks slid, tracking losses in U.S. shares on higher-than-expected inflation data there, as the materials sector tumbled after the government called for measures to deal with “overly fast” commodity price rises. The benchmark CSI 300 Index ended 1% lower, dragged by a 4.2% plunge in the materials subgauge that was its largest in seven weeks. The 10 biggest decliners in the main index were all from the sector, with Aluminum Corp of China sinking 9.2% to be the worst performer. Consumer discretionary shares were down 2.7%, with Gongniu Group among the biggest laggards after the company said it was under monopolistic probe by a local government. China needs to effectively deal with the commodity price surge and strengthen the coordination of monetary policies with other measures to ensure the stable operation of the economy, the state-run Xinhua news agency reported, citing a meeting of the State Council, the country’s cabinet, on Wednesday.

In Japan, the Nikkei 225 extended its drop to as much as 2.6%, briefly erasing its gains in 2021 as it faced the worst weekly loss since April 2020. SoftBank Group, Fast Retailing, Tokyo Electron lead losses; the Topix was down 1.5%.

In rates, treasuries were little changed trading near the low end of Wednesday’s range, with curve slightly flatter, after erasing gains. Treasury 10-year yields around 1.697% are less than 1bp higher on the day; bunds lag by 3bp, gilts by 4bp on Ascension Day holiday in some euro-area countries including Germany and France.  Dip-buying emerged during an active Asia session in which cash and futures volumes were almost double recent average. The Treasury auction cycle concludes with $27b 30-year bond sale at 1pm ET; Wednesday’s 10-year stopped through by more than 1bp; the WI 30-year yield is around 2.395% is above auction stops since November 2019 and 7.5bp cheaper than last month’s, which stopped through by 1.6bp. Yield curves in Europe bear steepen. BTPs widen across the curve to bunds, trading around session lows after a soft reception at today’s auctions.

In FX, the Bloomberg Dollar index held steady around Wednesday’s best levels. A gauge of the dollar’s implied volatility climbed to a one- month high after a surprisingly strong U.S. inflation print prompted traders to recalibrate bets for an interest-rate hike. Still, options traders haven’t determined whether that makes for a stronger greenback. The Australian dollar fell to its lowest in over a week as iron ore futures dropped after Chinese Premier Li Keqiang urged the country to deal with the surge in commodity prices and its impact. The yen and Swiss franc led advances as global stocks fell to a six-week low and U.S. equity futures retreated. NOK and AUD are the worst performers in G-10, CHF outperforms. EUR/USD briefly tests 1.21 before paring gains. TRY lags in EMFX. Bitcoin remains ~8% lower after its overnight slump.

In commodities, front-month crude futures drop over 2%: WTI trades back on a $64-handle, Brent back below $68. Spot gold trades near $1,814/oz, holding a narrow range close to Wednesday’s worst levels. Base metals are in the red with LME nickel slumping close to 3

After yesterday’s CPI shocker, the Labor Department’s data is likely to show U.S. producer prices rose 0.3% last month after a gain of 1% in March. A separate report is expected to indicate claims for U.S. unemployment benefits was below 500,000 in the latest week, for the third time in a row.

Looking at the day ahead, the data highlights will include the April PPI reading from the US, as well as the weekly initial jobless claims. Central bank speakers include BoE Governor Bailey and Deputy Governor Cunliffe, the Fed’s Barkin, Waller and Bullard, the ECB’s Centeno and BoC Governor Macklem. Finally, earnings releases include Disney, Airbnb and Alibaba.

Market Snapshot

• S&P 500 futures down 0.5% to 4,039.50
• MXAP down 1.5% to 198.62
• MXAPJ down 1.4% to 667.78
• STOXX Europe 600 down -1.36% to 431.97
• Nikkei down 2.5% to 27,448.01
• Topix down 1.5% to 1,849.04
• Hang Seng Index down 1.8% to 27,718.67
• Shanghai Composite down 1.0% to 3,429.54
• Sensex down 1.0% to 48,690.80
• Australia S&P/ASX 200 down 0.9% to 6,982.72
• Kospi down 1.3% to 3,122.11
• Brent Futures down 2.2% to $67.79/bbl
• Gold spot up 0.0% to $1,815.77
• U.S. Dollar Index little changed at 90.72
• German 10Y yield rose 1.9 bps to -0.105%
• Euro little changed at $1.2084

Top Overnight News from Bloomberg

• Fighting between Israel and Gaza Strip militants is spilling over into communal clashes inside Israel, where decades of pent- up grievances and nationalism have exploded into mob violence between Arabs and Jews
• Tesla Inc.’s Chief Executive Officer Elon Musk said the electric-vehicle manufacturer is suspending purchases using Bitcoin, triggering a slide in the digital currency
• South Korea unveiled plans to spend roughly $450 billion to build the world’s biggest chipmaking base over the next decade, joining China and the U.S. in a global race to dominate the key technology
• U.S. consumer prices are rising the most in decades, which, on its own, might suggest trouble for the world’s largest economy as it looks to recover from the Covid-19 pandemic. However, Americans are simultaneously freeing up space on their credit cards like never before, which could allow them to better withstand such increases in at least one sign that a sustained upward spiral in inflation can’t be dismissed so easily.

Asian equity markets were pressured following on from the losses in the US as US CPI printed its highest reading since 2009 which spurred a rise in yields and extension of the losses across the major indices with both the S&P 500 and DJIA posting their worst 3-day performance in over 6 months. ASX 200 (-0.9%) traded negatively with the index weighed on by underperformance in tech and weakness in property names although the downside for the local benchmark was stemmed by strength in healthcare after reports that Australia agreed to purchase a total 25mln doses of the Moderna (MRNA) COVID-19 vaccine through to next year and the Health Minister also noted they are in discussions with Moderna to locally manufacture its vaccine. Nikkei 225 (-2.5%) spearheaded the declines in the region once again as earnings releases failed to lift the mood with SoftBank investors disappointed by the lack of extension to the share buyback program and after the Co. announced it is to self-finance its Vision Fund to cut big investor pay-outs but would also expose the group to heavy losses in the event of a major downturn. Hang Seng (-1.8%) and Shanghai Comp. (-1.0%) conformed to the subdued picture across the region with risk appetite not helped after further criticism from the US regarding human rights abuses by China including in the annual International Religious Freedom Report, and after the latest Chinese lending and financing data also fell short of estimates, while the TAIEX (-1.4%) briefly recouped early losses after local reports stated that Taiwan sees a smaller chance of raising the COVID-19 alert although the recovery was only brief. Finally, 10yr JGBs were lower amid spillover selling from the vicious treasury sell-off that was triggered by the highest US inflation reading in more than a decade and after a decent US 10yr auction did little to help claw back losses. Nonetheless, Asia-Pac yields were relatively stable overnight following mixed results at the 30yr JGB auction and with Aussie yields unmoved by the RBA’s regular QE purchases.

Top Asian News

• China Property Stock Sinks on Spinoff Plan, Spooking Bondholders
• Evergrande Raises $1.4 Billion Selling Shares in EV Unit (2)
• Senate Panel Advances Bill to Counter China in Bipartisan Vote
• Asian Stocks Set to Enter Correction on Inflation, Virus Woes

Bourses across Europe trade with losses, albeit off worst levels (Euro Stoxx 50 -1.5%) as the region plays catch-up to the stock rout on Wall Street which continued into APAC trade amid the US CPI-exacerbated inflation concerns, whilst the intensifying conflict in Israel/Gaza adds to the soured mood. Traders will be keeping a keen eye on the US Jobless Claims later today for any nuances that could pressure the Fed alongside the PPI print. US equity futures have re-joined the sell-off after some overnight consolidation, with the NQ, YM, RTY, and ES printing below yesterday’s respective lows as the US 10yr yield remains close to yesterday’s highs. Back to Europe, with Scandi and Swiss markets away in observance of Ascension Day, the remaining bourses largely see broad-based losses with the DAX cash and futures below 15k and FTSE 100 (-2.0%) the narrow laggard as losses in its mining giants weigh. The Basic Resources sector is the clear laggard as copper and iron ore prices see a sizeable pullback following their recent bull runs. Overall, sectors portray a more defensive tone and a “risk-off” mood, with Staples, Utilities, and Healthcare all faring slightly better than their counterparts, although the Healthcare sector also sees giants Roche and Novartis out of action due to the public holiday. In terms of individual movers, Burberry (-8.0%) resides at the foot of the Stoxx 600 despite reinstating its dividend and reporting a sales rebound as focus turns to the Chinese market in the months ahead amid the Burberry boycott in light of comments made over China’s human rights policy. Prudential (-5.5%) accelerated losses after announcing an intent to raise USD 2.5-3bln in equity. To the upside meanwhile, Telefonica (+2.7%) is one of the top large-cap performers following an earnings beat across the board.

Top European News

• U.K. 10-Year Yield Rises to 0.92%, Highest Since March 2020
• Italy Bonds Fall Ahead of Debt Sales; Large Screen Selling Seen
• Barclays Sees Value in Renewables, But Says Stay Selective
• Rolls-Royce Pins Hopes on Second Half With Big Jets Sidelined

In FX, choppy trade and some consolidation in the aftermath of Wednesday’s blow-out US CPI data, with the DXY also succumbing to a bit of resistance and offers into 91.000 as several key technical levels straddle the round number, including the 21 DMA (90.932), 100 DMA (91.062) and 21 WMA (91.087). However, this was relatively short-lived and after pause for breath in wake of its swift and sizeable rise from 90.153 to 90.798 yesterday, the index and Greenback in general are advancing again as Treasury and other debt yields remain elevated and the Buck retains a firm underlying bid on risk-off premium given the ongoing slump in global stock markets on ramped up reflation vibes. Moreover, several big option expiries could keep the Dollar underpinned vs major peers and the DXY aloft within a higher 90.909-587 range. Ahead, jobless claims, PPI, the final leg of Quarterly Refunding and yet more Fed commentary.

• CHF/JPY/NZD – The Franc, Yen and Kiwi are holding up a bit better than their G10 counterparts in the face of renewed Greenback strength and a fair degree of spread convergence between Swiss, Japanese and NZ bonds vs USTs is providing a buffer. Accordingly, Usd/Chf remains capped just under 0.9100, Usd/Jpy has faded around 109.79 and Nzd/Usd is back above 0.7150 following a brief dip below.
• EUR/AUD – Both looking susceptible to steeper depreciation vs their US rival, with the Euro only just recovering from a stop-chase through the 21 DMA (1.2064) in time to avoid more sell orders sitting at or beneath 1.2050. Nevertheless, Eur/Usd also faces heavy and layered option expiry interest from the round number above to 1.2150, including 1.3 bn at 1.2100, 1 bn from 1.2115-35 and the same size between 1.2140-50. Meanwhile, the Aussie is trying to keep tabs on the 0.7700 handle with the aid of 1 bn expiries starting from 0.7690 and ending at the strike after declining alongside copper and other base metals overnight, but will have to do very well to reclaim more lost ground given expiries beyond 0.7750 (at 0.7760-65 and 0.7790-95 in 1 bn apiece) and the fact that the half round number was not pierced earlier.
• GBP/CAD – Sterling is rotating around 1.4050 after finally losing sight of 1.4100 in the post-US inflation data fallout, awaiting independent impetus and direction via BoE speakers, while the Loonie has retraced from fresh 8 year or so midweek peaks in tandem with a retracement in crude prices between 1.2104-57 parameters and also looking for Central Bank inspiration via BoC Governor Macklem.

In commodities, WTI and Brent front month futures see hefty losses in early European trade with the complex subdued as the Colonial Pipeline premium unwinds, whilst the soured tone across markets exacerbate losses. WTI Jun sees itself on either side of USD 64.50/bbl (vs high 65.81/bbl) while Brent July dipped blow USD 68/bbl (vs high USD 69.04/bbl). That being said, the geopolitical landscape remains heated amid the intensifying Israeli/Gaza conflict whereby the US sided with the former and Russia with the latter, meanwhile, Israel is poised to ramp up its military offensive with a ground invasion of Gaza later today according to reports. Furthermore, separate reports suggested that Houthi-led rebels have carried out “a large joint offensive operation” against Saudi, with Aramco facilities among the targets. Elsewhere, the JCPOA has taken somewhat of a backseat at the moment given the market focus on the inflation narrative and geopolitics in the Middle East, although officials did note that negotiations will have to pick up the pace to reach a deal within weeks. Over to metals, spot gold and silver remain suppressed by post CPI yields and the Buck, with the former around USD 1,815/oz (vs high 1,822/oz) whilst spot silver dipped below USD 27/oz (vs high USD 27.24/oz). In terms of base metals, copper and iron ore futures eased following the recent bull run, with LME copper back below USD 10,500/t as the soured risk tone caps upside.

US Event Calendar

• 8:30am: May Initial Jobless Claims, est. 490,000, prior 498,000; Continuing Claims, est. 3.65m, prior 3.69m
• 8:30am: April PPI Final Demand MoM, est. 0.3%, prior 1.0%; PPI Final Demand YoY, est. 5.8%, prior 4.2%
• 8:30am: April PPI Ex Food, Energy, Trade MoM, est. 0.3%, prior 0.6%; 8:30am: PPI Ex Food, Energy, Trade YoY, est. 4.3%, prior 3.1%
• 8:30am: April PPI Ex Food and Energy MoM, est. 0.4%, prior 0.7%; PPI Ex Food and Energy YoY, est. 3.8%, prior 3.1%

DB’s Jim Reid concludes the overnight wrap

Well, well, well. That was an exciting day to be working in financial markets. Does that US CPI print get us closer to the inflation regime shift that we’ve been calling for this year? It’s dangerous to read too much into one number but the broad strength gives us confidence that this is not just a transitory story. Another buzz word for us has been how this year will be “complicated” for markets especially once reopening happens. This release personifies that thought process. You may get dull periods but this year is going to be a big battle between the bullishness of mass reopening/stimulus on one hand and the inflationary consequences on the other. Expect regular pockets of vol. I still lean heavily on the inflationary camp but the reality is that the battle is still in the early stages and non-inflationists will still be able to use the transitory argument for several more months yet.

To run through the headlines, the April CPI print came in at a much stronger-than-expected +0.8% on a month-on-month basis (vs. +0.2% expected), which in turn sent the year-on-year print to +4.2%, which was above every economists’ estimate on Bloomberg and the highest it’s been since September 2008. Core inflation didn’t provide any respite either, with the +0.9% monthly increase being the fastest pace of core price rises since September 1981, sending the annual number up to +3.0%, the highest since January 1996.

Sovereign bond yields shot up in response to the print on both sides of the Atlantic, with yields on 10yr US Treasuries up +7.0bps to 1.692%. The move was driven by higher real yields (+4.9bps) rather than inflation expectations (+2.2bps), but with 10yr breakeven closing at 2.56%, a level not seen in more than 8 years. This rise in inflation expectations was evident across the curve, with the 5yr breakeven climbing +3.5bps to 2.75%, a level not seen since 2005. However inflation expectations were even higher intraday with the 5yr breakeven rising +11bps intraday, which would have been the largest daily rise since back in November when we got the first efficacy news from the Pfizer trials.

Of course, markets are now on edge as to what this might mean for monetary policy, but the Federal Reserve officials we heard from yesterday predictably downplayed the report and continued their mantra that any rises in inflation would prove temporary. Vice Chair Clarida said that he was surprised by the reading, but his speech still said that he expected “inflation to return to – or perhaps run somewhat above – our 2 percent longer-run goal in 2022 and 2023”, with this outcome being “entirely consistent” with the Fed’s new framework. Governor Bostic added later in the day that he was “expecting a lot of volatility at least through September” on inflation readings as transitory and base effects work through the data. He went on to say that “then we will have to see what is happening with the supply chain disruptions and the commodities prices and those sorts of issues.” The Fed is going to have a real communication and policy problem if this inflation isn’t transitory. This number is a huge headache for them regardless of the public pronouncements.

The strong inflation number meant that US equities continued their slump for a 3rd day running, with the S&P 500 down another -2.14%, as the VIX index of volatility rose a further +5.8pts to a fresh 2-month high of 27.6pts. The S&P has pulled back every day this week after hitting a new high on Friday after the historic miss in the US jobs report. The index has now fallen -4.01% this week, the worst three-day stretch since the last week of October. Tech stocks led the declines with the NASDAQ down -2.67%, which means the index has now lost -7.8% since its all-time high in late April. The selling was very broad, with 94% of the S&P 500 trading lower and 23 of the 24 industry groups negative yesterday with 15 of these seeing losses over 2.0%.Energy stocks (+0.06%) were the lone exception, buoyed by both Brent crude (+1.12%) and WTI (+1.23%) oil prices closing at their highest level since the pandemic began. For Europe it was a brighter picture however, with the STOXX 600 recovering +0.30% following its worst day so far this year on Tuesday and closing before the last leg of the US sell-off. The STOXX Banks index advanced +1.17% to a post-pandemic high as sovereign bond yields in Europe hit fresh highs.

10yr bunds (+3.8bps) and gilts (+5.3bps) hit levels not seen in nearly 2 years, at -0.12% and 0.89% respectively. Breakevens moved higher across the continent, with 10yr German ones at a 7-year high of 1.48%, while the 5y5y forward inflation swap for the Euro Area was up +3.0bps to 1.63%, a level not seen in over 2 years.

There are some signs of markets stabilising overnight with futures on the S&P 500 up +0.33%. Asian markets are catching down still though with the Nikkei (-1.60%), Hang Seng (-0.92%), Shanghai Comp (-0.74%) and Kospi (-0.73%) all trading in the red. European equity futures are also pointing to a weaker open as the markets here catch up with last leg of the US sell-off last night. Elsewhere, Bitcoin is down -6.83% overnight to $50,759 after Elon Musk tweeted that Tesla has suspended vehicle purchases using the digital currency over environmental concerns in its mining process. As a reminder from a CoTD we did earlier this year, if Bitcoin was a country it would use around the same amount of electricity a year to mine as Switzerland does in total. There are always those that say that a lot of it is renewable but an awful lot is not as well! See here for that CoTD. Musk added that Tesla will not be selling any Bitcoin. The tweet had sent the crypto currency down as much as -15% at one point in time.

Another big event yesterday was the meeting between President Biden and congressional leaders from both parties over the administration’s economic proposals. President Biden sought to offer optimism, while citing the partisan divide, saying he would see if he could “reach some consensus on a compromise.” While both Republican leaders, McConnell and McCarthy, said that there were places where they could find bipartisanship they also reiterated they were committed to a plan far smaller than President Biden’s proposed $ 4 trillion. One line that has been drawn is a corporate tax raise to 21% that undoes the 2017 tax cuts, with McConnell saying that would be “our red line.” Politically speaking, the higher inflation numbers aided Republican talking points, who have been calling for restraint on the economic proposals, in part because of the risk of higher prices.

There wasn’t a great deal of news on the pandemic yesterday. The EU’s executive branch has asked the 27 member states to enact a non-essential travel ban on India only allowing EU citizens and long-term residents to travel. With all the talk of breakdowns in supply chains, the news out of Brazil that they are likely to run out of ingredients for Astazeneca’s vaccine by the end of the week is a concern. Elsewhere, in the US, the CDC has approved the Pfizer/BioNTech shot for those 12-15yrs old with just the FDA’s sign-off needed before the shots can be distributed. Sticking with vaccines, researchers from University of Oxford reported in The Lancet medical journal that people who got one dose of AstraZeneca’s shot and another of Pfizer’s vaccine reported more short-lived side effects such as fatigue and headaches with most of them being mild. The results are early findings from a study that has yet to show how well such a cocktail defends against the virus.

Looking at yesterday’s other data, the main highlight was the Q1 GDP reading from the UK, which showed a slightly smaller-than-expected-1.5% contraction (v.s -1.6% expected), with the monthly GDP reading for March of +2.1% (vs. +1.5% expected) outperforming expectations. Our UK economist has revised up his 2021 forecast in response (link here) and now sees GDP growth this year at +6.7%. Separately in the Euro Area, industrial production rose by just +0.1% in March (vs. +0.8% expected), though the European Commission upgraded their projections in their latest forecast, which now sees the Euro Area growing by +4.3% this year and 4.4% next (vs. +3.8% for both years in February).

To the day ahead now, and the data highlights will include the April PPI reading from the US, as well as the weekly initial jobless claims. Central bank speakers include BoE Governor Bailey and Deputy Governor Cunliffe, the Fed’s Barkin, Waller and Bullard, the ECB’s Centeno and BoC Governor Macklem. Finally, earnings releases include Disney, Airbnb and Alibaba.

With tech stocks tumbling in the past week amid surging inflation fears, at least the commodity sector appears safe from the global reflationary risk-off wave that swept across markets. But maybe not anymore: overnight Chinese stocks slumped, tracking losses in U.S. shares on much higher-than-expected inflation data there, as the materials sector tumbled after the government called for measures to deal with “overly fast” commodity price rises.

China will monitor changes in overseas and domestic markets and effectively cope with a fast increase in commodity prices, the state-run Xinhua news agency reported, citing a meeting of the State Council, the country’s cabinet, on Wednesday according to Reuters. According to the report, the state will step up coordination between monetary policy and other policies to maintain stable economic operations, the cabinet also said, as reported by state television.

The verbal intervention took place as prices for commodities such as copper, coal and steelmaking raw material iron ore extended recent rallies to hit all-time highs this week on concerns a post-coronavirus pandemic demand rebound in China is outpacing supply. China is the world’s biggest market for copper, coal and iron ore and consumers face much higher costs as some analysts expect a commodities “super-cycle”.

And while the cabinet did not say how it would cope with the rise in commodity prices, we are confident that the centrally-planned surveillance state can do literally anything it wants or needs, to achieve its goals.

In response to the government warning, the benchmark CSI 300 Index ended 1% lower, dragged by a 4.2% plunge in the materials subgauge that was its largest in seven weeks.

The 10 biggest decliners in the main index were all from the materials sector, with Aluminum Corp of China sinking 9.2% to be the worst performer. Consumer discretionary shares were down 2.7%, with Gongniu Group among the biggest laggards after the company said it was under monopolistic probe by a local government.

The news displeased foreign investors who sold a net 5.6 billion yuan worth of mainland stocks via the trading links with Hong Kong, the most since March 31, according to Bloomberg.

Separately, the government’s tapering of pandemic-related stimulus looks to be showing effect, with growth in total social financing slowing in April to the weakest since March 2020, the latest official data showed, confirming perhaps the most ominous trend in global finance:  China’s credit impulse is collapsing and is about to drag the global reflationary wave down with it.

Just when you though Elon Musk’s change of heart on bitcoin could be short lived, he has again taken to Twitter on Thursday morning, furthering his “environmental” case against the cryptocurrency. 

At about 0600 EST, Musk followed up on yesterday’s statement about no longer accepting bitcoin by Tweeting out a chart of bitcoin electricity consumption. Musk wrote that the energy usage trend for bitcoin over the past few months “is insane”. 

Energy usage trend over past few months is insane https://t.co/E6o9s87trw pic.twitter.com/bmv9wotwKe

— Elon Musk (@elonmusk) May 13, 2021

The Tweet sent bitcoin, which was already hovering around support at $50,000, plunging lower again…

The reasoning for Musk’s stark turnaround on bitcoin isn’t yet clear.

Some attributed it to potential regulatory issues:

I agree w/ others who think @SEC_Enforcement told $TSLA they can’t book auto revenue using fake currency; as a matter of fact, $TSLA might have to restate 1Q21 earnings for illegally including #Bitcoin trading gains in operating income $TSLAQ $ARKK $MS $GS

— Patrick Comack (@patrickcomack) May 13, 2021

Some said they simply “didn’t get it”:

$TSLA so Elon won’t accept transactions in $BTC due to energy consumption yet was perfectly fine buying billion+ of BTC for the Balance Sheet? Makes ZERO sense. Either shows a lack or initial diligence or questionable fiduciary decision making. I like Elon, but, I don’t get that

— The_Ravid (@The_Ravid) May 13, 2021

Others didn’t speculate on the cause, but just noted the stark change in Musk’s attitude.

This is wild. Musk is presenting the case against Bitcoin. Something has changed wildly in his world. And no matter what it is, we can’t go back on this: Elon Musk has officially called out Bitcoin for not being environmentally friendly. This is a seismic pivot. Seismic. https://t.co/qqtxj5FwIU

— Quoth the Raven (@QTRResearch) May 13, 2021

And have speculated it has to do with Tesla wanting to enter the U.S. renewable fuel credit market, while others have speculated that the U.S. (or perhaps even Chinese) government may have prompted the sudden change of heart. As we suggested in jest yesterday – if it’s really about the environment – wouldn’t Musk have to stop accepting the Yuan, too?

Next: TSLA stops accepting yuan pic.twitter.com/Iy9kEbwCPg

— zerohedge (@zerohedge) May 13, 2021

Recall, we noted yesterday that after announcing plans to accept payment for Tesla’s cars in bitcoin back in February, Musk announced via tweet that the company was suspending bitcoin payments over concerns about the environment. “We will not be selling any bitcoin,” he added.

As perhaps the biggest booster of bitcoin in corporate America, Tesla announced during its Q1 earnings report released last month that it made a $272 million profit selling some of the bitcoin it had purchased on the company’s balance sheet. Earlier this week, Musk joked about the possibility that the firm might accept Doge for payment.

In a note published on Twitter, Musk wrote that while he is still personally a believer in the cryptocurrency, Tesla has become concerned about the role of fossil fuels in bitcoin mining, a common criticism made by environmentalists against bitcoin. “Cryptocurrency is a great idea on many levels and has a promising future but this cannot come at a great cost to the environmet,” Musk wrote. He added that the company “will not be selling any bitcoin and we intend to use it for transactions as soonas mining transitions to a more sustainable energy.”

Tesla & Bitcoin pic.twitter.com/YSswJmVZhP

— Elon Musk (@elonmusk) May 12, 2021

While the initial reaction in crypto was anything but bullish, analysts quickly noted that this could be good news for ethereum, as Musk noted in his tweet that Tesla will be looking at alternatives in the crypto space that use “<1%" of bitcoin's energy consumption.

As JPM recently pointed out in a note to clients, ESG factors are one reason ethereum’s explosive move higher, which has made it a standout crypto performer in recent weeks, will likely continue. The greater focus by investors on ESG has shifted attention away from the energy intensive bitcoin blockchain to the ethereum blockchain, which in anticipation of Ethereum 2.0 is expected to become a lot more energy efficient by the end of 2022. Ethereum 2.0 involves a shift from an energy intensive Proof-of-Work validation mechanism to a much less intensive Proof-of-Stake validation mechanism. As a result, less computational power and energy consumption would be needed to maintain the ethereum network.

In other words, this is one area where ethereum can out-compete bitcoin in the long run.

But when it comes to fossil fuel consumption, the traditional banking system has crypto beat.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Soar Above Hubris and Overconfidence To Fortify Your Wealth

“Neither Bull nor Bear“

A growing deflationary hurricane is churning off the coast. At the same time, a massive inflationary warm front is surging toward us, threatening inflation like we have not seen in forty years.  As if forecasting future economic conditions was not tricky enough, both systems are being fueled in unknown ways by the convergence of historical amounts of monetary and fiscal stimulus.

The two ominous and encroaching weather systems make economic and market forecasting extremely difficult. The most recent evidence came from last week’s BLS employment report. The consensus of economic forecasters missed the mark by 734,000 jobs. That is over three times the average monthly job growth pre-pandemic.

To add insult to injury, consider forecasters must also untangle global supply line problems and resulting shortages of many commodities and finished goods. Further, robust pent-up demand from the lifting of economic restrictions and a global pandemic significantly influences the economic climate.

Despite such extraordinary circumstances, the level of confidence in economic and market forecasts is remarkably high. Many “experts” forecast beautiful days with a temporary bout of above-average inflation. There is nary a mention of the potential for debilitating inflation and almost no recognition of the troubling deflationary hurricane off at sea.

The confidence and hubris backing forecasts should be of great concern, not comfort.

The Butterfly Effect

In 1963, Edward Lorenz, a meteorology professor from MIT, wrote a white paper called Deterministic Nonperiodic Flow. Years later, his theories became a core foundation of Chaos Theory.

Per the MIT Technology Review, the essence of his work is that “small  changes can have large consequences.” His logic is better known as the Butterfly Effect.

“Lorenz suggested that the flap of a butterfly’s wings might ultimately cause a tornado. And the butterfly effect, also known as “sensitive dependence on initial conditions,” has a profound corollary: forecasting the future can be nearly impossible.”

“Yet Lorenz’s own deterministic equations demonstrated how easily the dream of perfect knowledge founders in reality. That the tiny change in his simulation mattered so much showed, by extension, that the imprecision inherent in any human measurement could become magnified into wildly incorrect forecasts.”

Misplaced Confidence

How a simple flap of a butterfly wing can change the environment attests to the difficulty in predicting the weather. Meteorologists are quick to describe their limitations and relatively poor level of confidence around longer-range forecasts. They understand the impossibility of calculating millions of variable factors affecting the weather.

During more typical economic and market conditions, prognosticators struggle with forecasts. For example, the first graph below shows how the Fed consistently overestimated economic growth coming out of the last recession.

The following graph, courtesy of Deutsche Bank, highlights how Wall Street economists have consistently erred in their expectations for higher interest rates over the last fifteen years.

As the title of the next graph tells, investors have a long history of poor Fed Funds forecasts.

Today, those at the Fed offer investors a good amount of confidence in predicting the pace of the economic recovery. They appear highly confident that any spurt of inflation will be transitory. If wrong, they offer complete confidence in their unproven tools to halt inflation. We know from historical experience that when the inflation genie gets out of the bottle, it is very difficult to arrest.

Wall Street analysts shrug off record equity and bond market valuations with forecasts of growth and normality.  Investors buying in at such valuations must have total trust that the Fed and Wall Street are correct. Despite the evidence that professional economic prognosticators are not very good at their jobs, everyone seems assured of the future.

The graphs below show money supply growth, and the fiscal deficit are at levels that are anything but ordinary. Are we to believe the effects and consequences of such extreme monetary and fiscal policy, occurring concurrently, are easy to predict? What kind of professional would fail to recognize the peril of such a claim?

Confidence Despite A Poor Track Record

The cocksure attitudes of leadership, economic and political, and blind confidence put in them is perplexing given their poor track record. Consider a small sample of their dreadful forecasts:  

• In June of 2017, Janet Yellen, Fed Chair, stated: “Would I say there will never, ever be another financial crisis? … Probably that would be going too far. But I do think we’re much safer, and I hope that it will not be in our lifetimes, and I don’t believe it will be.” Less than three years later, GDP fell over 9% in a quarter, and the unemployment rate shot up from 3.5% to 14.8% in a month. The S&P 500 fell over 40% in four weeks.

• In May of 2007, a year before the subprime crisis would bankrupt many financial institutions and cripple others, Ben Bernanke stated: “we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” 

• “I believe that the general growth in large [financial] institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.” Alan Greenspan 2000

• “We will not have any more crashes in our time.” Famed economist John Maynard Keynes 1927

• “There is no cause to worry. The high tide of prosperity will continue.” – Andrew W. Mellon, Secretary of the Treasury. September 1929

Flip a Coin

The point in highlighting forecasting blunders is not to shame the forecasters. Instead, it is to help our readers understand that despite decades of experience, reams of data and information, and well sought-after educations, economists and market forecasters are human. They, like everyone else, have little ability to forecast the future accurately.   

From an economic and market perspective, we are not in the lazy days of summer. Instead, we are in a highly charged, volatile environment. As a result, there are many unknowns, well beyond anything these brave forecasters ever witnessed or studied.

Their rosy forecasts may be correct. The economy might continue to recover gradually. The recent spike in inflation may be transitory, and economic data will assume prior trends. Unicorns may spew rainbows.

However, there are excellent odds they will once again be wrong. Lorenz stated: “small changes can have large effects.” Now consider the potential range of effects from the plethora of economic and policy factors exerting significant influence over economic activity and human behaviors.

The reality is like meteorologists predicting next week’s weather; no one knows what the economy holds in store. Of course, they can extrapolate current trends and make educated guesses on how consumers and corporations react to future events. Still, no one has ever experienced anything like what we face today.

Summary & Advice

At RIA Advisors, we have a marketing tag line as follows:

Bulls win in Bull Markets; Bears win in Bear Markets. Eagles soar above and take advantage of opportunity. Let us help you soar as you reach your financial goals with R-I-A Advisors. Neither Bull nor Bear.

Given the economic climate and extreme market risks and rewards, we take an agnostic view of markets. We are not wed to opinions of economic activity or inflation and how they may steer markets. We are not self-proclaimed bulls or bears.

Paying top dollar for assets requires independent thinking and careful attention to market activity. To grow and preserve wealth in what may be a coming melt-up or meltdown, we must soar well above the nonsense and confidence spewed by so-called experts.  

From the brightest traders on Wall Street to the halls of the Federal Reserve and in the studios of the self-anointed media economic experts, there is zero appreciation for the potential of massive forecasting errors.

Quite often, investors are rewarded for going against the crowd, especially when the masses are in agreement on what the future holds.

The Federal Reserve continued to increase its holdings of mortgage-backed securities by the tune of $40 billion per month, fueling a housing bubble with record-low mortgage rates and low inventory. 

Even as the housing sector has more than recovered from the downturn, Chair Jerome Powell continues pedal to the metal with MBS purchases. According to the National Association of Realtors (NAR), this has resulted in the median price for a single-family home to soar the most on record in the first quarter. 

“Nationally, the median existing-home sales price rose 16.2% on a year-over-year basis to $319,200, a record high since 1989. All regions recorded double-digit year-over-year price growth, with the Northeast seeing a 22.1% increase, followed by the West (18.0%), South (15.0%), and Midwest (14.4%),” NAR said. 

As home prices surge, Powell still doesn’t have a satisfactory answer for why the Fed continues its massive MBS purchases every month. 

Here’s Powell’s quote in full from an April press conference:

“Yeah. I mean, we started buying MBS because the mortgage-backed security market was really experiencing severe dysfunction, and we’ve sort of articulated, you know, what our exit path is from that. It’s not meant to provide direct assistance to the housing market. That was never the intent. It was really just to keep that as, it’s a very close relation to the Treasury market, and a very important market on its own. And so, that’s why we bought as we did during the global financial crisis. We bought MBS, too. Again, not intention to send help to the housing market, which was really not a problem this time at all. So, and, you know, it’s a situation where we will taper asset purchases when the time comes to do that, and those purchases will come to zero over time. And that time is not yet.”

Back to the report, Lawrence Yun, NAR chief economist, said, “record-high home prices are happening across nearly all markets, big and small, even in those metros that have long been considered off-the-radar in prior years for many home-seekers.” 

Of the 183 metro areas covered by NAR, 163 had double-digit price gains, up from 161 in the fourth quarter. 

“The sudden price appreciation is impacting affordability, especially among first-time homebuyers,” said Yun. “With low inventory already impacting the market, added skyrocketing costs have left many families facing the reality of being priced out entirely.”

In a separate report, Redfin’s monthly data showed that in April, homes sold at their fastest pace on record with nearly half off-market within one week.

Quantitative easing is a crapshoot, the Fed’s overstimulation is fueling a housing bubble. Any taper announcement, possibly at Jackson Hole, could throw a wrench into the housing market later this year. 

Submitted by Chris Turner, via AvGeekery.com,

Many of us AvGeeks are tracking the progress of the passenger counts supplied by the Transportation Security Administration during the COVID pandemic. Avid numbers geeks also know that raw data should always be converted to associated cool charts.

The first chart below displays the raw data.  Because the TSA lists the most current day first, the chart reconstructs a chronological visualization for the same time periods January – December.

Well aren’t those some squiggly lines? Because these are daily points, the lines show large amplitudes that correlate to high traffic (Fridays) and low traffic (Tuesdays).  Let’s smooth out the lines using a rolling 7 day average to provide a better picture. 

Deriving Some Encouraging Conclusions

The 7 day chart shows some interesting facts.  The first part of 2020 on a rolling average basis, had approximately 5% increase in traffic over 2019 (grey line).  The precipitous drop from February to April highlights the extent to which passenger traffic decreased.  One could follow the 2020 line from right and then see the 2021 line in Blue to left as a continuation.  Although 2021 began at less than 50 percent traffic compared to 2020, passenger counts have rapidly increased since January 2021.

Playing the Percentages

Speaking of percentages, the chart below indicates the raw percentage differences and a smoothed 7 day average. Note that there are only 2 lines – the orange line is the difference between 2019 and 2020.  The blue 2021 line shows the difference between 2019 and 2021.

A What-If Scenario

When trying to identify when normalcy will return, Here’s a “what if” scenario: What if passenger traffic grew by 5% year over year from 2019 to 2020 through 2021?

What would be the point in identifying where passenger traffic might be at 5% growth?  That answer rests in the below graph that shows the approximate “lost passenger counts” due to pandemic. 

Some Bad/Good News

In just over a year, roughly 600,000,000 passengers did not travel. But if the 2021 pace of passenger counts continues, by August we could surpass 2019. That would be great news for the aviation industry.

Earlier, we noted how French officials are planning to sabotage talks between the UK and the EU about expanding access to EU financial markets. At this point, even if Britain does manage to make progress with the EU in a meeting later this month, at this point, the transfer of top talent from the City to the Continent looks irreversible.

According to Bloomberg, Morgan Stanley, Barclays and Goldman Sachs are among the bulge bracket banks that are accelerating the pace of moving personnel out of the City in the wake of the pandemic, even as Goldman plans to send those who are left in London back to the office for the first time next month.

The fact that London banks are no longer allowed unfettered access to clients based on the Continent has created huge problems for all employees, but the coveted front-office workers, who typically earn the most, are finding the disruptions impossible to stomach. For example, the post-Brexit framework requires client-facing bankers to always have a “chaperone” from inside the bloc on the line whenever they speak to clients.

But it’s not just Brexit that’s driving the exodus now; even though American banks have largely insisted that the work-from-anywhere revolution won’t be permanent, many senior bankers are deciding to stay in Europe for the climate, and other lifestyle perks.

Lifestyle choices are also playing their part, with traders and other senior staff moving too. Working from home during the pandemic enabled some bankers to leave London for warmer continental climes, mirroring a shift by Wall Street executives to Miami during the height of the COVID outbreak in New York.

Some European bankers are now looking at making the shift permanent.

“There is Brexit but not only, there is a post-Covid phenomenon too,” said Emmanuel Goldstein, Morgan Stanley’s France chief executive, explaining that some French bankers were returning home having spent their entire careers overseas.

Here’s a rundown of some moves that have caught newswires’ attention:

• Barclays’ head of M&A for Europe and the Middle East, Pier Luigi Colizzi, has recently moved to Milan and will run the region’s deals team from there, two sources familiar with the lender said, making him one of the few regional M&A heads based outside of London.
• Barclays has also beefed up its offices in Paris and Frankfurt with local hires, poaching senior M&A bankers from BNP Paribas and Greenhill & Co.
• Goldman Sachs’ head of European corporate and sovereign derivatives, Alessandro Dusi, has moved to Milan, where overall headcount has swelled to about 60 from 20 in 2017.
• In its Madrid office, Goldman now has 60 staff, double pre-Brexit levels.

To sum up, while the mass exodus of banking jobs from the city hasn’t materialized – consulting firm EY calculates that 7,600 Brexit-related financial services jobs left London up until March, a fraction of London’s half-a-million financial workforce – but the jobs that have disappeared are disproportionately among the higher-paying, client-facing gigs. And while that might not be reflected in the head count, it’s a major red flag in terms of influence, and virtually dooms any change the UK had of drawing back more promising private firms hoping to go public.

Authored by Nick Corbishley via WolfStreet.com,

Net mortgage borrowing in the UK hit £11.8 billion in March, the strongest since the series began in 1993, according to Bank of England data. The previous peak was in October 2006 (£10.4 billion), when the UK was in the grip of the pre-financial crisis bubble. The difference between then and now is that back then the economy was about to fall off a cliff, whereas now it has already fallen off a cliff, having last year suffered its biggest drop in economic output in 300 years.

The UK’s biggest lender HSBC said it doled out more mortgages in March than in any other month of more than 40 years offering home loans.

There are plenty of reasons for this lending boom, including the ongoing exodus from the cities to the villages of rural England, even as London’s population is shrinking for the first time in 30 years, and rents have been falling for 13 straight months.

But home prices are also rising, albeit less steeply, in London and other major cities. In April 2021 Chestertons reported 65% more buyer enquiries in London, 75% more sales agreed and 90% more sales completed than in April 2019. These findings chime with HMRC’s latest figures, which show record transactions numbers in March across the UK – up 93% from 2019.

The most important reason for the surging volume of residential property transactions is the support provided by the Bank of England and UK government to property buyers and investors.

In mid-March 2020, as it grappled with the early fallout of the virus crisis, the BoE slashed the UK’s base interest rate from 0.75% to 0.25%, then a week later to 0.1%, the lowest ever. The rate cut was in response to the economic stress caused by the shutdown of the UK economy. And the falling mortgage rates have stoked demand for housing.

The government too has pursued policies aimed at inflating the housing market and propping up the mortgage lending industry. First, it introduced a stamp duty holiday that was supposed to end at the end of March but was extended at the last minute til the end of June. This has driven much of the recent surge in new mortgages.

Then, last month, the Chancellor announced the launch of new government-backed mortgages with 5% down-payments. If borrowers default on the mortgages, taxpayers rather than the banks will be on the hook. Here’s what the government had to say at the launch of the lending program:

“First announced at the Budget, the scheme will help first time buyers or current homeowners secure a mortgage with just a 5% deposit to buy a house of up to £600,000 – providing an affordable route to home ownership for aspiring home-owners.

“The government will offer lenders the guarantee they need to provide mortgages that cover the other 95%, subject to the usual affordability checks.”

The government admitted that the COVID-19 pandemic “has led to a reduction in the availability of high loan-to-value (LTV) mortgage products, particularly for prospective homebuyers with only a 5% deposit.”

Banks, it seems, are no longer offering the 95% or 100% deals on mortgages to first-time homeowners that were essentially guaranteed by parents or other family members. You can’t exactly blame banks for tightening their lending standards. Given the acute economic uncertainty that continues to prevail even as the UK economy begins to reopen, it’s not easy to tell who will still be solvent in a year or two’s time.

So the government is committed, it says, “to supporting people who aspire to become homeowners, helping over 685,000 households to purchase a home since 2010 through government backed schemes including Help to Buy and Right to Buy.”

The government’s own National Audit Office had found that the Help to Buy scheme dished out billions of pounds of publicly subsidized loans to relatively well heeled homeowners who were perfectly capable of buying their first property without need for outside help. As of 2018 only 37% of the roughly 210,000 people who had benefited from Help to Buy would not have been able to afford a property without it.

In the Help-to-Buy scheme first-time property buyers got to put down a deposit of as little as 5% on a new-build home worth as much as £600,000 and received an “equity loan” from the government. The loan covered between 20%-40% of the property price depending on its location. The rest of the financing was covered by a traditional mortgage.

Now the government is going the full hog and offering to subsidize mortgages with 5% down payments for first-time buyers. Banks such as Lloyds, Santander, Barclays, HSBC and NatWest are already offering the mortgages. And they’re also slashing their mortgage rates. Presumably, they are also loosening their lending standards. After all, it’s the government’s problem — not theirs — if a borrower defaults.

But no cost is too high when it comes to sustaining the UK’s all-important housing bubble.

And for the moment it’s working: according to the mortgage lender Nationwide, in April, the average UK house price jumped 2.1% compared with March, the biggest monthly rise recorded in 17 years.

This comes as some 130,000 homeowners were still on mortgage holidays as of March, according to trade body UK Finance. Another 500,000 people are on tailored payment plans with their banks. There are also over a million people trapped in unmortgageable apartments due to the flammable cladding crisis, which is already having an effect on prices at the lower end of the market, where the specter of forced sellers looms large. 

*  *  *

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As the spat between the UK and France over access to British fishing waters – a contentious issue that nearly scuppered the post-Brexit trade deal – worsens, France has apparently decided to go for the jugular.

Last week, French officials threatened to cut off electricity to the UK-dominated island of Jersey while a “protest” staged by French fishermen nearly prompted a confrontation between British and French naval ships. Now, France is threatening to do everything in its power to scupper a EU deal that would broaden access to European markets for British financial firms.

In keeping with threats made by a French diplomat last week, Bloomberg reports that French diplomats are working to stall an agreement that would help restore some of the access British financial firms once enjoyed to European markets, which was lost when Brexit officially came into effect following the end of the transition and the start of 2021.

Though it wouldn’t have much practical effect in the near term, reaching a Memorandum of Understanding between the UK and the EU about plans to re-integrate their financial systems is seen by the UK as a critical first step to restoring the level of access they once enjoyed. Negotiations in Brussels later this month will bring EU leaders together to further the discuss a potential deal on market access. To be sure, the EU has said that it’s in no rush to restore the reciprocity rules that would restore trading rights for British financial firms.

Here’s more from BBG:

At the end of March, Britain and the EU had agreed on a forum regarding cross-border financial market access. While granting so-called equivalences that would allow U.K. financial firms to do business in Europe remains a separate and unilateral process, the MoU would help speed up the process.

Since Brexit took effect at the beginning of 2021, London-based financial firms have been largely unable to operate in the bloc, forcing banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc. to move billions of dollars in assets and thousands of staff to the continent.

All 27 EU states must sign off on an MoU before it can be implemented. BBG says talks could begin in the coming days. But if the British are still refusing to hand out fishing licenses for the waters around the island of Jersey by then, well, they can expect the French to do everything within their power to stall talks on the MoU.

As a reminder, here’s how close British and French Navy vessels came to a confrontation earlier this month (courtesy of Bloomberg).

France has accused the British government of reneging on some of its promises from the Brexit deal by refusing to hand out licenses for French fishermen in certain British-controlled fishing waters, primarily those off the island of Jersey, which lies close to the French coast.