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E.g., 24-11-2017
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    Gavekal Research

    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

    0
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    Gavekal Research

    A Qualified Positive For Chinese Banks

    The Hong Kong-listed H-shares of mainland Chinese financials are the best performing segment of one of the world’s strongest markets year-to-date. So far this year, the H-share index is up 12% in US dollar terms, driven largely by gains in the stocks of China’s big banks and insurers. So it is natural for investors to sit up and take notice on reports that China’s big four financial regulators have drafted a joint proposal to tighten their...

    0
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    Gavekal Research

    The EM Reflation Trade Is Past Its Best

    The emerging market reflation trade has been on fire. This week Dr. Copper broke out of his six-year downward trend, adding fuel to the reflationary flames. As a result, while the relative performance of cyclical stocks has moderated in developed markets during February, EM cyclicals have continued their bullish run. Their strong performance has helped to lift the MSCI EM index by 10% year-to-date in US dollar terms to reach a 19-month high. But...

    2
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    Gavekal Research

    Emerging Markets Trumped

    In yesterday’s Daily, Louis argued that despite the renewed strengthening of the US dollar over the last couple of months since the US election, there has been no generalized flight out of emerging markets. Sure, Turkey appears to be experiencing a classic emerging market currency crisis. But as Louis noted, the collapse of the lira has been driven by peculiarly Turkish factors. There is little or no risk of contagion spreading to the broader...

    0
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    Gavekal Research

    The Japan Reflation Trade

    About a month ago, Japanese investors learnt that a man who wants to rip up their prime minister’s prized free trade deal and potentially jettison Japan’s key security guarantees would soon be US president. After an initial wobble, they spent most of the last four weeks buying equities with such gusto that the Nikkei 225 is up almost 14%.

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    Gavekal Research

    How Bad Is The Dollar Squeeze?

    This has not been your regular dollar squeeze. Over the last month, the cost of obtaining US dollars offshore has soared to levels last seen in “crisis” periods, yet bank equities have rallied the most in six years. Rather than a new crisis unfolding, we seem to be transitioning to a macro environment where dollars are structurally scarce. This will be challenging for weak link economies, as shown yesterday by adverse market moves in Brazil and...

    2
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    Gavekal Research

    Why So Calm In Emerging Markets?

    Historically, a strengthening US dollar has been bad news for emerging markets; just think of the Asian crisis of 1997. And rising US long rates do not exactly help; consider the taper tantrum of 2013. Put them together then, and throw the prospect of greater trade protectionism into the mix, and the current global environment should be absolutely toxic for emerging market assets. Yet despite considerable local pain, notably in Mexico, the...

    1
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    Gavekal Research

    A Good Bond Repricing, Anyone?

    Even after the recent move higher in yields, there is general agreement at Gavekal that long-dated bonds remain horribly overvalued. The question is whether the adjustment toward fair value happens in a disruptive manner, or through a smooth transition to a new growth cycle. Anatole tends to the view that US economic growth should pick up from here, while Will Denyer is on recession-watch. The Federal Reserve, for its part, is worried about...

    2
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    Gavekal Research

    The Economics Behind Korea’s Political Scandal

    The political turmoil engulfing South Korea claimed the scalps of both the prime minister and the finance minister on Wednesday, as embattled president Park Geun-hye opted for a cabinet reshuffle in a bid to shore up her sagging administration. In recent months Korea has seen the bankruptcy of Hanjin Shipping, the country’s largest shipping company, and the recall of millions of Samsung’s Galaxy Note 7 phones, the flagship product from the...

    0
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    Gavekal Research

    Safety First In EMs

    After a steady rise in emerging market inflows over the last seven months, tighter US financial conditions have led to an abrupt reversal. On the back of inflation concerns and a stronger US dollar, the seven day moving average of daily portfolio flows to EMs, as of last Monday, had fallen to its lowest level since the renminbi-induced sell-off 14 months ago. EMs are vulnerable to an externally-induced pull-back, for even if key central banks...

    0
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    Gavekal Research

    That Sinking Feeling

    You almost have to feel sorry for poor Haruhiko Kuroda. Just over a week after the Bank of Japan governor announced his intention to overshoot the central bank’s 2% inflation target, it is painfully obvious that investors believe he will fall short. That much is clear from the Japanese government bond market. At last week’s meeting the BoJ announced that from now on it will tailor its JGB purchases to target a 10-year yield of zero. In the days...

    0
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    Gavekal Research

    Real Yields In The Driving Seat

    Notwithstanding yesterday’s bounce, the stock market is a nervous place just now. After riding a post-Brexit rebound that saw both the S&P 500 and the Nasdaq Composite scale record highs on minimal volatility, investors are increasingly wondering about the extent of the potential near term downside, not just in the US but around the world

    2
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    Gavekal Research

    Real Yields Still Favor A Strong Yen

    Haruhiko Kuroda didn’t quite say he will do “whatever it takes” to push up inflation expectations, but he did the next best thing. Speaking at Jackson Hole on Saturday, the Bank of Japan governor promised “to take additional easing measures without hesitation”. Declaring there is “ample space” to expand the size and the scope of the BoJ’s asset purchases, as well as to push short term interest rates further into negative territory, Kuroda...

    0
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    Gavekal Research

    The Fed’s Hawkish Stance

    For those who thought Janet Yellen a dyed-in-the-wool dove, her Jackson Hole speech on Friday gave pause as she endorsed fellow policymakers’ recent statements that the US economy was strong enough to warrant interest rate rises. Markets quickly adjusted. The implication for global asset markets is not altogether encouraging.

    0
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    Gavekal Research

    The Next EM Yield Play?

    With global growth having stabilized and central banks remaining in super-easy mode, the dash for yield is making emerging markets ever more interesting. In recent months a number of our Hong Kong-based writers have advised investors to play this trend through bonds not equities, with Udith chiming in on Monday (see Indonesia: Bet On Stability Not Growth). The question for those who expect this “not too hot, not too cold” phase to persist is...

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    Gavekal Research

    Cheap For A Reason

    By most measures, US equities are not cheap. Yet many investors remain overweight, believing that in a world of ultra-low interest rates and negative bond yields, equity valuations should be higher because future cash flows are now discounted at a much lower rate than in the past. At first glance, the equity risk premium—the expected return on stocks over and above the risk-free rate—appears to support this belief. At more than one standard...

    0
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    Gavekal Research

    Ripples In The Eurodollar Market

    The Eurodollar market is making waves. While most benchmark interest rates around the world have been stable or softening, US dollar Libor has bucked the trend. Over the last seven weeks three-month Libor has climbed by almost 20bp to a shade over 0.8%. Meanwhile the TED spread, which effectively measures interbank credit risk by tracking the spread between Eurodollar rates and three-month US Treasury bill yields, has shot to its widest since...

    2
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    Gavekal Research

    The Last Free Lunch In US Markets

    Even as US equities hit new highs, this most policy-driven of bull markets remains unloved, with most investors we meet expecting an eventual collapse. US profits are declining, valuations are rich and the headwinds facing the industrial sector, in particular, show no sign of abating. On an economy-wide basis, the return on invested capital earned by US firms is falling, so edging the economy closer to recession (see A New Look At Capital:...

    1
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    Gavekal Research

    The EM Equity Question

    Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.

    2
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    Gavekal Research

    Waiting For Another Tantrum

    One of the most powerful phenomena to hit markets can be the counter-trend reversal, especially when it is fueled by surprise and a big dollop of anxiety. Given the focus on the Fed’s upcoming policy decision, coming at a time when global bond yields are stuck at ultra-low levels, is another hissy fit possible?

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