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E.g., 23-01-2018
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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...

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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...

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    The Persistence Of European Political Risk

    This was supposed to be the year that European political risk was laid to rest by the spring defeats of populist Euro-skeptic parties in the Dutch and French elections. But as 2017 draws to a close, anyone glancing at the headlines from Europe is likely to come away with the impression that reports of the demise of political risk were ludicrously premature. A rundown of this week’s news, from today’s regional election in Catalonia, through...

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    Gavekal Research

    Where Has Eurozone Inflation Gone?

    The eurozone’s recovery continues, but all is not proceeding quite as expected. At its meeting last week, the European Central Bank’s governing council raised its forecasts for eurozone growth over the next two years to reflect the single currency area’s strengthening cyclical upswing. But while growth is accelerating, inflation remains largely missing in action, with the ECB last week revising down its forecasts for core inflation.

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    Gavekal Research

    Towards ECB Stealth Tightening?

    As the eurozone’s economy picks up, the European Central Bank finds itself facing a dilemma. In order not to freak out financial markets and push long-dated yields sharply higher, which could threaten to trigger a new financial crisis, it has promised to continue its quantitative easing program of asset purchases until at least September 2018, and not to raise policy rates until well after the end of those purchases. Yet as inflationary...

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    Gavekal Research

    Behind Eurozone Credit Growth

    The eurozone credit cycle is accelerating. Data released yesterday showed loans to non-financial companies grew at 2.9% YoY in October, the fastest rate since June 2009, while loans to households were up 2.7% YoY for the third month running. The pick-up in lending to private businesses bodes well for eurozone growth and markets next year, with respondents to the European Central Bank’s bank lending survey indicating that investment and...

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    Gavekal Research

    Too Much Forward Guidance?

    It should be an ideal environment for equity investors. Europe yesterday published stronger than expected growth figures for the third quarter, with German GDP expanding 2.8% YoY, and even laggard Italy growing 1.8%. That performance raises the possibility of faster earnings growth even as the European Central Bank is proposing to stretch out its stimulative asset purchases through the third quarter of next year and keep interest rates in...

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    Gavekal Research

    Keep Calm And Suck It Up

    The Bank of England is expected to turn tail today by raising interest rates for the first time in a decade. What follows is a particular worry for homeowners, who since 2008 have seen interest payments on mortgages fall by as much as -95% due to 550bp of rate cuts. After all, the specter of a disorderly Brexit looms, businesses are threatening to move out of the UK and economic growth has slowed to a miserly 1.5%. I am relaxed about this...

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    Gavekal Research

    The Trouble With Eurozone ROEs

    Economic sentiment in the eurozone is riding high, probably too high. The European Commission’s industrial and consumer confidence indexes are each close to the peaks they recorded in 2000 and 2007. Such high levels suggest overconfidence rather than rational expectations. Moreover, as far as investors are concerned, there are good reasons to be skeptical about the potential of European equity markets to outperform—largely to do with the...

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    Gavekal Research

    A Very British Zombie Apocalypse

    After the Bank of England signaled its intent to raise interest rates yesterday, sterling jumped more than 1% against the US dollar and the international FTSE 100 index fell similarly. With the UK’s latest inflation reading rising to 2.9% and unemployment hitting a post-1975 low of 4.3%, it is increasingly hard to justify leaving the policy lending rate at 0.25%. One argument for deferring hikes is the UK’s lack of wage growth, but such thinking...

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    Gavekal Research

    2002 All Over Again For Europe?

    The eurozone’s recovery is speeding up despite the unresolved “original sin” of lumping a single currency on to a heterogeneous economy. Yesterday Charles argued that this conceit meant the next big move for Europe would be back toward crisis, and among other things investors should avoid eurozone banks. I would not dispute this basic analysis, but take a different view on timing.

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    Gavekal Research

    Don’t Sweat The Euro

    In response to a stronger euro, the European Central Bank yesterday cut its inflation forecasts. Since the ECB’s monetary policy mandate is entirely focused on consumer prices, the disinflationary impact of a stronger currency leaves policymakers with a conundrum: do they go ahead and taper asset purchases as expected, or instead hold back, figuring that the currency markets are doing the “tightening” job for them?

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    Gavekal Research

    Despite Draghi, Flows Favor The Euro

    All eyes will be on Mario Draghi this week. Last Thursday’s release of minutes from July’s European Central Bank monetary policy meeting highlighted policymakers’ unease at the strength of the euro. The suspicion now is that the ECB president may attempt to talk down the euro when he stands up to make his lunchtime speech this Friday at Jackson Hole. Yet even if Draghi does play down the prospect of an early or rapid ECB exit from either...

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    Gavekal Research

    In Work But Out Of Pocket

    Data released yesterday showed that the UK’s unemployment rate fell to 4.4% in the second quarter, its lowest since the second quarter of 1975 (when Britons voted by a 34pp margin in favor of membership of the precursor to the European Union). Yet despite the lowest unemployment in generations, wage growth in the UK remains for the most part missing in action. Workers’ total earnings rose by a muted 2.1% in 2Q. With CPI inflation running at a...

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    Gavekal Research

    Get Selective Over Eurozone Stocks

    Emmanuel Macron’s political honeymoon proved short-lived, but the new French president’s honeymoon with eurozone equity investors was over before it began. In a classic case of buy the rumor sell the fact, the euro Stoxx index peaked on May 5, the last trading day before the second round of the French presidential election. That run-up had been driven by receding fears of deflation, as investors embraced the idea of eurozone reflation, coupled...

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    Gavekal Research

    Making Sense Of Mario Draghi

    Mario Draghi got people scratching their heads last month. “As the economy continues to recover, a constant policy stance will become more accommodative,” declared the European Central Bank president. “The central bank can accompany the recovery by adjusting the parameters of its policy instruments—not in order to tighten the policy stance, but to keep it broadly unchanged.”

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    Gavekal Research

    Don’t Give Up On Eurozone Equities

    When a market fails to rally further on successive rounds of good news, investors can be forgiven for feeling a tad nervous about the outlook. It is little surprise, therefore, that many portfolio managers are expressing skepticism about the near-term sustainability of the bull market in eurozone equities. Since the election of Emmanuel Macron as French president two months ago, the macro headlines from the single currency area have been...

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    Gavekal Research

    Common Sense Prevails In Italy

    The European Union authorities bowed to the inevitable yesterday. They agreed to let Rome spend as much as €17bn in Italian taxpayers’ cash to prevent losses among the senior bondholders and depositors in two Italian regional banks that the European Central Bank declared on Friday to be failing.

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    Gavekal Research

    A British Rebalancing?

    Last week the Bank of England left interest rates unchanged, but three out of eight policymakers voted for a hike. In the past any weakness in UK consumption has been met with a soothing monetary response. The fact that the consumer looks increasingly forlorn, yet the BoE is hanging tough suggests the game has changed.

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    Gavekal Research

    Goldilocks Beds Down

    Headline attention today is clearly focused on the car-crash general election result for UK prime minister Theresa May. At the time of writing, it was still unclear whether May would be able to form a viable government after the vote. Unsurprisingly, the uncertainty triggered a steep 1.6% sell-off in sterling (see Trading The UK Election).

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