Category: zerohedge

In January 2020, Bridgewater’s Ray Dalio warned “cash is trash,” suggesting investors should diversify into gold.

“You can’t jump into cash. Cash is trash,” says @RayDalio. “You have to have a well-diversified portfolio, you have to be global, and you have to have balance…and you have to have a certain amount of gold in your portfolio.” pic.twitter.com/lZqCnvsqBh

— Squawk Box (@SquawkCNBC) January 21, 2020

A year later, the billionaire warned “investing in UST bonds (and most financial assets) has become stupid.”

And last month, the founder of the world’s largest hedge fund warned that the “United States could become perceived as a place that is inhospitable to capitalism and capitalists” under the Democrats and his firm got behind bitcoin as a storehold of wealth.

So, no cash; no bonds; buy gold, buy bitcoin… and now  Bridgewater’s co-chief investment officer Greg Jensen warned investors that parts of the U.S. equity market are in a bubble, but shorting too early is the “easiest place to die” for an investor.

Jensen joined Bloomberg’s “What Goes Up” podcast to discuss this week’s Federal Reserve meeting and how ample liquidity from the central bank, combined with a booming economic rebound, make conditions ripe for markets to get more bubbly.

Q. Bubbles are a very strange phenomenon because the risk-reward relationship is so interesting. It almost seems that as an investor, you have to participate in bubbles. Because if you think it’s a bubble too early, you really miss the best returns from them. How do you know when it’s time to get out of an overvalued market?

A: All along through Bridgewater’s history we’ve been systematic. So we’ve taken the kind of discussion we’re having now — a very qualitative view of the world — but translated into ways to measure it. So you take something like a bubble, right? A classic qualitative thing. What do you mean by bubble? How do you measure that it’s a bubble? Is it enough to say prices are high relative to history, or what’s the actual measure? And then how reliable is it?

And we have six gauges of a bubble that we use all over the world. Then you could apply it to cryptocurrency. You can apply it to anything you wanted in the world to stocks, to bonds to anything. Our basic scoreboard is: Are prices high relative to traditional measures? Are prices discounting unsustainable conditions?

So, as an example today, there’s something like 10% of stocks that are pricing in more than 20% revenue growth and margin expansion. If you look at history, 2% of stocks actually achieved that. That’s an extremely hard thing to do.

Q: That’s not counting the base effects from last year, right?

A: No. I’m talking about ongoing growth rates without the base effect. It doesn’t happen. That’s very, very unlikely to happen. Potentially with inflation or something you might, but in a normal kind of forward-looking picture, you don’t get that. So that’s an example of discounting unsustainable conditions. They can’t, as a group, actually achieve that condition.

The third thing is new buyers entering the market. How many new buyers are there? How big a part of the market are they? There’s the broad sentiment measures. There’s purchases being financed by leverage and buyers and businesses sort of making extended forward purchases. That’s all part of our checklist for a bubble. And you see today a fair amount of the equity market in the U.S. in a bubble, but not the aggregate.

There are definitely pockets that meet those standards and that’s dangerous. And then, like you said, what do you want to do, buy or sell them? Well, that’s a whole other dangerous thing.

And that’s where, when we had a drawdown in 2000-2001 associated with the bubble — both the dollar and the equity market and how that was playing out at the time — that really forced us to get into flows, which is basically how we measure bubbles today. Where’s the money coming from? Who are the buyers and sellers? What are their balance sheets? How much more money can they put into this bubble versus how much income they’re getting and when does that start to flip? And so for us, that process of being able to look at the balance sheets of the buyers and sellers and think about when they’ve been stretched to an extreme — where they won’t have the money, where there’s more supply coming than possible demand.”

So you look at the IPO pipeline, you look at the creation of new instruments, how fast those balance sheets are growing. And that’s how we try to measure that criss-cross. And it’s still a very, very dangerous game, like you’re saying.

So the third part is be careful and be conservative in your thinking around the ability to time those things, because that’s kind of the easiest place to die in asset prices is trying to be short a bubble too early.

 Click here to listen to the full podcast…

Authored by Tom Ozimek via The Epoch Times,

Skyrocketing lumber prices that have tripled over the past 12 months have driven the price of an average new single-family home to rise by $35,872, according to new analysis by the National Association of Home Builders (NAHB), with the price spike threatening to hobble the momentum of the U.S. housing market, one of the bright stars of the recovery from the pandemic recession.

While homebuilder sentiment remains optimistic, as indicated by the NAHB Housing Market index, headwinds due to rising building costs have pulled the index down from recent highs.

“The supply chain for residential construction is tight, particularly regarding the cost and availability of lumber, appliances, and other building materials,” said NAHB Chairman Chuck Fowke in a statement.

At the onset of the health crisis, “the mills stopped producing,” said Dustin Jalbert, senior economist and lumber industry specialist at Fastmarkets in Burlington, Massachusetts. “As soon as they saw 20 million unemployed, they shut down production,” Jalbert added.

But the pandemic drove demand for housing in low population density areas and for home office space, while the Fed dropped interest rates, driving mortgage rates down to historic lows. This confluence of factors turned out to be a boon for housing, with surging demand pushing housing inventories to record lows.

Lumber producers have struggled to catch up with the bustling homebuilding activity, with lumber prices jumping more than 300 percent year-on-year to record highs.

“The logging operation, the shipping of the logs to the mill, the shipping of the finished product, getting workers back on the job, it’s not like flipping a switch to bring those back online,” Jalbert said.

A worker loads logs at Ledwidge Lumber Co. in Halifax, Canada, on May 10, 2017. (The Canadian Press/Darren Calabrese)

This lumber price hike has also added nearly $13,000 to the market value of an average new multifamily home, NAHB said in a post. This translates into households paying $119 a month more to rent a new apartment, the association said, adding that its representatives on April 29 held a “productive” virtual meeting with White House staff from the Domestic Policy Council, National Economic Council, and the Office of the Vice President.

“The discussion covered mill capacity issues, mill worker shortages, and how soaring lumber prices are exacerbating the housing affordability crisis and putting the American dream of homeownership out of reach of millions of households,” NAHB said in a statement.

The association called on the White House to hold a summit on lumber and building material supply chain issues and to temporarily remove the 9 percent tariffs on Canadian lumber to help reduce price volatility.

“The administration was noncommittal on both requests but the door remains open for future talks,” NAHB said.

In the short term, mills are moving toward meeting the demand boom.

“The lumber industry is going to hit production capacity this summer, but things will calm down in 2022,” Jalbert said.

While lumber prices should come back to earth, headwinds remain. Resources remain constrained and Washington has to conduct trade negotiations with Canada, which provides the United States with about 30 percent of its lumber, according to Jalbert.

“There’s going to need to be more investment in the industry to meet this demand,” he said.

But while lumber prices have surged, the cost of concrete has remained stable, with more homebuilders considering this alternative to keep costs down.

Insulating concrete forms (ICFs), which are polystyrene forms that are stacked in place and then filled with concrete to form a solid wall, have become “a highly popular alternative to wood framing,” NAHB said.

“Home builders are not likely to leave behind traditional ‘stick-built’ homes without good reason,” NAHB said in a post. “But with lumber prices now adding nearly $36,000 to the price of an average single-family home and with recent advancements in building technology in other areas, certain framing methods at least deserve a look.”

Three weeks ago, just before the start of Q1 earnings season we said “Q1 Earnings Will Be Stellar, But Are Fully Priced-In” noting that “the past quarter is already fully priced in – and expected to be spectacular – which is why actual earnings may only disappoint.”

We were right.

As of this weekend, 303 S&P500 companies have reported first quarter results (75% of total market cap). 69% of companies reporting have beat street wide earnings estimates by >1SD (significantly higher than 46% historical avg) whereas only 6% have missed estimates by >1SD (significantly lower than historical avg of 14%). In short a spectacular earnings season not only in absolute terms, but also relative to expectations. Here is Goldman’s John Flood describing just how spectacular: 

This earnings period we are seeing the highest percentage of companies beat street wide earnings ests (by >1SD) in the 20+ years that we have tracked this data. Very few companies are missing.

That’s the good news. The bad news, as we also predicted, is that “beats are NOT being rewarded and the few misses we have seen are being severely punished” as Goldman puts it. Indeed, this is the second consecutive quarter in which earnings beats are being punished by a market which has been priced to beyond perfection. 

Here is JPMorgan with the dismal quantification: we are now more than halfway through earnings season, with the Tech sector largely completed, and companies that beat EPS estimates are seeing their stocks fall, on average 30bps and companies that miss EPS estimates are seeing their stocks fall 2%.

What does this mean? Well, for those who had hoped that the stunning beats by the likes of Google, Amazon or Apple would reprice the tech sector higher, it means more disappointment and a question of whether this is indeed “as good as it gets.” Here, again, is JPMorgan:

A strong, and improving, macro environment is filtering into earnings and companies are not necessarily being rewarded. If we see a strong NFP next Friday, does that give markets the boost that they are looking for?

Probably not, especially if it is so strong (see “Early Indications Point To 1.5 Million Jobs Number“) that markets freak out again about another inflationary tsunami. That said, there is one possible wildcard: corporate buybacks, which as we reported last weekend, resumed after exiting the blackout period last Friday. Here is JPM again:

With buybacks accelerating, can corporate demand act as the incremental buyer if institutional investors pullback on their activity into the summer?

We’ll find out soon enough but one thing is clear: if not even buybacks can push this priced to beyond perfection market to a new record high (if “transitory”) plateau, there is just one possible direction for stocks next.

Last week, the first whispers emerged that Verizon was in talks with Apollo to dump its media division, which includes the remnants of Yahoo and AOL, for a pricetag of roughly $5 billion – a tiny fraction of the $300 billion combined valuation for AOL and Yahoo during their prime 20 years ago, as Bloomberg’s Tara Lachapelle pointed out in a tweet.

AOL and Yahoo were valued at more than $300 billion two decades ago. Now they may sell for just $5 billion https://t.co/mllZ1hJnc7 via @bopinion $VZ $APO pic.twitter.com/9gP8EKe2fW

— Tara Lachapelle (@taralach) April 29, 2021

After reports piled up over the weekend, Bloomberg and others have has confirmed Monday that a deal had been struck. Reports put the pricetag at $5 billion, then high end of the $4 billion to $5 billion range reported over the weekend.

Verizon Communications Inc. is nearing an agreement to sell its media division to Apollo Global Management Inc., according to people with knowledge of the matter, a move that would jettison once-dominant online brands like AOL and Yahoo!.

A deal for Verizon Media could be announced as soon as Monday, said the people, who asked to not be identified because the matter isn’t public. Verizon will keep a stake in the business, they said.

No final decision has been made and discussions could fall through. The assets could fetch as much as $5 billion, Bloomberg News has reported.

Verizon and Apollo declined to comment.

Furthermore, Verizon will maintain its minority stake in the new entity, which will be known as Yahoo.

Verizon already dumped the Huffington Post to Buzzfeed (which proceeded to fire 1/3rd of the site’s staff after it failed to hit certain traffic benchmarks) last year, and it has been reportedly searching for a buyer for the rest of its ill-fated media assets for some time. Whatever proceeds it manages to raise from the sale will likely be immediately invested in buying more 5G wireless spectrum as it competes with rival AT&T to dominate the new generation of wireless.

Yahoo and AOL still publish some popular websites, including TechCrunch, Yahoo Finance and Yahoo Sports. Former AOL chief Tim Armstrong convinced Verizon to invest in media, envisioning a “house of brands” under the Verizon aegis. He orchestrated the 2017 purchase of Yahoo for $4.5 billion. Verizon bought AOL in 2015 for $4.4 billion. In 2018, Verizon wrote down the value of the combined division (then named “Oath”, though it would later become Verizon Media Group) by $4.6 billion. Armstrong was ousted a few months before the writedown was announced.

Under CEO Hans Vestberg, Verizon agreed to pay $53 billion in March to license wireless airwaves to help expand its 5G network infrastructure. It has also planned to spend another $10 billion over the next few years to upgrade its systems and build more wireless cell towers. The company already carries a mountainous $180 billion in debt, and has been responsible for some of the biggest corporate bond deals in market history.

S&P and Nasdaq futures, and European bourses were volatile but ultimately rose on Monday to kick off a new month in a quiet session which saw several major markets closed, following a week of record earnings beat which however resulted in big stock drops with investors also keeping an eye on India covid cases and economic data to gauge the pace of recovery.

Trading was subdued with several including Japan, China and the U.K. closed for public holidays. S&P 500 futures added 0.6%, Dow e-minis were up 216 points, or 0.64%, and Nasdaq 100 e-minis were up 40.25 points, or 0.30%. Europe’s Stoxx 600 Index gained 0.4%. The yen weakened, while gold advanced.

With more than 60% of companies already having reported mostly stellar results so far, profits are now expected to have risen 46% in the first quarter, compared with forecasts of 24% growth at the start of April, which however has failed to propel stocks to new highs.

Monday’s mood reversed from last Friday’s surprise selloff as the biggest nasdaq companies reported blowout earnings only to be punished by the market. Some notable premarket movers:

• Megacap FAAMG stocks rose in premarket trading, with Apple, Amazon.com, Alphabet and Microsoft adding between 0.2% and 0.4% after posting largely upbeat results in the prior week.
• Tesla Inc fell 0.9%. Industry sources told Reuters the electric vehicle maker, under scrutiny in China over safety and customer service complaints, is boosting its engagement with mainland regulators and beefing up its government relations team.
• Moderna Inc gained 2.4% after the drugmaker said it would supply 34 million doses of its COVID-19 vaccine this year to the global COVAX program

Europe’s Stoxx 600 dipped then reversed after euro zone factory activity growth surged to a record high in April, boosted by burgeoning demand and driving a rise in hiring, although supply constraints led to an unprecedented rise in unfulfilled orders, the latest PMI survey showed. IHS Markit’s final Manufacturing Purchasing Managers’ Index (PMI) rose to 62.9 in April from March’s 62.5, albeit below the initial 63.3 “flash” estimate but the highest reading since the survey began in June 1997.

“The euro zone was late out of the gates in terms of its economic rebound but it does seem to be starting. Looking at where we are now the numbers are encouraging,” said Bert Colijn at ING. “It is a foregone conclusion that Q2 will be much stronger than Q1 was.”

Here are some of the biggest European movers today:

• Mediaset rises as much as 3.2% before paring some of the gains. The Italian broadcaster could be near a deal to resolve a legal dispute with Vivendi, Italian media reported over the weekend. Bestinver says that a solution with Vivendi could be a positive catalyst for the stock.
• Straumann shares climb as much as 2.6% to a record after Vontobel (buy) raises PT to CHF1,570 from CHF1,280 following the Swiss dental-implant maker’s “convincing” 1Q sales and given its longer-term prospects.
• KPN shares drop as much as 4.4% after the Dutch telecom carrier, long considered a potential takeover target, said it rejected two separate, unsolicited approaches. A report saying KPN got a EU3/share offer disappointed some investors, while analysts stressed the difficulties for would-be buyers.
• Siemens Gamesa shares fall as much as 6% after full-year sales forecast missed estimates. While the company topped Ebit expectations in 2Q, its 2021 guidance cut was unexpected given good onshore order volumes in first half, Citi says in note.

Earlier in the session, Asian stocks declined for a second day with the MSCI Asia Pacific Index slid 0.6%, heading to a one-month low as a resurgence in Covid-19 infections continued to weigh on sentiment. Stock markets in Japan, China, Thailand and Vietnam were shut for the holidays. The region’s surging coronavirus pandemic cases remains a concern, with the daily death toll in India hitting a record 3,689 on Sunday. Meanwhile, Singapore had its first fatality due to complications from Covid-19 in nearly two months over the weekend. Taiwan semiconductor stocks and Chinese internet companies were the biggest drags on the market. “A worsening pandemic situation in India cast a shadow over the Asia-Pacific markets, as investors assess the risk of reopening delays and stricter border controls,” Margaret Yang, a strategist at DailyFX, wrote in a note. South Korea’s benchmark erased gains and closed 0.7% lower as short selling resumed after a 13-month ban. Taiwan was the worst-hit market on Monday, with its benchmark falling almost 2%. Asian stocks have underperformed global peers for the past six weeks amid a surge in coronavirus cases

“Interest rates going forward will be led more by expectations on the tapering from the Fed rather than by inflation,” Raffaele Bertoni, head of debt capital markets at Gulf Investment Corp., said on Bloomberg Television.

As we reported overnight, billionaire Warren Buffett warned of rising price pressures and a “buying frenzy” spurred by low interest rates in his latest marathon Berkshire annual meeting. On Friday, stocks were spooked after Dallas Fed President Robert Kaplan (who’s not currently a voter on the rate-setting committee) said signs of excessive risk-taking suggest it’s time to consider fewer bond purchases. His remarks contrast with those of Fed Chairman Jerome Powell. These warnings come as all top U.S. financial officials and Powell are downplaying inflation risks.

A busy week for U.S. economic data is expected to show resounding strength, particularly for the ISM manufacturing survey and April payrolls. Forecasts are that 978,000 jobs were created in the month – with whisper numbers as high as 1.5 million – as consumers spent their stimulus money and the economy opened up more.  Such gains could stir speculation of a tapering in asset purchases by the Federal Reserve, though Chair Jerome Powell has shown every sign of staying patient on policy.

“Payrolls should show another near 1 million jobs gain, but that would still leave them 7.5 million below pre-COVID levels,” said Tapas Strickland, a director of economics at NAB.

“Chair Powell recently noted that it would take a string of months of job creation of about a million a month to achieve the substantial progress required to justify tapering QE.”

In FX, the Bloomberg Dollar Spot Index inched lower as most Group-of-10 peers advanced after Friday’s rally in the greenback; the dollar index stood at 91.253 and off a two-month trough of 90.422, though it still ended April with a loss of 2%. The euro was steady at $1.2026 , having backtracked form a nine-week peak of $1.2149 on Friday. It now has solid support around $1.1990 as it shrugs off weaker- than-forecast PMI numbers and 10-year French, Belgian and Austrian yields all rose above last week’s highs as traders unwind haven buying amid thin liquidity; Eurozone April manufacturing PMI 62.9 vs flash reading 63.3. Australia’s dollar oounced from a one-week low a day before an interest rate decision from the central bank and ahead of its quarterly Statement on Monetary Policy later in the week. The front-end of Aussie swaps are fully discounting a rate hike of 15bps by mid-2022, which looks extreme relative to the bank’s latest cash rate guidance, according to Goldman Sachs strategists. The yen slipped to a three-week low against the dollar amid speculation that the Federal Reserve will tighten monetary policy over time while the Bank of Japan retains an easing bias.

In rates, Treasuries opened cheaper at 7am ET amid declines for futures on low volume as overseas cash bond markets were closed. Those losses were pared led by bund futures, leaving U.S. 10-year yields cheaper by ~2bp vs Friday’s close. Treasury yields cheaper by less than 2bp across the curve with front-end outperforming, steepening 2s10s by ~1.5bp; German 10- year yields are cheaper by around 1.5bp vs Friday as month-end demand bid fades. Focus this week is on Wednesday’s Treasury refunding announcement — where most dealers expect auction sizes to be unchanged from February — followed by Friday’s April employment report. On the supply side the dollar issuance slate empty; potential $150b of supply is expected for this month as financing remains cheap with spreads near the lowest in three years.

In commodity markets, gold held to a narrow range around $1,768 an ounce sidelined in part by investor interest in crypto currencies as an alternative hedge against inflation. Oil prices ran into profit-taking on Friday but still ended the month with gains of 6% to 8%. Brent was last up 16 cents at $66.92 a barrel, while U.S. crude firmed 18 cents to $63.76 per barrel.

Ethereum hit a record high on Monday trade above $3,000 for the first time, extending last week’s rally in the wake of a report that the European Investment Bank (EIB) could launch a digital bond sale on the ethereum blockchain network.

Powell is due to speak later on Monday and will be followed by a raft of Fed officials this week. Dallas Fed President Robert Kaplan caused a stir on Friday by calling for beginning the conversation about tapering

Market Snapshot

• S&P 500 futures up 0.5% to 4,193.50
• SXXP Index up 0.3% to 438.73
• MXAP down 0.6% to 205.19
• MXAPJ down 0.7% to 691.51
• Nikkei down 0.8% to 28,812.63
• Topix down 0.6% to 1,898.24
• Hang Seng Index down 1.3% to 28,357.54
• Shanghai Composite down 0.8% to 3,446.86
• Sensex down 0.6% to 48,490.19
• Australia S&P/ASX 200 little changed at 7,028.80
• Kospi down 0.7% to 3,127.20
• Brent futures little changed at $66.82/bbl
• Gold spot up 0.4% to $1,776.60
• U.S. Dollar Index little changed at 91.20
• German 10Y yield up 3 bps to -0.17%
• Euro up 0.2% to $1.2042

Top Overnight News from Bloomberg

• President Joe Biden’s $4 trillion vision of remaking the federal government’s role in the U.S. economy is now in the hands of Congress, where both parties see a higher chance of at least some compromise than for the administration’s pandemic-relief bill
• The European Commission proposed easing restrictions on tourism and leisure travel for those who have been fully inoculated, adding to signs of a gradual return to normalcy as vaccinations gather pace
• Container shipping rates are heading higher again, driven to new heights by unrelenting consumer demand and company restocking from Europe to the U.S. that are exhausting the world economy’s capacity to move goods across oceans
• The booming ETF industry may be set to lure even more cash in the coming years as rich Americans facing higher capital gains taxes look to limit what they owe Uncle Sam
• Pressure mounted on Boris Johnson as the ruling Conservative Party’s polling lead shrank ahead of local elections, and the leader of the Scottish Tories said the U.K. Prime Minister should quit if he’s found to have broken rules over the funding of refurbishments to his apartment

A quick look at global markets courtesy of Newsquawk

Asian equity markets began the week subdued amid key market closures, lack of fresh macro-drivers over the weekend and ahead of this week’s risk events including earnings, central bank updates and US NFP data. ASX 200 (Unch.) traded indecisively although was just about kept afloat by the top-weighted financials sector after big four bank Westpac posted a 256% jump in H1 net and with sentiment initially helped by strong data after AiG Performance of Manufacturing Index rose to its third highest on record. KOSPI (-0.6%) lacked firm direction as the partial lifting of the short-selling ban was counterbalanced by trade data released late last week which showed exports rose by the most in over a decade. The Hang Seng (-1.3%) was heavily pressured amid an ongoing crackdown by China which ordered tech giants to unbundle their financial services as Beijing calls for a stop to companies turning their mobile payment apps into financial supermarkets through the offering of loans and insurance policies. US-China tensions also lingered after the USTR announced it will keep China on its watchlist for IP violations and suggested the new China IP protection law was insufficient, while the absence of Stock Connect trade added to the headwinds due to market closures in mainland China, which alongside Japan, will remain shut through to Wednesday.

Top Asian News

• More Than 40 Hong Kong Stocks Stay Halted for Delaying Earnings
• Singapore Air Raises $1.5 Billion From Sale-Leaseback Deals
• UBS Expects Record IPO Year for India Despite Covid-19 Crisis
• Schlumberger-Backed Arabian Drilling Said to Plan Saudi IPO

European majors kicked the first session of May off with respectable gains across the board before fading earlier upside (Euro Stoxx 50 -0.2%) following on from a more cautious APAC session – with Japanese and Chinese players away until Wednesday. US equity futures meanwhile see varying gains with the cyclically-led RTY (+0.6%) outpacing whilst the tech-heavy NQ (Unch). From a more macro lens, eyes continue to remain on vaccination efforts/COVID developments and their corresponding effects on economic data and subsequently on monetary and fiscal policy. In early hours this morning, the ECB’s VP floated the idea of thinking about tapering emergency measures when 70% of Europe’s adult population (currently under 30%) is vaccinated – with experts suggesting the end of August as a more realistic deadline for this to be achieved. Turning to earnings, overall around 60% of the S&P 500 have reported actual results for Q1 thus far, according to FactSet, who suggest that of these companies, 86% have reported beats on EPS and 78% on revenue. During this week, 133 S&P 500 companies are due to report including three Dow components. Back to Europe, UK’s FTSE is closed on account of the early May Bank Holiday, whilst broad-based gains are seen across the Euro Zone bourses. Sectors are mostly in the green with the exception of Oil & Gas with a modest downside in prices keeping gains in the sector capped – also do note that sector heavyweights Shell and BP are not trading. Overall it is difficult to discern a particular theme or tone via the sectors. In terms of induvial movers, Lufthansa (+2.3%) is firmer after its CEO said the Co. and its Eurowings are aiming to fly to a minimum of 100 locations this summer. Siemens Healthineers (+1.9%) and Siemens Gamesa (-3.8%) see varying performances post-earnings. Finally, KPN (-3.0%) is pressured after rejecting two separate takeover offers, one from EQT/Stonepeak and the other from KKR.

Top European News

• Europe’s Powerful Earnings Fail to Move The Needle for Investors
• The U.K.’s Future May Be in the Hands of Scotland’s Rebel Youth
• Europe Is Casting Aside Double-Dip Slump as Growth Restarts
• Euro-Area Factories Face Unprecedented Supply-Chain Delays

In FX, the Dollar index looks quite comfortable above the 91.000 handle after Friday’s rebound to register a late peak for the week, but is off best levels between 91.190-390 parameters as several components claw back some losses and other majors derive a degree of traction via supportive fundamental and technical impulses. However, trading conditions are relatively thin at the start of the new month due to market closures in various countries, such as Japan (Constitution Day), China (Labour Day) and the UK (early May Bank holiday) awaiting the final US Markit manufacturing PMI, ISM and construction spending before speeches from Fed’s Williams and Chair Powell.

• NZD/AUD/EUR/GBP – All firmer against the Greenback, with the Kiwi holding within a 0.7156-83 range ahead of NZ jobs data on Tuesday and the Aussie hovering around 0.7725 following a bounce from the low 0.7700 area in wake of solid manufacturing PMIs (AIG survey especially) and ahead of trade in the run up to the RBA tomorrow. Similarly, the Euro has drawn encouragement from resilience into 1.2000 rather than somewhat mixed Eurozone manufacturing PMIs or significantly stronger than expected German retail sales, and Sterling seems content after staving off offers within a pip of 1.3800.
• JPY/CAD/CHF – The Yen is retesting support close to a key Fib retracement level that appears to be the only real prop protecting a more pronounced reversal from recent highs and return to 110.00 vs the Buck. Specifically, 109.64 represents a 61.8% bounce in Usd/Jpy from 107.48 low on April 23 to 110.97 apex from March 31 and the headline pair has been up to 109.69, but not convincingly through may Japanese participants are out of action and will not be back until Thursday due to Golden Week. Elsewhere, the Loonie has lost some steam alongside oil prices and is back around 1.2300 in advance of Canada’s manufacturing PMI, while the Franc is fairly flat circa 0.9130 and 1.0985 against the Euro following a strong Swiss manufacturing PMI and weekly sight deposit balances suggesting no intervention even though Eur/Chf has fallen to lows last seen on April 19.
• SCANDI/EM/PM – The tables have turned to an extent for the Nok and Sek, as the former is back beneath 10.0000 vs the Eur amidst the aforementioned downturn in crude and a dip in Norway’s manufacturing PMI before Thursday’s Norges Bank policy meeting, but the latter pares some declines from almost 10.1900 on the back of a marked acceleration in the Swedish manufacturing PMI. Meanwhile, EM currencies are on the back foot vs the Usd and the Try has not benefited from softer then forecast Turkish CPI as it pivots 8.3000, but Gold is outperforming around Usd 1775/oz and flanked by DMAs as the 50 sits at Usd 1744.15 and 100 resides at Usd 1798.34.

In commodities, WTI and Brent front month futures again experience a choppy session with conditions also thin as China, Japan, and the UK are away on domestic holidays. The front-month contracts have thus far printed a USD 1/bbl range apiece with WTI now just under USD 64/bbl and Brent around USD 67/bbl. Prices found a floor in recent trade with news about the EU permitting vaccinated travellers from abroad also supporting sentiment in the complex. However, COVID continues to take its toll on India with the recent string of case increases continuing to mark records. Reports have also suggested that LNG cargoes are said to have been diverted away from India amid its situation. It will be interesting to see whether the developing situation prompts any response from OPEC+ after the group, in essence, opted to maintain its plan to gradually bring back oil to the market. Turning to geopolitics, there was some confusion surrounding the progress in Iranian nuclear talks, but it seems a deal remains in the balance after the US and UK refuted Iranian media reports regarding a prisoner swap and the unfreezing of funds. That being said, talks seem to have made some headway with the Iranian foreign ministry suggesting two deals have been drafted but there is a dispute over some figures and entities on the US list. Elsewhere, the Iranian spokesman also said Tehran is ready to have talks with Saudi Arabia at any level and in any form – one to watch given the two countries reside on either side of the Persian Gulf. Also to keep on the radar, Petrobras could see action from labour unions could impact production in Brazil’s 750k BPD Campos basin. Turning to metals, spot gold and silver benefit from the softer Buck but remain around recent ranges with the former around UDS 1,775/oz and the latter around USD 26/oz at the time of writing. LME and Shanghai copper both see domestic holidays. Finally, Citi expects benchmark iron ore to hit USD 200/t in the upcoming weeks but notes the average price in Q2/Q3 could be around USD 183/t before waning to USD 160/t in Q4.

US Event Calendar

• April Wards Total Vehicle Sales, est. 17.6m, prior 17.8m
• 9:45am: April Markit US Manufacturing PMI, est. 60.7, prior 60.6
• 10am: April ISM Manufacturing, est. 65.0, prior 64.7
• 10am: March Construction Spending MoM, est. 1.7%, prior -0.8%
• 2:20pm: Fed Chair Powell Speaks on Community Development

DB’s Jim Reid concludes the overnight wrap

After what is probably more than 6 months I’m actually going to a restaurant tomorrow night. Reservations are like gold dust here in the U.K. at the moment so my wife and I are very lucky to join a couple who have one. Only a few problems. We have to eat outside, it’s going to be cold, it might rain, and my old school friend who booked it hasn’t replied to me confirming it. The good news is that he reads the EMR so I’m hoping he’ll confirm once this hits inboxes. Unless of course we’ve been replaced by a more exciting couple. In that case I’m keen to shame him. I hope not as my wife and I are like caged tigers waiting for social interaction that isn’t each other at the moment.

After a little bit of consolidation over the last month, bond yields have acted a little like a caged tiger this week with yesterday seeing another big climb higher. 10yr US Treasuries were up as much as +7.8bps intra-day yesterday to 1.686% after being as low as 1.53% intra-day last Friday. It was the highest yields had traded since April 13. However the benchmark rate finished a more moderate +2.5bps higher on the day at 1.634%. This still left the week-to-date rise at +7.7bps, which would be the first weekly increase in yields since the week ending April 2 unless there is a massive rally in bonds today. Real rates (+2.5bps) drove much of the final move as inflation expectations (+0.1bps) were more muted. However, inflation expectations did rise for the 5th straight session (+9.4bps in all over this period), with the 10yr breakeven measure closing at 2.426% – its highest level in just over 8 years. In Europe there was a similarly large selloff, with yields on 10yr bunds up +3.8bps to -0.19%, marking the first time in over a year that they’ve closed above the -0.20% mark, while 10yr French yields (+4.4bps) likewise closed at a 1-year high.

Although rising bond yields seemed to clip their wings a little as the move higher accelerated, US equities still moved to fresh all-time highs yesterday as the combination of strong economic data and better-than-expected earnings releases helped to buoy investor sentiment and fuel fresh life into the reflation trade. By the close, the S&P 500 had gained another +0.68% to end the session above the 4,200 mark for the first time, and the MSCI World index was up +0.39% at its own record high. This positive mood music could be seen across a range of indicators, and Bloomberg’s index of US financial conditions actually eased to its most accommodative level since 2007 yesterday, which just shows the extent to which markets are primed for a strong recovery over the coming months.

A late selloff in Europe meant that indices there ended the session lower with the STOXX 600 closing down -0.26%. Banks outperformed however thanks to the moves higher for yields, and the STOXX Banks index was up +1.16% in its 6th successive daily advance, taking the index to its highest level since the pandemic began. Over in the US, the gains were fairly broad-based with over 78% of the S&P moving higher on the day, though the NASDAQ (+0.22%) underperformed slightly, while the small-cap Russell 2000 (-0.38%) lost ground. US banks (+2.10%) joined their European counterparts in reacting strongly to global yields. Otherwise nearly every industry group outside of the pandemic winners of Software (-0.59%) and Biotech (-1.02%) gained in the S&P. The biggest industry laggard was autos (-3.03%), where Ford (-9.41%) reduced its forecast significantly due to a semiconductor shortage that has caused vehicle production across the industry to stall. They forecasted a -$2.5bn hit to earnings because of the lack of chips, in what they considered the “worst-case”. This is becoming a recurring theme across different sectors.

Elsewhere in earnings, Amazon saw their shares rise +3.2% in after-market trading on strong beats across business segments. Q1 revenue rose +44% and the company offered guidance on sales for the upcoming quarter ahead of analysts’ estimates, with indications that aspects of the pandemic bump in online-sales may endure. Elsewhere in big tech, Twitter saw shares slide over -7% with EPS at $0.16 (vs. $0.12 exp.) on lower revenue guidance even as user growth was in-line with prior estimates. One issue for the company may be the stronger ad revenues seen by competitors Google and Facebook earlier this week.

Overnight in Asia we have seen China’s official April PMIs come in softer than expectations for both manufacturing (51.1 vs. 51.8 expected) and services (54.9 vs. 56.1 expected). Zhao Qinghe, an economist at the statistics bureau said that “some surveyed companies said problems such as chip shortages, poor international logistics, shortages of containers, and rising freight rates are still serious.” He also added that a slowdown in manufacturing supply and demand and rising cost pressures are also issues. These comments on rising cost pressures and chip shortages are likely to get more attention from markets and particularly inflation enthusiasts. In the details of the manufacturing PMI, a sub-index of new export orders for factories eased to 50.4 in April from 51.2 previously, while new orders were at 52. In contrast to the official manufacturing PMI, China’s Caixin manufacturing PMI came in at 51.9 as against 50.9 expected. The statement accompanying the release said that the increase was supported by significant expansion in both manufacturing demand and supply, as “manufacturers stayed confident about the economic recovery and keeping Covid-19 under control.” So a little different to the official release.

Elsewhere, Chinese regulators have imposed wide-ranging restrictions on the financial divisions of 13 companies, including Tencent and ByteDance in an antitrust crackdown.

Asian markets are mostly trading lower this morning with the backdrop of conflicting signals from China’s April PMIs and the continued antitrust crackdowns on tech giants in the country. The Nikkei (-0.52%), Hang Seng (-1.53%), Shanghai Comp (-0.51%) and Kospi (-0.74%) are all losing ground. Futures on the S&P 500 are also down -0.28% and European ones are also pointing to a weaker open. In terms of other overnight data, Japan’s final April manufacturing PMI printed 0.3pt stronger than the flash at 53.6.

There were also a number of important data releases for markets to digest yesterday, even if the overall impact was muted as they came in basically as expected. The main highlight was the news that the US economy had grown at an annualised pace of +6.4% in Q1 (vs. +6.7% expected), leaving US GDP less than 1% beneath its pre-Covid peak in Q4 2019. Meanwhile, the upward revision of +19k to last week’s initial jobless claims data from the US meant that this week’s number of 553k was the lowest since the pandemic began last year, albeit above the 540k reading expected.

Another story yesterday was the continued strength in commodity markets, which has been one of the major themes of the month as pretty much the entire range from metals to agriculture to energy prices have shown sizeable gains in recent weeks. Oil prices rose for a 3rd day running, with both Brent crude (+1.92%) and WTI (+1.80%) prices seeing decent advances, which were in part attributed to data showing road-fuel demand in the UK is nearing the levels seen last-summer and also as large cities in the US announce reopening plans. Meanwhile copper rose above $10,000/tonne in trading at one point for the first time in a decade yesterday, as it closes in on an all-time high set in February 2011 of $10,190 on an intraday basis. The industrial metal finished the day marginally lower (-0.11%), but is up nearly +28% YTD.

Positive headlines regarding the pandemic were another factor supporting sentiment yesterday. Firstly, French President Macron said that the restrictions would be eased from May 3 when restrictions on domestic travel would be lifted, while the nightly curfew would be gradually eased before it’s completely lifted on June 30. Meanwhile in Germany, health minister Spahn said that 1.1m vaccine doses had been administered yesterday, which is a record for the country. And in the UK, the 7-day case average fell to 2,259 yesterday, which is its lowest level since early September when the level of testing was a fraction of its current levels. In the US, NYC Mayor de Blasio said that they planned to fully reopen the city on July 1, though Governor Cuomo pushed back that he would like it to happen even sooner. Chicago’s mayor also announced they would be easing restrictions to allow for more seating capacity at restaurants, bars and other indoor venues. There was some bad news in the US, where Oregon announced a surge in cases, driven primarily by the younger, partially-vaccinated populations. The Governor has responded by increasing the risk-level on many counties to their extremes, shuttering indoor dining among other restrictions.

Elsewhere, emerging markets like Brazil and India are continuing to reel under the severe current wave with total fatalities in Brazil now topping 400k with the country reporting more covid deaths so far in 2021 than in whole of 2020. India has reported a record 386,452 daily infections while daily fatalities came in at 3,498. On the more positive side, BioNTech CEO Ugur Sahin said that he is “confident” the company’s Covid-19 vaccine with Pfizer will be effective against the Indian variant of the COVID-19 virus. He added that the company is evaluating the strain and the data will be available in the coming weeks.

Looking at yesterday’s other economic data, and the European Commission’s economic sentiment indicator for the Euro Area advanced to 110.3 in April (vs. 102.2 expected), which is the highest it’s been since September 2018. Over in Germany, data showed that unemployment unexpectedly rose by +9k in April (vs. -10k expected), while the preliminary inflation reading for April rose to a 2-year high of +2.1% (vs. +2.0% expected). Finally, pending home sales in the US rose by a lower-than-expected +1.9% in March (vs. +4.4% expected).

To the day ahead now, and there are an array of data highlights including the first look at Q1 GDP for the Euro Area, Germany, France and Italy. On top of that, we’ll also get the flash Euro Area CPI reading for April, and the unemployment rate for March. Over in the US, there’s the personal income and personal spending data for March, the MNI Chicago PMI for April and the final University of Michigan consumer sentiment index for April. From central banks, the Fed’s Kaplan will be speaking, while earnings releases include Exxon Mobil, Chevron, AbbVie and Charter Communications.

An off-the-cuff comment made by Berkshire No. 2 Charlie Munger (who, at 97, is 7 years older than Buffett) during Saturday’s annual meeting seized the attention of the financial press and Berkshire shareholders watching from a distance: If something were to happen to Buffett, Munger quipped, Berkshire Vice Chairman Greg Abel – who presently runs all Berkshire’s non-insurance businesses – would be tapped to take over as CEO.

Greg Abel

The comment appeared to confirm years’ worth of speculation that Abel would be Buffett’s successor, though the choice had been narrowed to two candidates: Abel, who runs the non-insurance business, and Vice Chairman Ajit Jain, who runs Berkshire’s insurance businesses.

After the comments went unconfirmed all weekend,, CNBC’s Becky Quick, Buffett’s favorite financial journalist, has apparently spoken with Buffett and members of the Berkshire board and can now confirm that the takeover scenario described by Munger is in alignment with the Berkshire board’s present thinking.

“The directors are in agreement that if something were to happen to me tonight it would be Greg who’d take over tomorrow morning,” Buffett said.

For a long time, many speculated that David Sokol, who once ran both MidAmerican ENergy (now Berkshire Hathaway Energy) and NetJets for Berkshire, would be Buffett’s logical successor. But he abruptly left the firm in 2011 following reports that he had purchased a $10 million stake in chemical company Lubrizol before recommending it to Berkshire as a potential buy.

In recent years, rumors have swirled that Abel would likely take over from Buffett should he decide to retire. As Munger said on Saturday, it’s believed that Abel will help preserve Berkshire’s unique culture.

President Xi made clear during a speech earlier this year that he wouldn’t allow rictures in China’s domestic capital markets, or the pressure of international investors, to shake the CCP’s drive to curb the power of China’s biggest tech giants. And so it is just weeks after Beijing forced Ant Group to apply to become a bank holding company, WSJ reports that Fidelity, one of the world’s largest institutional investors, is now valuing its investment in Ant at a 50% loss.

Three years ago, Fidelity was among a small group of foreign investors allowed to purchase a stake in Ant – a financial firm that got its start as an “affiliate company” of Alibaba and is still controlled by Alibaba founder Jack Ma. Fidelity recently marked Ant shares in several of its funds at prices impying a $144 billion valuation for the company as of late February, according to regulatory filings cited by WSJ. Notably, that’s before Ant was forced to convert to a bank holding company, and before Beijing’s edict that 13 of China’s biggest tech firms (including Ant) take responsibility for loans issued via their platforms.

But one thing the writedown does reflect is the scuttled IPO for Ant, which was supposed to be the biggest IPO ever – and taking place on markets in nominally Communist Shanghai, no less – until the CCP scuttled the offering (which was supposed to raise $34 billion for Ant) simply to spite Jack Ma, over some mildly critical comments he made at an obscure tech conference days before.

At a $144 billion valuation, Fidelity is signaling to investors that it believes Ant is worth less now than it was three years ago – now that the hope of a exit to China’s army of retail investors has been forestalled, perhaps permanently – when Fidelity first purchased its stake. This roughly squares with what analysts have warned, as many have pointed out that Beijing’s crackdown will put a lid on Ant’s potential growth and profitability.

WSJ also pointed out that the $144 billion number represents “a big comedown from last August, when Fidelity’s marks pinned the company’s valuation at $295 billion, the filings showed. At the time, the Hangshou-based startup was preparing to go public and had just released listing documents that detailed how profitable it was and how quickly it had grown in recent years.”

Fidelity isn’t the only US fund manager to mark down its Ant holdings: Some funds managed by T. Rowe Price and BlackRock marked their Ant shares at prices that implied valuations of between $200 billion and $250 billion at the end of 2020 or in early 2021.

WSJ noted that mutual funds update these valuation metrics all the time, and it’s possible Ant’s valuation could rise after Beijing ends its campaign against its own tech giants. But for now, at least, it looks like the CCP and President Xi are only just getting started, and furthermore, the pressure will likely extend to Tencent, JD, Meituan and other major Chinese tech firms. Most of these firms are publicly traded and giants like Fidelity own reams of their shares.

Ant owns Alipay, a popular mobile payments and lifestyle app that has more than a billion users in China. It handled the equivalent of more than $17 trillion worth of payment transactions in the year to June 2020. In addition, Ant has leveraged its giant customer base to cross-sell many other financial products – although Beijing appears to now be placing restrictions on the types of loans and other products it can offer. At the time the IPO was scuttled, China’s regulators chided Ant for straying too far from “its roots as a payment provider [its Alipay app handled more than $17 trillion in transactions]”.

Once Ant officially becomes a bank in the eyes of the state, it will be subject to new restrictions and capital requirements, which will transform the company into a slow-but-steady-growth financial institution, not the momentum stock that Fidelity and other investors – which include sovereign wealth funds, private equity firms and many others who are probably feeling pretty miffed right about now – had envisioned when they plunked down their cash.

After this, maybe Fidelity and its rivals will think twice about investing in the next hot Chinese unicorn, now that risk managers must contend with the reality that the CCP can scuttle an IPO at any time.

Authored by Mike Shedlock via MishTalk.com,

The proliferation of fake health certificates is exposing a logistical blind spot for the airlines. Confusion doesn’t stop there.

Airlines Struggle to Police Fake Certificates 

In Europe, Fake Covid-19 Certificates Hit Airlines, Which Now Have to Police Them

Airlines are battling a scourge of passengers traveling with falsified Covid-19 health certificates.

Deutsche Lufthansa AG has been fined up to 25,000 euros, or about $29,800, by Germany for allowing passengers with false or incorrect documents to board, according to people familiar with the penalties. 

Complications? You Bet!

At London Heathrow Airport, the additional checks by border control have led to lines of more than six hours for arriving passengers. That is with just 541,000 passengers passing through the airport in March, down 91.7% from the comparable period in 2019.

The EU wants airlines to enforce restrictions that it sets up, but that makes the airlines responsible for detecting easily faked documents. 

The six hour wait time with traffic down 91.7% is a perfect of government sponsored madness that happens more in Europe than the US although we are not totally immune to such nonsense either. 

Negative Tests Required in the US

On January 24, I noted new CDC Guidelines Require Proof of Negative Test on inbound international flights to the US.

It’s unclear how well the US is enforcing that requirement.

Where Can You Go?

Hooray! You are vaccinated and ready to travel. But where can you go?  

You may be vaccinated but the World Still Isn’t Ready For US Travelers

US Vax Pass 

No doubt the “solution” will be government-mandated heath passports in Europe.

What About the US and Canada?

• Chicago – Yes: Chicago’s public health commissioner, said the “Vax Pass” will be required to attend concerts and other summer events starting in May.

• Illinois – Up to Local Officials: The Sun Times says Gov. J.B. Pritzker is taking a pass on the “Vax Pass.” Instead of a passport, the governor said residents across the state will be provided with something more akin to a doctor’s note — and only if they ask for it.

• Missouri – Will Bar: The Missourian reports Missouri Senate renews push to bar vaccine passports and limit local health orders.

• US – Yes: On March 28, the Washington Post reported “Vaccine Passports are on the Way. The Biden administration and private companies are working to develop a standard way of handling credentials ” 

• US – No: On April 6, the BBC reported US Rules Out Federal Vaccine Passports.

• Canada – Yes: Forbes reports Canada Will Require Using A Vaccine Passport For Entry.

40 States Will Ban Covid-19 Passports

Who’s in charge? That’s the key question as 40 States Creating Legislation to Ban Vaccine Passport Requirements.

At state Capitols across the country, lawmakers are advancing legislation to ban COVID-19 vaccine passport requirements for businesses and schools. 

The vaccination passports currently exist in one state — a limited government partnership in New York with a private company — but that hasn’t stopped GOP lawmakers in a handful of states, including Pennsylvania, from rushing out legislative proposals to ban their use.

“Government should not require any Texan to have proof of vaccination,” said Texas Republican Gov. Greg Abbott.

While New York rolled out the “Excelsior Pass,” a digital vaccine passport, lawmakers in Indiana worked on a bill that includes a vaccine passport ban. It passed by a wide margin, just as many Hoosier state health departments saw an uptick in no-shows for COVID-19 shots.

Confusing Mess

It’s not at all clear what the procedure will be for international flights into the US. And if you wish to travel to Europe, expect long lines on top of needing a Vax Pass.

The EU and US are messes of a different kind. The result is a hodgepodge of conflicting and confusing regulations depending on where you are at and where you are headed.

Tokens associated with 29 year old crypto billionaire Sam Bankman-Fried are skyrocketing. 

Solana, abbreviated as SOL, is up about 40% over the past week, according to Bloomberg. This makes it “the top performing large coin among those tracked by CoinMarketCap.com”. It also moves its market cap up to $11.6 billion. SOL token is used on the Solana blockchain, which is a network attempting to compete with ethereum. 

SOL is already doing 10 times more in daily transactions than ethereum, Kyle Samani, co-founder of Multicoin Capital said. Aaron Brown of Bloomberg Opinion, said: “Solana is a promising competitor in a crowded space. It’s been going up because it’s a good blockchain that seemed to be gaining ground recently, but there are lots of good blockchains and (as everyone knows) the sector is volatile and prone to short-term enthusiasms.”

Another token associated with Bankman-Fried, Serum, has seen its value almost 10x to a $494 million market cap this year alone. FTX’s FTT coin is also up about 10x in the same time period. 

Bankman-Fried’s firm Alameda Research started getting attention years ago when he appeared “at the top of a leader board of trading performance on the BitMex exchange” consistently. Since then, his firm has become one of the largest crypto traders worldwide by focusing on strategies like arbitrage. 

“I’m always happy when people focus more on the products, but I’m also honored by a lot of the support that I and our team have been getting recently,” Bankman-Fried told Bloomberg.

Nic Carter, co-founder of researcher Coin Metrics, said: “Sam is an extremely talented entrepreneur and has had staggering success with FTX, so it doesn’t surprise me that people are indirectly backing him by betting on his associated tokens.”

Recall, we highlighted Bankman-Fried about a week ago for the way he aimed to revolutionize stock trading. His exchange, FTX, lets people not only trade equities 24 hours a day, but also bet on props like whether or not Donald Trump will retake the presidency in 2024. It became popular due to Bankman-Fried’s commitment to donating 1% of its revenue to charity – and keeping the exchange reliable. 

Recently, FTX made news when it bought the naming rights to the former American Airlines Arena – the home of the Miami Heat – for $135 million. The offshore exchange is “far more exciting” than Coinbase to many crypto traders because it operates outside the reach of U.S. authorities and offers both cryptos and derivatives.

Bankman-Fried is hopeful regulators eventually allow his products: “Nothing operates 9:30 a.m. to 4 p.m., five days a week. There’s actually a lot of room to innovate in stock exchanges.”

Authored by Alan Mammoser via OilPrice.com,

Look to ports for the nascent green hydrogen economy  

Hydrogen, produced without carbon emissions, will find use in many sectors of a future ‘hydrogen economy.’ Its high energy intensity can make it the basis of fuels that reduce carbon emissions in the ‘hard to abate’ transportation and industrial sectors. Its unmatched capacity to store energy long term and seasonally should make it an indispensable energy carrier in power systems reliant on intermittent sources of renewable energy. 

The economies of scale to sustain markets for the lightest element are not in place. Yet a growing consensus among experts is that these will arise in clusters where heavy industry, transport and pipelines converge. Industrial ports will likely be places where the carbon-free hydrogen economy first comes together in a complete system. 

A recent policy brief from the Atlantic Council Global Energy Center puts focus on existing clusters of hydrogen production in the US. It suggests the Port of Long Angeles, and the region along the Texas Gulf coast, as advantageous locales for the initial rise of low-carbon hydrogen.  

Likewise, the International Renewable Energy Agency (IRENA) in a recent report ‘Green Hydrogen Cost Reduction, Scaling Up Electrolysers,’ asserts that industrial clusters will be key places for green hydrogen production to achieve the economies of scale required for broad deployment. 

Hydrogen rising in Rotterdam

Among the leaders is the Port of Rotterdam in the Netherlands. Emboldened by the European Union’s new Hydrogen Strategy, the port is taking significant fist steps to becoming Europe’s ‘hydrogen hub’ and one of the most advanced centers of green hydrogen production in the world. 

Rotterdam is already a major energy import and production hub. The port has over 100 industrial companies with a large refining and petrochemicals cluster. Its energy business includes petroleum, coal, natural gas, biomass, steam and heat. It also hosts significant wind energy and solar energy resources. The port is the main energy transfer point to the rest of Northwest Europe, especially to Germany by ship and pipeline. 

This rich center of energy flows should offer an excellent environment to create a complete hydrogen value chain with carbon-free and low carbon hydrogen. It was a main topic of conversation at the 2nd World Hydrogen Summit, held on-line earlier this month with numerous industry sponsors. The summit was organized by the London-based Sustainable Energy Council in partnership with the Port and the City of Rotterdam.    

“Hydrogen is our next step, the new game changer,” said Ahmed Aboutaleb, Mayor of the City of Rotterdam, speaking at the Summit. 

He was referring to the production of ‘blue’ hydrogen, noting the port’s investment in CO2 storage infrastructure in depleted offshore gas fields. But he was also referring to green hydrogen produced with power from renewable sources, including imported renewable power, which will eventually replace the blue at Rotterdam. 

“We are on the way to a sustainable, circular city economy,” he said. 

Allard Castelein, President & CEO, Port of Rotterdam Authority, speaking at the same conference, said the port’s energy and fuel system will be completely overhauled in the next 30 years. A ‘hydrogen backbone’ will be built through the port area to realize a circular system.  

The work will require new infrastructure for new value chains. Current planning encompasses production (blue and green), pipeline infrastructure, import, storage, transit, and a trading platform. Multiple users are foreseen industry, road transport and inland navigation.  

“In this way, we aim to get a vast green production of hydrogen by the end of this decade,” he said. 

The Port is working with government on regulations and subsidies and with coalitions of companies in all parts of the system. It seeks public-private partnerships. 

It is developing a business park for electrolysers, with centrally organized power connections and water, to be operational by 2024. Companies involved include Shell and BP. Meanwhile it is conducting a feasibility study with Uniper for electrolyser development. It anticipates more than 500MW of electrolyser capacity by 2025, and at least 2GW by 2030.   

The nearby North Sea will be a major asset for green and blue hydrogen production. Electrolysers will be directly linked to North Sea wind farms, with plans for more offshore wind power in the works. Blue hydrogen will come from refinery gasses and from natural gas with carbon capture and storage under the North Sea seabed.

Castelein explained that green and blue hydrogen will work together, with blue intended to reduce cost initially in chemicals and steel manufacturing. Eventually, by 2050, the Port wants blue entirely replaced with green hydrogen. It foresees 20 million metric tons of hydrogen produced and deployed in 2050, with one-third to remain in The Netherlands, the rest for export to Germany and elsewhere. Much will go to chemical and steel industries in Northwest Europe. 

New and innovative transport infrastructure is being planned to move all of this. The Port is close to taking final investment decision on an ‘open access’ pipeline through the port area that will link producers, import terminals, and users. It is working on setting up a trading platform, a ‘hydrogen exchange’ for import and transport of hydrogen to Germany. There are projects to deploy hydrogen directly in transport, such as for fuel for inland navigation on the Rhine, and for trucks, with Air Liquid to have 1000 hydrogen-powered trucks by 2025. 

This robust hydrogen economy will require much more green hydrogen than what can be produced from local renewable sources. Clearly the import of energy will be necessary. 

“The North Sea is simply not big enough to provide us with enough wind to fully serve the market,” said Castelein. 

He anticipates substantial hydrogen import from 2030 onwards. The Port is in communication with countries with lots of renewable energy potential and good sea access, places as far afield as Portugal, Morocco, Iceland, Oman, Uruguay, and Australia. 

These new energy flows will require new infrastructure, and they’re looking at pipelines for shorter distances, such as to Germany. But Castelein believes that, like oil and gas for long distance journeys, cross-ocean shipping will be the solution for hydrogen.  

“Shipping costs are not a show stopper, even when the shipping industry shifts to more sustainable fuels,” he says.  

He says that other factors will be much more important than shipping cost for hydrogen, as shipping cost is 5-10% of total cost including renewable electricity production, electrolysis, electrofaction, storage, shipping and retrieval. Within Europe, he says, shipping cost could be less than 5%. He notes that research shows that ammonia is a potential solution for long-distance shipping of hydrogen.  

Rotterdam provides a full picture of what it now means to attempt to create a future ‘circular economy’ of hydrogen, with multiple initiatives that seek to be mutually reinforcing. Its wide ranging initiatives include production (green and blue), infrastructure, the development of imports, setting up of import terminals, setting up a hydrogen exchange, and current work on applications in multiple sectors.  

“I find this to be an inspiring time,” says Castelein. 

Impending imports

Energy flows through the Port of Rotterdam now account for some 13% of the EU’s total energy needs, mostly in the form of crude oil for fuels and petrochemicals. This energy flow will change significantly according to Martijn Coopman, Program Manager for the Port of Rotterdam, who was also speaking at the Summit in a session hosted by the Embassy of the Kingdom of the Netherlands in GCC. 

Currently the Port’s industries have nearly a half million metric tons (Mt) of demand for hydrogen annually, with this expected to expand to 1.2 Mt by 2030, and a rapid increase expected after that. Blue hydrogen will be produced locally, but the Port has committed to deploy blue hydrogen only as a transition fuel, phasing it out in favor of green hydrogen by 2050.  

As demand for green hydrogen increases in Germany, Holland, Belgium and elsewhere in the EU, the flow of hydrogen through the Port could increase to 20 million Mt by 2050. To produce it by renewable energy will require, according to the Port’s calculations, 200GW of installed wind capacity. To put this in context, currently The Netherlands receives 1GW of wind energy from its part of the North Sea, and this may rise to 60GW by 2050. So most of the flow of green hydrogen through Rotterdam will need to come from imports. 

The Port is now entering MOUs and joint partnerships with potential exporters. One interesting partnership, according to Coopman, is with the Port of Sohar in Oman. The port on the Omani coast, in development since 2004, is actually a joint venture between the Port of Rotterdam Authority and the Sultanate of Oman. 

A recently announced project will create hydrogen from solar power by electrolysis, with on-site storage for use by the Port of Sohar’s industries. While it’s a modest first project, the Port has an ambitious plan for solar PV development on-site for further development of hydrogen production. Oman is widely seen to have potential to become a net exporter of green hydrogen fuel. 

Robin Mills, CEO of Qamar Energy, speaking at the same session, presented data showing nearly 3GW of wind and solar PV in construction, bid or study phases in Oman with intended completion by 2024. He noted that the best combined solar and wind resources in the region are in northwest Saudi Arabia and in southern Oman. 

It is no coincidence, Mills said, that the region’s two largest green hydrogen projects now under development are in these areas of coincidence of intense solar and wind power, at NEOM in northwest Saudi Arabia and at Duqm in Oman. The Hyport Duqm project will produce up to 500MW electrolyser capacity on-site, for production of green hydrogen for local industries as well as eventual export to Europe.