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    Gavekal Research

    The Trouble With Trade Retaliation

    When this week US president Donald Trump threatened to slap tariffs on an additional US$200bn of imports from China, on top of the US$50bn already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.

    2
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    Video: The Hong Kong Peg Under Pressure

    The Hong Kong Monetary Authority has again been intervening in the foreign exchange market after it stepped in last month when the Hong Kong dollar fell to its weakest in 35 years. So far the HKMA has bought HKD62bn, selling almost US$8bn to defend the Hong Kong dollar’s peg to the US dollar. In this video interview, Tom Holland explains what’s going on, and why there is zero risk Hong Kong will be forced to devalue its currency.

    0
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    The Curious Case Of The HK Dollar

    One of the longest awaited adjustments in financial markets may finally be about to happen. Last year, betting that Hong Kong dollar interest rates would rise to converge with US dollar rates was reckoned to be among the surest trades in world markets. Yet the convergence never happened. Over the last 12 months, one-month Hong Kong dollar Hibor has consistently traded at a discount to one-month US dollar Libor of more than 30bp. And since the...

    0
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    Gavekal Research

    Gauging The Strength Of The Oil Bid

    It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.

    5
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    Gavekal Research

    Real Yields, The Euro And The Dollar

    The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.

    4
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    Gavekal Research

    Mnuchin’s Weak Dollar

    If Robert Rubin were dead, he would be turning in his grave. Speaking in Davos yesterday, US Treasury secretary Steven Mnuchin shook markets by declaring: “A weaker dollar is good for us.” His remark broke the precedent set by Rubin in 1995 and adhered to by Treasury secretaries ever since, of insisting: “A strong dollar is in the best interest of the US.”

    5
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    Gavekal Research

    Equities, The Yen And The BoJ’s Exit

    Last month Bank of Japan governor Haruhiko Kuroda participated in an ECB panel on the importance of communications as a tool of monetary policy. He seems to have taken the message to heart. In the couple of weeks since, scarcely a day has gone by without Kuroda or one of his colleagues on the BoJ’s policy board talking publicly about the “reversal rate”, hinting heavily that the central bank is looking to dial back its ultra-accommodative stance.

    0
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    The Catalan Question And The Future Of Europe

    Yesterday the world was treated to the unedifying sight of the national police of a democratic state using violence in an attempt to prevent peaceful crowds of citizens from voting. If any investors still believed that the electoral defeat of the far right earlier this year in the Netherlands and the election of Emmanuel Macron in France had resolved the structural forces working to fragment the European Union, yesterday’s footage from the...

    5
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    Gavekal Research

    Is The Whale Breaking Surface?

    Charles has often said that the impact of a market shock shows up with the same sort of delay as the effects of dynamite fishing. First the small fry float to the top, then the mid-size fish. Only later does the dead whale break surface. With that analogy in mind, Louis has long maintained that investors will not be able to call the end of the oil price slump with any confidence until they have seen major bankruptcies and/or consolidation among...

    4
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    Gavekal Research

    The Wile E. Coyote Moment

    Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...

    0
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    Gavekal Research

    Saudi, The Oil Price & Capital Markets

    It says a lot about the dynamics currently at work in the oil market that the king of Saudi Arabia yesterday promoted his firebrand young son to crown prince, yet the price of oil still fell -2.7%. The question now is whether Saudi will double down on its current policies in a fresh attempt to goose up the oil price, whether Riyadh will be forced by its rapidly eroding finances to change direction entirely and devalue the riyal, much as Russia...

    0
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    Gavekal Research

    The UK’s Pre-Election Wobble

    In mid-April, when UK prime minister Theresa May took the decision to call a general election for June 8, she did so because she was confident her Conservative party would be returned to government with a massively increased parliamentary majority. Six weeks later, and with just one week of campaigning still to go, that confidence is a distant memory.

    0
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    Gavekal Research

    The Upside Of The Commodity Downside

    Once again, commodity prices are taking a beating. Since Wednesday the price of Brent blend crude oil has slumped by 7%. Over the last two months copper has slipped 8%, and iron ore futures traded in China are down a precipitous 30%. Coming on top of data that showed the US economy grew by a meager annualized 0.7% in the first quarter, and the recent tightening in China’s credit conditions, the latest slide in commodity prices has been...

    2
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    Gavekal Research

    Pound’s Rally Based On Flawed Assumptions

    The spring sun was shining on UK prime minister Theresa May yesterday when she stood in Downing Street to announce a cut-and-run general election for June 8. The sun was shining too on sterling, which rallied 2% against the US dollar and 1.3% against the euro on the news. The market clearly expects that a greatly increased parliamentary majority for May’s Conservative government following the vote will boost the chances of a softer Brexit deal...

    2
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    Gavekal Research

    The Dollar In The Coming Quarter

    The first quarter of the year demonstrated once again that there is little more uncertain than a sure thing in the foreign exchange market. Rewind to mid-December, just before markets eased back for the holiday season, and the consensus firmly favored a stronger US dollar in 2017 . Of course, when sentiment is so strongly aligned, it means there are few marginal buyers left to enter the market. As a result, the consensus was confounded, as the...

    0
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    Hong Kong Seminar — March 2017

    In Gavekal’s Asia focused seminar in Hong Kong last week Arthur Kroeber, Udith Sikand and Tom Holland presented their outlooks for the rest of the year.

    0
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    Gavekal Research

    On Borrowed Time In Hong Kong

    Last month, home prices in Hong Kong’s secondary market climbed to a record high, up more than 150% from the depths of the financial crisis. At the same time, Hong Kong’s stock market has been among the world’s strongest major markets so far this year, comfortably outperforming the S&P 500. The buoyancy of Hong Kong assets owes more than a little to investor enthusiasm for the global reflation trade, and to inflows of Chinese money. But more...

    2
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    Gavekal Research

    The Big US Dollar Risk

    The US dollar enters 2017 up by 25% against a broad basket of currencies over the last two-and-half years. The single biggest question for investors in the new year must be whether the dollar continues its bull run.

    4
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    Gavekal Research

    The Dollar Surge Continues, For Now

    Louis likes to say that the foreign exchange market is a serial monogamist. At any one time, the market is faithful to a single idea. The trouble is that at any moment it is liable to switch the object of its affections. Right now the foreign exchange market is clearly still smitten by the Trumpflation trade. Following the US Federal Reserve’s decision earlier this week to raise interest rates, yesterday the US currency’s DXY index climbed to...

    2
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    Gavekal Research

    The Unsustainable Oil Price Spike

    It took a while, but the spike in the oil price expected at the end of November finally occurred this morning in Asia, when front-month Brent crude futures briefly hit US$57.89/bbl, up from US$54.33/bbl on Friday. The jump higher was triggered by news over the weekend that a handful of major non-Opec producers led by Russia have agreed to cut their output by 558,000 barrels per day on top of the 1.2mn b/d reduction announced by Opec at the end...

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