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    Gavekal Research

    A “Once In A Generation” Shift

    There is a contradiction at the heart of the current bull market in pretty much all assets. On one hand, investors believe that firms can optimize their operations and keep doing more with less. Yet on the other hand, they assume that the global economy will remain awash with excess capacity. Charles and Louis argue that as such cognitive dissonance may get a reality check, investors may need to radically rethink their portfolio architecture.

    8
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    Gavekal Research

    When Political Stagnation Is Benign

    Last week, European economic affairs commissioner Pierre Moscovici declared Italy a “political risk” for the European Union. Some of the Euroskeptic campaign rhetoric has certainly been alarming. But in this paper Nick and Cedric delve into Italy’s electoral arithmetic to conclude that no incoming government is likely to have the will or capability to act on such combative promises.

    0
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    Gavekal Research

    Keep Duration Short

    Washington may have temporarily sorted out its spending plans, but the bigger news for investors is the apparent breakout in 10-year treasury yields. The benchmark-of-benchmarks has risen to 2.65%, exceeding highs recorded in the months right after the Republicans’ election wins in November 2016. This can be ascribed to strong global growth, higher commodity prices, US tax cuts and tighter monetary policy. Hence, with US long-rates now offering...

    13
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    Gavekal Dragonomics

    Fewer Surprises From Supply-Side Reform

    China’s “supply-side reform” in coal, steel, and other products been a major swing factor for markets over the past two years. And Chinese officials started off 2018 by doubling down on their rhetoric about supply-side reform. But as Rosealea explains, there are good reasons to think the upside risk to commodities prices will be low this year.

    0
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    Gavekal Research

    The German Coalition And Europe

    Late Sunday, party delegates of Germany’s social democrat SPD voted 362 to 279 to begin formal coalition talks with chancellor Angela Merkel’s CDU/CSU conservatives. Hurdles still remain, but our base case is that the weekend’s vote paves the way for the formation of a Grand Coalition by April. After months without a stable government, any reduction in uncertainty will naturally be positive for markets. But for investors, the most significant...

    0
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    Gavekal Dragonomics

    Reviewing The Risks For 2018

    After a solid performance in 2017, worries about China have broadly receded, and our view is that 2018 should see continuity in economic policy and only a moderate slowdown in growth. In this piece, Andrew assesses the state of four major risks to this sanguine outlook, based on the latest economic data and a flurry of recent policy statements.

    0
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    Gavekal Research

    Taxes And Yields

    US equity markets have started 2018 committed to the idea that Goldilocks is alive and well. Although no clear picture has emerged of its impact, the passage of the most significant tax reform since the 1980s has had S&P 500 firms opining publicly that they hope to invest more and treat staff better. The corollary is that this cycle might be getting a second wind. The fear is inflation, as shown by yesterday’s move in treasury yields to...

    0
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    Gavekal Research

    Securing The Indo-Pacific

    Forty years after the Southeast Asia Treaty Organization was dissolved, Tom argues that an expanded version of that “Asian NATO” concept may be developing, but this time the potential theater of operations stretches across the Indo-Pacific and includes the full panoply of great powers. What has not changed is that China remains the protagonists’ key bogeyman.

    0
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    Gavekal Research

    From Recovery To Expansion

    Perception is a funny thing. Yesterday President Emmanuel Macron pitched up in London and wowed the British by loaning them a 70 meter piece of embroidered propaganda that celebrates their conquest 950 years ago. By contrast, the last French president to visit Britain had a pint of warm beer with David Cameron in a pub and no one noticed. A similarly discombobulated dynamic can be seen in European equity markets, where years of pessimism have...

    0
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    Gavekal Research

    Video: The Next Phase Of Europe's Recovery

    Cedric expects 2018 to confirm the eurozone economy as moving from recovery to expansion. Hence, four key macroeconomic trends that emerged in 2017 should become paramount this year.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call January 2018

    In Gavekal’s monthly research call yesterday, Louis Gave reviewed evidence that the investment environment is experiencing a once-in-a-generation shift from a deflationary environment to one that is broadly inflationary. Anatole Kaletsky argued that this metamorphosis will likely be an orderly affair. Arthur Kroeber updated his view on China’s likely impact on global commodity markets.

    0
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    Gavekal Research

    Stick With Dollar Depreciation Plays

    The last year has seen a rare outbreak of consensus at Gavekal. Since last January partners and analysts have been almost universally bearish on the US dollar. In that time, the DXY dollar index has slumped some -12% from its heavily overvalued level at the beginning of 2017. Now the first 12 trading days of 2018 have seen the DXY slide -1.9%, breaching September’s support level to sink to its lowest since the end of 2014. This latest...

    4
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    Gavekal Dragonomics

    The Regulatory Storm Continues

    China’s financial-regulatory storm is far from over: in recent weeks, the banking regulator has issued a half-dozen new or proposed rules, and launched another campaign to uncover financial malpractice. While this means credit growth will slow further, Chen Long argues regulators can still avoid shocks to the economy and market sentiment.

    0
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    Gavekal Research

    The Yield Curve As A Duration Guide

    With US stock markets scaling new heights, there are multiple reasons why nervous equity investors might want to reduce portfolio risk. The usual way to do this would be by increasing allocations to long-duration treasury debt. But with long-dated yields now rising, what duration of treasuries should investors hold? And when and how should they adjust duration?

    0
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    Gavekal Research

    The Five Big Bond Market Questions

    With 10-year US treasury yields near the point of breaking out above their 2017 high of 2.6%, financial commentators around the world have suddenly become obsessed with a single question: Have bonds finally entered a bear market, after the multi-decade bull trend that started back in October 1981, when the 10-year yield peaked at 15.8%?

    0
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    Gavekal Research

    Sunshine (For China) In Korea

    Sunshine has dispelled the clouds of war on the Korean Peninsula, at least for now. News headlines are cautiously celebrating the de-escalation of tensions leading up to the South Korean Winter Olympics. This amounts to a quiet victory for China's diplomacy, despite its being which was outwardly rejected by both Pyongyang and Washington.

    1
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    Gavekal Research

    Don’t Fear The End Of The Bond Bull Market

    Bond bears have been given succor in the opening days of 2018. First the Bank of Japan trimmed buying of long-dated Japanese government bonds, indirectly causing 10-year treasury yields to surge to 2.6%. Then European Central Bank policymakers were yesterday shown to be bulled up on the state of the eurozone recovery. On the face of it, central banks seem to be whistling a very different tune. In fact, it is investors who have caught up with...

    1
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    Gavekal Research

    Spending Again In Germany

    Picture the typical German consumer. The image that comes to mind is almost certainly of a deeply conservative individual: cautious, thrifty in his or her spending habits, and with a deep-seated aversion to maxing out the credit card. As with most stereotypes, this one has some foundation in experience. But like many, it also looks increasingly out of date. While Germany’s booming export sector has got most of the attention recently, it is...

    1
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    Gavekal Dragonomics

    After The Bounce In Coal Demand

    After three straight years of decline, China’s consumption of coal rose 1% in 2017, and prices are rallying. But in this piece, Rosealea argues that this bounce in demand is unlikely to persist. With the property market cooling and official efforts to switch away from coal continuing, coal use should resume its decline in 2018.

    0
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    Gavekal Research

    US Inflation Expectations: Further To Run To Catch-Up

    Over the last six weeks, market inflation expectations have undergone a signal shift to the upside. The US five-year break-even inflation rate has climbed from below 1.7% in early December to 1.95% this week. In other words, market expectations for US inflation, which had long remained markedly subdued, have now played catch-up with the Federal Reserve’s own projections, which see core PCE inflation rising to 1.9% this year and 2% in 2019....

    3
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