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E.g., 20-03-2019
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    Gavekal Research

    The Danger Of Grexit Complacence

    Grexit is growing more likely by the day. Yesterday Wolfgang Schäuble, the German finance minister, said in New York that financial markets had “priced in” all possible outcomes of Greece’s debt woes, arguing there is no risk of contagion to other eurozone members. At the same time, Greek finance minister Yanis Varoufakis is in Washington, where according to reports he is scheduled to meet Lee Buchheit, a senior lawyer who specializes in...

    0
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    Gavekal Research

    The Eurozone's Sustainable Recovery

    Eurozone retail sales registered their first month-on-month fall in five months in February, prompting fears that Europe’s consumer-driven revival may be faltering. Since last May the price of oil has fallen -32% in euro terms, lifting real wages by 2% and boosting consumer purchasing power across the eurozone. Over the last three months, however, oil has rebounded 22% from its January low, eroding some of the European consumer’s purchasing...

    0
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    Gavekal Research

    The Road To Eurozone Rebalancing

    At a record 7.8% of gross domestic product, Germany is running the largest current account surplus in the world. To put that into perspective, in absolute terms Germany’s surplus over the last 12 months amounts to €218bn. In contrast, China’s current account surplus last year was a relatively modest €161bn. With the European Central Bank’s printing presses operating at full steam and depressing the euro’s exchange rate, Germany’s current account...

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    Gavekal Research

    Much Ado About Sterling

    The budget delivered this week by George Osborne will not be enough to win the UK’s May 7 general election for the Chancellor of the Exchequer’s Conservative Party. Instead all signs point to a hung parliament, with no one party holding enough seats to command a majority. Heightened political uncertainty in the run-up to the poll—and quite possibly in its immediate aftermath, given the horse-trading needed to form what is likely to prove an...

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    Gavekal Research

    In The ECB We Trust (Well, For Now)

    Ever since the European Central Bank announced its €60bn-a-month QE program in January the market has craved answers to some elementary questions. Specifically:

    1
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    Gavekal Research

    Germany Normalizes

    Germany gets a bad rap for obsessively chasing export competitiveness to the detriment of its embattled eurozone partners. The relentless pursuit of current account surpluses—now at a record 7.5% of GDP—has caused domestic demand to lag and denied neighbors a source of demand, the opposite of what was intended with the eurozone construction. But this looks to be changing as German real wages grow at the fastest pace in more than 20 years. As...

    2
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    Gavekal Research

    A Cosmetic Victory For The Reformers

    On the face of things, it looks as if last week brought two major victories for Europe’s structural reformers. On Friday Greece’s finance minister Yanis Varoufakis was forced to blink first and accept an extension of his country’s existing bailout package under austere terms dictated largely by the German Finance Ministry. Just two days earlier the French government resorted to presidential decree to force a package of structural reforms...

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    Gavekal Research

    The Greek Endgame

    With most votes counted it looks as if the euro system has helped give birth to the continent’s very own Hugo Chavez, with the third largest party in Greece’s parliament being neo-Nazis. Nice work! With Spain going to the polls later this year and Italy never far from its next political imbroglio, Greece offers a glimpse of what Europe’s political future could look like. The question is whether the irresistible rise of Alexis Tsipras and his...

    1
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    Gavekal Research

    QE And The Drift To Euro-Stagnation

    It’s official, or at least very nearly. Sovereign debt purchases in the secondary market by the European Central Bank are legal under European law. This was the opinion of the European Court of Justice yesterday when giving a preliminary ruling on the ECB’s program of Open Monetary Transactions which was proposed in 2012 although never actually used. The ruling removes a key obstacle to the ECB adopting quantitative easing although the court...

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    Gavekal Research

    Europe’s Quantitative Teasing

    On Wednesday the eurozone is likely to inch a step closer to quantitative easing when the European Court of Justice hands down its preliminary ruling on the legality of the European Central Bank’s program of Outright Monetary Transactions proposed in 2012. While the ECJ is expected to find that the OMT lies within the ECB’s competence (to use Euro-jargon), any qualifications it makes will go a long way to determine the shape of a eurozone QE...

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    Gavekal Research

    Draghi’s Job Just Got A Lot Harder

    The specter of debt default is once again haunting the eurozone. Failure by the Greek government to get its candidate elected president in a December 17 parliamentary vote will lead to a general election in January; an election that the radical left wing opposition party Syriza, which is currently ahead in the opinion polls, stands a real chance of winning. The prospect triggered a sharp sell-off in Greek government bonds yesterday, with the...

    3
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    Gavekal Research

    Crunch Time, Really, For The ECB

    There is an odd dissonance to the spin that has led up to tomorrow’s European Central Bank’s meeting. On the one hand, ECB officials are doing their best to paint the move towards full-blown quantitative easing as manifest destiny. Indeed, the economic conditions seem to merit such action given awful PMIs released this week for France, Germany and Italy, which together account for two thirds of eurozone GDP. Yet there is a parallel track of ECB...

    1
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    Gavekal Research

    Italy Inches Towards Reform

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    Gavekal Research

    At The Limits Of Policy

    If Europe was looking for a quick fix it is clear that relief is unlikely to come from fiscal policy. Any hope that promises of “structural reform” would allow the strictures of the Fiscal Compact to be loosened have been dashed. For sure the French and Italian budget deals with Brussels look to include plenty of fudge, which makes them less contractionary than the headline suggests. However, much is now riding on monetary policy. In this regard...

    1
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    Gavekal Research

    Europe: Hope Springs Eternal

    On Sunday the European Central Bank will announce the results of its Comprehensive Assessment: intended to be an exhaustive—and conclusive—examination to establish once and for all the health of Europe’s banking sector. Although previous stress tests lacked credibility, hopes are high that the ECB’s latest exercise will assuage lingering fears that hand grenades still lurk undetected on the balance sheets of eurozone banks. By restoring...

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    Gavekal Research

    Europe's Losing Battle For Recovery

    The wobble in world markets continues, with stock indices across all time zones down steeply in recent sessions. Investors are not only realigning their exposure in anticipation of tighter liquidity conditions as the US Federal Reserve finally brings its asset purchases to a close later this month (see More Fools Than Money?). Ahead of today’s European Central Bank meeting they are also looking nervously at the magnitude of the task facing...

    1
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    Gavekal Research

    Italy’s Intergenerational Struggle

    Recession has become a way of life in Italy with 11 of the last 12 quarters seeing negative economic growth. The gloom was reinforced yesterday with the release of industrial orders for July showing a 0.7% YoY contraction. The sad thing for the one-time precocious catch-up kid of Europe’s post-war miracle has been Italy’s complete embrace of its dribbling dotage. Far from raging against the fading of its economic youth, Italy’s power elites have...

    4
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    Gavekal Research

    The ECB's Damp Squib

    To the surprise of the market, the first round of the European Central Bank’s keenly anticipated Targeted Longer Term Refinancing Operations turned out to be a damp squib, generating only half the expected level of demand. In the event, banks borrowed just €83bn, well short of the €167bn Bloomberg consensus. Given that in the last three months European banks have repaid more than €80bn borrowed through the earlier 3-year LTROs, the net...

    2
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    Gavekal Research

    History Favors A Flatter US Curve

    Futures market pricing suggests the Federal Reserve will remain accommodative well into 2015, with the first US rate hike still nine months away. Yet in recent days expectations of Fed tightening while other central banks are easing have pushed the US dollar to a 14 month high against the euro and a 6 year high against the yen. This divergence of views makes positioning tricky. However, investors looking for a risk-managed way to ride the Fed’s...

    2
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    Gavekal Research

    How To Play QE In Europe

    The string of dismal second quarter data that emerged from the eurozone’s core on Thursday has left investors facing a quandary. Clearly the woeful GDP prints from Germany—down -0.2% quarter-on-quarter—and France—which stagnated for the second quarter in a row—make it more likely that the European Central Bank will embark on full-blown quantitative easing in the coming months, and sooner rather than later. But while the probability of QE is...

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