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E.g., 17-12-2018
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    Gavekal Research

    More Trouble Ahead For Italian Yields

    The market gave an unequivocal two thumbs down to Italy’s budget deficit forecast announced on Friday. In proposing a deficit target for each of the next three years of 2.4% of GDP, finance minister Giovanni Tria was perceived to have bowed to pressure from Italy’s populist coalition for spending increases and tax cuts, and to have relegated debt reduction to a back seat. In response, Italy’s 10-year government bond yield jumped 26bp to 3.14%,...

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    Gavekal Dragonomics

    Catching Up In Chips

    Technology is at the heart of China’s trade conflict with the US, and no technology is more critical than semiconductors. So as the US moves to block its access to technology, China is doubling down on its drive to build up a domestic semiconductor industry. In this piece, Dan lays out the reasons why China’s drive will eventually succeed.

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    Gavekal Research

    The Big Lesson From Argentina

    One of the reasons this summer’s sell-off in Argentinian debt was so vicious was that few international banks these days are willing to make markets in such “exotic” bonds, and even fewer are prepared to hold a substantial inventory. As a result, when foreign investors rushed for the exit, there was no market. But as Louis explains in this paper, the problem is hardly unique to Argentina. Markets a lot closer to home could face similar trouble.

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    Gavekal Research

    The Severity Of India’s Rout

    It has been a torrid month for Indian markets. Equities have tanked by -7%, the rupee has dropped to all-time lows, and a new crisis is emerging in the financial sector. Liquidity is tightening in the money markets, threatening the survival of several non-bank financial companies and raising the prospect of contagion risk that could spill over to the rest of the financial system and lead to a broader economic slowdown. The rout in emerging...

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    Gavekal Research

    The Art Of (Trade) War

    Donald Trump’s trade war against China demonstrates that the Washington consensus is dead and buried. This suggests that the world will split into three monetary zones, each with its own anchor currency and risk-free asset class. As a result, the close relationship between the renminbi and the US dollar is a thing of the past and China’s vast current account surplus will become unsustainable. Charles examines what all this means for investment...

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    Gavekal Research

    Rate Rises And The US Stock Market

    For the first time in the long post-2008 cycle, the US has a positive real interest rate. After Wednesday’s 25bp hike in US rates, at just short of 2.25%, the effective Fed funds rate will now exceed the Federal Reserve’s favored core PCE measure of inflation, which at the end of July stood at 2%. In theory, that could change later Thursday with the release of August PCE data. But with the dot plot suggesting another rate hike this year and...

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    Gavekal Dragonomics

    Macro Update: Staying Calm In The Trade War

    Where does China stand as the trade conflict with the US mounts? While stock markets have tanked, the economy has not. In this concise chartbook, Chen Long presents the major macro and market indicators to explain why growth is holding up and why the government is not yet unleashing a major stimulus.

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    Gavekal Research

    Does Beijing Really Manage The RMB Against A Basket?

    Possibly the only easy thing about studying China is that Chinese policymakers tend to “say what they do and do what they say”. Take the Chinese exchange rate as an example. From 1998 to 2005, the renminbi’s exchange rate was fixed at CNY8.28 to the US dollar. Then, in 2005, investors were told that the renminbi would be allowed to appreciate gradually and with a controlled daily volatility. When the financial crisis hit, the Chinese exchange...

    4
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    Gavekal Research

    Back To A Three-Figure Oil Price

    Oil broke higher on Monday, with the price of Brent decisively breaching US$80/bbl, a level it had repeatedly tested since early May, when the US administration announced it would reimpose sanctions on Iranian exports. The immediate trigger for the break-out was the decision at the weekend by the Opec cartel plus Russia not to increase their formal output target in the near term. At first glance, the market response might appear an over-reaction...

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    Gavekal Dragonomics

    The Backlash Against The War On Air Pollution

    Steel prices are high thanks to a tough government plan to reduce smog by shutting down metals production—but the rise in prices has recently started to reverse as uncertainty over these policies increases. Rosealea reports on the steel industry’s new pushback against strict output curbs, and why these controls are likely to become more flexible.

    3
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    Gavekal Research

    The Dissolution Of Chimerica

    The economies of the US and China are by far the world’s largest. Such has been their importance and dependence that the composite phrase “Chimerica” emerged to describe both the integration of supply chains and corporate profitability as well as cultural connections. Today, the single most important question may be: is the foundation on which this Chimerica pillar rested now crumbling?

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    Gavekal Research

    No Deal Could Mean No Brexit

    After European Union leaders rejected Theresa May’s Chequers deal, the UK government is left with only two alternatives, argues Anatole. If Parliament in November is confronted with No Deal or No Brexit, the most likely outcome would be a new referendum and a vote to remain. The result will be a massive appreciation of sterling and a rally in many UK domestic assets.

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    Gavekal Research

    The Quandary Of Rising Yields

    Imagine that you had been told at the start of this year that equity markets in the likes of Argentina, Turkey and South Africa would fall by as much as half, that the renminbi would slide by -10% against the US dollar and that Chinese and Hong Kong stocks would be back in a bear market. You would probably have assumed that long-dated treasuries would make a great investment. Yet, here we are, with 30-year treasury yields up about 50bp this year...

    6
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    Gavekal Research

    Heads I Win, Tails I Don’t Lose In Japan

    A glance at the headlines suggests the story in Japan is still “stasis as usual”. As expected, on Wednesday the Bank of Japan reaffirmed its intention to keep interest rates low indefinitely. And later on Thursday, Shinzo Abe is all but sure to fend off a leadership challenge from within his ruling Liberal Democratic Party, setting him on course to become the country’s longest-serving prime minister. In tune with this “no change” refrain,...

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    Gavekal Research

    The Message From US Housing Construction

    Wednesday saw a soft US housing data release for August, pointing to a coming weakening in residential construction. With the Fed raising rates and 10-year treasury yields well above 3%, equity investors may sniff late-cycle decay. KX shares such concerns, but advises investors to hold their noses for a while longer.

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    Gavekal Dragonomics

    The China Inc. Annual Report 2018

    In this chartbook, Thomas outlines the key trends in the fundamentals of China’s corporate sector. Growth in sales and profits has stayed stronger for longer, but is driven mainly by high materials prices. A rebound in capex is starting to fade. Deleveraging continues but more slowly, and may not last much longer as profits cool and debt rises.

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    Gavekal Dragonomics

    Pragmatism Will Prevail On Iranian Oil

    The US is preparing to re-impose sanctions on Iran, threatening to punish any country that continues to buy its oil. China has struck a defiant tone, and many analysts expect Chinese oil companies to ignore the US sanctions. But in this piece, Yanmei argues that Chinese importers have little choice but to sharply reduce their purchases from Iran.

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    Gavekal Research

    When To Buy UK Stocks

    “Deal or no deal” is the question blurring all UK investment decisions. Britain’s exit from the European Union should be settled before the end of the year, but the run-in will be nerve-wracking. Since Prime Minister Theresa May released her halfway-house “Chequers” plan in early July, investors have fretted that the UK may crash out of the EU next March with no new trading relationship in place. My colleague Anatole has consistently downplayed...

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    Gavekal Research

    Digging In For A War Of Attrition

    Donald Trump’s administration has upped the ante in its trade war with China, imposing tariffs on an additional US$200bn of Chinese imports. The tariffs will take effect on September 24 at a rate of 10%, rising to 25% at the beginning of 2019 unless some kind of a deal can be worked out with Beijing. The chances of a deal are vanishingly small.

    3
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    Gavekal Research

    Towards US Goods Price Deflation

    Emerging economies have spent the last three or four months squirming under the weight of a strong dollar. The effect of such currency strength is now showing up in the US itself, with the price of both consumer goods and imports softening. This deflationary pressure may end up impacting real interest rates, and hence the relative attractiveness of US bonds and equities.

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