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    Gavekal Research

    Why The US Cannot Win A Trade War

    The US has made a fundamental policy mistake in pursuing a trade war against China. A Keynesian macroeconomic analysis shows that the US will likely be worst affected by the conflict, while China should escape unscathed and several other emerging markets could be clear gainers. This sell-off may be an ideal opportunity to "buy the dip" in EMs

    7
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    Tail Risks That Worry Me

    Yesterday I made the case that emerging markets should be superior performers in a global bull market, which I characterized as the most hated in history. What that analysis left out was the relative prospects of the other big blocks in the global equity universe; namely, Europe and Japan. My core point yesterday was that trade wars do more harm to economies that close their markets than those countries which supply them, and on this score...

    1
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    Gavekal Research

    Misunderstanding Today’s EMs

    Suppose that, like me, you think the global equity bull market has a few more years to run and hence the sell-off which culminated with Turkish debt being downgraded two weeks ago was a merely a correction. Where are the best opportunities to “buy the dip”? The answer depends on whether you also share my view about the underlying causes of this year’s market setbacks.

    4
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    Gavekal Research

    The Most Hated Bull Market In History

    Anatole reviews the state of the US bull market and concludes that it still has legs. He does, however, warn that portfolio strategies which worked well during the disinflationary era since the mid-1980s are unlikely to play well in this bull market’s later stage.

    2
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    Gavekal Research

    The Bullish Logic Of Trump’s U-Turns

    The news on Wednesday that Donald Trump’s administration is considering imposing tariffs of 25%—rather than 10%—on an additional US$200bn of Chinese goods might appear to be an aggressive escalation of its trade conflict with China. But there is a high probability the proposed tariffs will never be implemented. Trump has a track record of talking tough, only to back down before it comes to the crunch; a pattern of behavior that may help to...

    4
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    Gavekal Research

    The Arithmetic Of Brexit

    If a country votes to make two plus two equal five, that “democratic decision” will eventually be overwritten by the rules of arithmetic. Anatole reckons this is what’s playing out in Britain, as Theresa May’s government struggles to get a parliamentary majority for any realistic Brexit plan. If the situation persists, the only alternative will be another referendum—only this time the choice would be between remain and a far less attractive, but...

    11
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    Gavekal Research

    Time To Buy Brexit Britain

    “Will the Brexit agony never end?” Anatole asked in mid-June. It now seems that the agony may end much sooner than expected. Following last Friday’s decision by prime minister Theresa May to blur all her “red lines” in negotiations with the EU, and—paradoxically—the subsequent resignation of hard-Brexiteer cabinet minister David Davis, the time to start buying cheap British assets may have come.

    4
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    Gavekal Research

    The Terms Of Betrayal

    Will the Brexit agony never end? Theresa May managed this week to remove troublesome amendments attached by the House of Lords to her legislation for taking Britain out of the European Union. But she was immediately in even deeper political trouble. These problems show just why I have been advising clients to avoid any big bets in sterling assets, whether long or short.

    1
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    Gavekal Research

    ‘Peak Politics’: Another Chance To Buy The Dip?

    In recent weeks, investors have been hit with multiple political shocks in the shape of Italian politics, American trade policy and global oil shenanigans. But even as President Donald Trump seems to escalate the American “trade war” and Italy’s new prime minister thumbs his nose at Brussels’ budget parsimony, Anatole asks if political risks have in fact peaked, offering a “buy the dip” opportunity.

    0
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    Gavekal Research

    Whether To Buy Italy (And The Euro)

    On Wednesday, Louis argued that the Italian president’s rejection of a proposed coalition finance minister was “worse than a crime, a mistake”. Anatole and Cedric are not so sure. In this paper they examine the two conditions—one political, one financial—that will signal a major buying opportunity in Italy.

    2
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    Gavekal Research

    The Resurgence Of Political Risk

    Political risk is now the main driving force of financial markets. In 2017 investors learned—or thought they had learned—that political upheavals just create noise, with no lasting effect on market trends that are set by economic fundamentals. But in 2018 this relationship has been reversed. Wherever we look today—at oil prices, global trade flows or conditions in Europe—politics seems to overwhelm economic fundamentals and set the market trends.

    2
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    Gavekal Research

    Hardly A Game Changer For Oil

    While nobody could have been surprised by the full-scale commercial warfare launched against Iran by President Trump yesterday, his announcement raised more questions than answers. The most important question is whether this action will make the world safer or further destabilize Middle Eastern and global geopolitics. The second question is whether the US enforcement of sanctions will really be as tough as Trump’s belligerent rhetoric and the...

    0
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    Gavekal Research

    What—Me Worry?

    What should most worry investors about the state of the US economy today? The answer is: “Total absence of worry”. That was my clear conclusion after a week in Los Angeles hobnobbing with the thousands of CEOs, financiers, technologists and politicians at the Milken Global Conference. An intoxicating cocktail of tax cuts, deregulation and record profits has transformed the post-crisis normalization of business confidence into uncritical euphoria.

    0
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    Gavekal Research

    The New Source Of Market Risk

    Believe it or not, there was good news, as well as bad, from the US markets last Friday. The bad news was obviously Donald Trump’s threat to escalate the trade war with China and the equally aggressive response from Beijing. The good news was the fall in March’s US payrolls growth to just 103,000 from February’s upwardly-revised 326,000. This slowdown has eliminated, at least until after the summer, the risk of an unexpected Federal Reserve...

    0
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    Gavekal Research

    Reasons To Buy The Dip

    After spending many years as Gavekal’s equity permabull, I joined Charles and Louis last December in warning of the risks to what was then a roaring, and accelerating, bull market. But my way of thinking about these risks was rooted in a different analytical framework, and so I have come to a different conclusion about how investors should respond to this latest sell-off (for Louis’ take, see Following Yesterday’s Pullback). With the lows of mid...

    0
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    Gavekal Research

    Why Aren’t Bond Investors Panicking?

    Once again, the volatility that rocked global financial markets in recent days was at least as interesting for what it didn’t tell us as what it did. Amid growing protectionism, rising rates and fiscal irresponsibility in the US government, the biggest and most important financial market of all—the US treasury market—isn’t bothered.

    7
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    Gavekal Research

    London Seminar — March 2018

    In our seminar in London this week Charles pondered the investment consequences of the US moving back into an inflationary period. Tom discussed Chinese politics in light of Xi Jinping’s elevation. Cedric presented on how investors can best benefit from the diversity of the European economy. Anatole explained why the long-running global bull market is likely to continue, but also where the risks are buried.

    0
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    Gavekal Research

    Change And Stasis In Italy

    In Italy’s general election on Sunday, the anti-establishment Five Star Movement emerged as the largest single party in each chamber of parliament, and the populist Lega eclipsed Silvio Berlusconi’s Forze Italia to dominate the right of Italian politics. Following these changes, it is hard to see how any plausible combination of parties can secure a stable majority in both houses of parliament. As Cedric and Anatole explain, the most likely...

    0
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    Gavekal Research

    Time To Stop Worrying About EU Political Risk

    Is it time for investors to finally forget about “political risk” in the eurozone? Judging by the weekend’s events in Germany and Italy the answer is an emphatic “Yes”. The big event was the overwhelming vote by Germany’s Social Democratic Party to participate in a “grand coalition” with the center-right. This means that Angela Merkel will be reappointed for a fourth term as chancellor. Thus Germany will have a stable government with no serious...

    6
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    Gavekal Research

    After The Yellen And Bernanke Puts, The Pavlov Put

    Last Monday, I pointed to three reasons why the recent turmoil in global equities would probably prove nothing worse than a counter-trend “buy on dips” correction, rather than the start of a serious bear market. That's not to say that worries about inflation and overheating are unfounded. But investors are still quite relaxed about both growth and inflation, as evidenced by historically modest bond yields.

    3
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    Gavekal Research

    CSI Wall Street

    Bear market massacre or harmless buy-the-dip correction? Financial investigators have spent the weekend sifting through, dismantling and reassembling dozens of clues to determine the true nature of the shocking crime committed on Wall Street last week, as stock prices suddenly went down instead of up. But amid the righteous indignation inspired by this offence against morality and natural law, possibly the most important forensic evidence has...

    5
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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

    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

    The Big Questions For 2018

    Many of the important questions confronting investors at the beginning of 2018 are the same as they were 12 months ago. And in most cases I would suggest the same answers. This may seem boring or stubborn, but it is quite reasonable in the middle of a long term economic expansion and structural bull market.

    1
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    Gavekal Research

    No Full English Brexit In The EU’s Roach Motel

    Full English Brexit is off the menu. When Theresa May rushed into the Café Berlaymont at 6:00am last Friday, all that was left on the menu was an over-priced double espresso with a side of Irish bacon. When she returned to Brussels yesterday, after losing a crucial parliamentary vote on her Brexit policy, the only new item on the menu was a large slice of humble pie.

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research December Call

    In Gavekal Research’s monthly conference call yesterday Anatole Kaletsky outlined five reasons why investors can be optimistic that the current bull market will continue for years to come. His bullishness is moderated by three broad risks.

    0
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    Gavekal Research

    Strategy Monthly: The Long Cycle Continues

    As equity markets everywhere continue to trade higher, money managers are getting increasingly nervous about how long the rally can last. In December’s Strategy Monthly, Anatole argues that we are still only half-way through a secular bull market that can last through the end of the decade. With further US rate hikes on the cards, barring any nasty surprises non-US markets are likely to outperform going forward. The only fly in the ointment is...

    0
  • Gavekal Research

    Goldilocks And The Ten Grizzly Bears

    Over the last fortnight, Anatole has written lengthy pieces on why he remains structurally bullish and how investors should play this trend. Today, he takes a realistic look at factors that could disrupt his generally upbeat assessment of the global economy and markets. This piece is a journey into Anatole’s darker side.

    2
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    Gavekal Research

    A Regime Change For Oil?

    Every US or global recession in the past 50 years has been preceded by a doubling or more of oil prices, but not every doubling of oil prices has been followed by recession. While even US$70/bbl probably does not pose a serious risk to the world economy, any rise above US$70 could spark a combination of inflationary pressure and reduced demand that proves lethal to global financial conditions and growth.

    0
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    Gavekal Research

    Fake Brexit? Or No Brexit?

    The British economy since the Brexit referendum is often likened to the suicide jumper who leaps off a 20-storey building, shouting “so far, so good” as he falls past the 10th floor. This comparison is unfair to suicides. The real message about economic performance from the government’s annual budget statement yesterday was “so far, so bad”. While a minority of economists and investors—plus a large majority of Conservative politicians—share...

    10
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    Gavekal Research

    New York Seminar — November 2017

    At Gavekal's November seminar in New York Louis Gave, Arthur Kroeber, Cedric Gemehl and Anatole Kaletsky presented their macro outlooks and investment recommendations.

    0
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    Gavekal Research

    Asset Allocation For The Global Bull Market

    On Monday Anatole outlined his fundamental reasons to believe that the world is enjoying a global bull market that still has years to run. Today he reviews the investment recommendations that flow from his thesis, and examines how investors can best play the unprecedented divergence of the US business cycle from the cycles in Europe and the emerging markets.

    2
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    Gavekal Research

    This Is (Still) Not A Peak: It’s A Global Bull Market

    It was almost five years ago that Anatole started to shout loudly that the US equity market had achieved a clear breakout from its more than decade long bear market trading range. His advice has been to stick with the trend. In light of this year’s near across-the-board upward moves in risk assets globally, it would be tempting to back away from this positioning. However, in this piece he argues that the bull market is now going global and so it...

    3
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    Gavekal Research

    False Dawn For The Dollar — And Oil

    Last week the US dollar broke out of its summer trading range and hit its strongest level against the euro and the yen since July. The Brent oil price broke through US$60/bbl to a two-year high. And even sterling seemed to be on the verge of strengthening beyond its post-French election trading range against the euro. How should investors respond to all these breakouts?

    1
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    Gavekal Research

    London Seminar — October 2017

    Anatole argued that the investment environment should remain upbeat given predictable monetary policy and a global cyclical upturn. Chen Long contended that China’s post-Party Congress slowdown should be gradual. Cedric made a bullish case for European equities, while Charles presented Gavekal’s latest artificial intelligence investment tools.

    0
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    Gavekal Research

    Sterling And The Brexit Soup

    Anyone who doubts that interest rate expectations are the main driving force of currency movements, got a wake-up call last week, when sterling surged from US$1.32 to US$1.36 in response to the Bank of England’s bluntly hawkish statement that “there may need to be some [upward] adjustment of interest rates in the coming months”. Nevertheless, I remain a denier.

    0
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    Gavekal Research

    Why Lower Forever Is Good News For Investors In Big Oil

    Suppose you are convinced, as I am, that oil prices will fall to near-zero by the middle of this century, for the reasons I outlined last week. If so, then among the best investments of the coming decades will be the equity of giant international oil companies such as BP, Shell, Exxon, Chevron, ENI and Total.

    7
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    Gavekal Research

    Oily Slope Of Hope

    As Louis often points out, a highly-touted stock that fails to rise on good news is often riding for a fall. The best example of such a “tired bull” at present is not the much-despised US equity market, which has continued making higher highs and higher lows since February 2016, despite a pretty terrible news flow. It is crude oil.

    0
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    Gavekal Research

    The Battle Of Brexit Is Over

    Judging by statements made by two of the most fervent Europhobes in Theresa May’s cabinet, Soft Brexit has emerged the victor over Hard Brexit. While this means the UK's exit will be postponed during a transition period, and possibly beyond, Anatole argues this comes with its own drawbacks and risks. Things are likely to get worse before they get better.

    0
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    Gavekal Research

    Draghi Can’t Lean Against The Euro’s Rise

    After the euro broke out of its three-year trading range last week, it is reasonable to assume that the European Central Bank would much rather see a big correction than a further move to the upside. But central bankers can’t always get what they want—and their powers to control the currency markets are much more limited than generally assumed by day traders and media headline writers.

    1
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    Gavekal Research

    Who’s Afraid Of The ECB?

    Mario Draghi’s hint last month that the European Central Bank’s bond buying may not continue forever unleashed a storm of panic among the perma-bears who still dominate the media and market commentariat. But its actual effect on markets themselves has so far been close to minimal. So should investors worry—or relax—about a repeat of the “taper tantrum” in May 2013, when Ben Bernanke first hinted that the Federal Reserve would eventually start to...

    0
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    Gavekal Research

    The Lost Decade

    Next month will mark the tenth anniversary of the Global Financial Crisis, and the developed world’s GDP per capita still lingers 20-25% below its pre-crisis long term trend. Were there no good economic policies to deal with the aftermath? Far from it, argues Anatole, but four features of post-crisis politics and ideology blocked constructive policy responses.

    4
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    Gavekal Research

    Draghi’s Two Ps And The Euro

    When choosing three adjectives to describe the ECB’s evolving monetary policy stance, Mario Draghi this week alighted on confidence, persistence and prudence. Yet judging by the big reaction in currency and bond markets, traders ignored the two Ps and heard only about Draghi’s confidence in Europe’s strengthening recovery. Markets treated the speech as a unambiguous signal that the ECB is turning more hawkish.

    2
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    Gavekal Research

    May Day For Hard Brexit

    After the Conservative government of UK prime minister Theresa May lost its parliamentary majority in last week's general election, Anatole argues that the "hard Brexit" strategy formerly pursued by May no longer looks politically viable. That means a Norwegian-style soft Brexit is more likely, which makes sterling assets look relatively attractive.

    3
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    Gavekal Research

    Audio & Transcript — Gavekal Research June Call

    Anatole Kaletsky responded to the British Conservative Party’s shock loss of their electoral majority by arguing that the UK is now likely to end up with a soft Brexit and may even end up rejoining the European Union. Louis Gave looked across recent market moves and argued that the case for emerging markets remains exceptionally strong.

    0
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    Gavekal Research

    Trading The British Election

    Anyone who claims to be confident about the outcome of tomorrow’s UK election is really just guessing, which is why we have advised against taking big positions in sterling assets—either long or short—before the exit polls are released. But from 10.01pm onwards, the currency markets could start to see major moves that are very tradeable in one direction or another. So for clients who got hooked on overnight currency trading after profitable (or...

    3
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    Gavekal Research

    ECB Normalization And Why Not To Worry About It

    The US Federal Reserve will almost certainly announce the second of this year’s rate hikes at its next policy meeting on June 14. The week before, on June 8, the European Central Bank will probably state for the first time in years that the risks to the eurozone are now balanced “symmetrically” instead of tilting unequivocally downwards. If they were brave they might even echo Benoit Coeuré, the French governing board member who in an interview...

    1
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    Gavekal Research

    What Trump Will And Won’t Do

    After President Trump’s shock firing of his top law enforcement official, this week has seen the White House scramble to keep some semblance of control over the news agenda. This means that an administration that was already dialing back the radical parts of its reform agenda will have even less room to drive change.

    1
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    Gavekal Research

    Macron And A New Europe

    With the populist, anti-EU tide now clearly reversing, first in Holland, then last night in France and finally in September’s German elections, investors can put to rest their worries about a breakup of the euro or the European Union and focus instead on the continent’s economic and financial fundamentals. These fundamentals have been steadily improving since the European Central Bank began its enormous bond purchase program in March 2015.

    5
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    Gavekal Research

    The Flip Side Of A Hard Brexit

    The pound has rallied strongly since Theresa May announced an early UK general election on April 18 and may soon break through US$1.30, opening the way for a rise back to levels not seen since last summer. This move has mostly been driven by politics in France, rather than Britain, but this may be about to change.

    1
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    Gavekal Research

    Stop Worrying And Buy Europe

    The market reaction made good sense, assuming that the opinion polls—which turned out to be uncannily accurate in the first round of the French election—prove right again and Emmanuel Macron wins by a landslide on May 7. The polls may, of course, be completely wrong and Marine Le Pen may become the next President of France, but for this to happen the polling error would have to be many times larger than it was in the case of Brexit or Trump.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call On The French And UK Elections

    In a special Gavekal Research Conference Call following the results of the first round of the French presidential election, Charles Gave and Cedric Gemehl presented their analysis of Marine Le Pen and Emmanuel Macron’s prospects in the second round in two weeks. Anatole Kaletsky presented his view of British politics and the future of the Brexit process following Theresa May calling for a snap election in June.

    0
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    Beyond The March Payrolls ‘Soft Patch’

    With the world busy going mad, have financial markets unexpectedly come to their senses? Friday delivered an enormous “miss” on US payrolls, with the March number printing at only 98,000, compared with expectations of 180,000. Yet the markets failed to react. The S&P 500 closed almost unchanged, while US treasury yields actually ticked up marginally. This absence of any selling in equities or buying in bonds was a crucial clue, like the dog...

    0
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    Gavekal Research

    London Seminar — March 2017

    In Gavekal’s seminar in London last week Will Denyer, Charles Gave, Tom Miller and Anatole Kaletsky presented their macroeconomic outlooks and offered investors asset allocation advice.

    0
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    Audio & Transcript — Gavekal Research March Call

    Yesterday’s call had Cedric Gemehl and Anatole Kaletsky opine on political risk leading up to French and German national elections later this year. Nick Andrews argued that the eurozone recovery is becoming self-sustaining, and offered views on capturing the upside, while hedging against political risk.

    0
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    The Importance Of The Dutch Election

    Today’s Dutch election may not seem very important in itself, since it is almost inconceivable that the anti-immigration Freedom Party of Geert Wilders will win enough votes to enter the next Dutch government. Nevertheless, the result—which is likely to be clear by around 0400 GMT Thursday—will have a big market impact. That’s because the Freedom Party’s performance will rightly be seen as a leading indicator of political events during the...

    3
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    The Best Macro Trade Of 2017

    What has been the world’s most crowded macro trade of the year to date? Not buying dollars, shorting US bonds or selling French OATs or sterling. The most over-extended speculative position in the world by historic standards has been the bullish exposure to crude oil. This began to reverse last week, and the -7% correction in Brent could soon turn into an avalanche.

    0
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    The Prime Minister Has No Clothes

    Britain’s House of Lords passed a crucial amendment yesterday to Theresa May’s Brexit bill. This amendment would give Parliament a “meaningful vote” at the end of the Brexit negotiations and could offer the possibility of stopping Brexit or seeking to extend the negotiations beyond the 2019 deadline, if the deal Mrs May brings home next year is deemed to be not good enough. Anatole argues this is a game changer for opponents of Brexit.

    7
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    Gavekal Research

    Because Of Trump, Or Despite Him?

    The enthusiastic market reaction to US President Donald Trump’s big speech on Tuesday night can be interpreted in two ways, both bullish for equities and bearish for bonds, but only one of them positive for the dollar.

    0
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    Gavekal Research

    Hong Kong Seminar — February 2017

    Gavekal’s global macroeconomic seminar in Hong Kong in February featured Anatole Kaletsky, Will Denyer and Louis-Vincent Gave. They presented on the global investment outlook under a Trump presidency, the decline in US productivity, and the sustainability of the "Trumpflation" rally.

    0
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    Points Of Agreement And Dissent

    Last week Louis laid out his roadmap for navigating financial markets in 2017. In this follow-up, Anatole picks up on five debating points, and details where and why he agrees or disagrees with Louis.

    2
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    The “Experts” May Yet Be Right

    Last week Louis set out a comprehensive roadmap for 2017. I have just five points to add: two points of strong agreement (on Europe and the oil price); two of dissent (on US bonds and Britain); and one that echoes Louis’s uncertainty and anxiety, but for slightly different reasons (about the pressures on the US dollar and what they could mean for emerging markets). I will explore these specific issues of agreement and dissent in a lengthier...

    3
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    Hard Brexit Means Soft Sterling

    Since the June referendum the only real choice for Britain has been Hard Brexit or No Brexit. The No Brexit option disappeared as soon as Theresa May became prime minister under the slogan “Brexit means Brexit”. Barring some deus ex machina that swept May out of power, that left only one possibility: a rock-hard Brexit.

    2
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    The Crisis Of Market Fundamentalism

    After 2008, the prevailing market fundamentalism forbade political interventions that could have shared the benefits of capitalism while mitigating its costs to specific people. The result was a post-crisis confusion and disillusionment whose political effects we witnessed last year—and which has not yet ended.

    9
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    Between A Rock And A Hard Brexit

    Sterling has gained almost 7% against the euro this month, partly because of comments from British ministers hinting at a softer version of Brexit than the sharp and rapid break implied by Theresa May’s early speeches. For example, sterling’s rebound through US$1.25 and from £0.90 to the euro was directly caused by a parliamentary answer from David Davis, the minister in charge of Brexit, suggesting that Britain might continue to make...

    0
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    Gavekal Research

    Only The Start Of The Trumpflation Trade

    Three weeks after the US presidential election, and it looks as though the Trumpflation trade may be running out of puff. Far from it, argues Anatole. With US policy about to swing from monetarist to Keynesian, markets are only at the start of a long term bear market in bonds and a bull market in the US dollar that will have enormous repercussions on asset prices around the world.

    2
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    Gavekal Research

    Austerity Lingers In Britain

    Rumors of the death of fiscal austerity are greatly exaggerated, at least in Europe. That is the most important lesson for global markets from the UK Treasury’s long-awaited budgetary response to the Brexit vote. Many investors believed in the immediate aftermath of the British referendum that this shock might be the catalyst for more expansionary fiscal policies all over the world. In the past two weeks, the prospect of a Trump fiscal stimulus...

    1
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    What A Trump Presidency Means For Global Investors

    The social and geopolitical implications of the Trump shock are much too complex and too charged with emotion for instant assessments to be worthwhile. Even in the case of ordinary presidential elections, the immediate first-day market reaction usually turns out to be wrong. I will therefore try to avoid moral judgements and confine myself largely to economic observations, dividing them into ten items of good and bad news from a strictly...

    3
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    Heaping Uncertainty On Brexit Doubt

    Markets and media were shocked by yesterday’s High Court judgement that UK prime minister Theresa May must seek parliamentary approval before pursuing her Brexit strategy. But for London’s legal community the decision was not unexpected. Many senior lawyers had predicted that the ruling would go against the government, if only because its case was so poorly presented by the Attorney General, who was forced for political reasons to concede the...

    1
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    When The Facts Change, I Change My Mind

    After the Brexit vote, Anatole became deeply bearish, fearing that a populist insurgency could unleash a destructive retreat from globalization. With the US electorate seemingly set to reject that pathway on November 8, the likelihood of other nations following Britain by turning in on themselves is greatly diminished.

    17
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    A Hardening Brexit And Softening Sterling

    The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...

    3
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    Debate: A Trump Win And The Dollar

    As the world seriously tunes into the US presidential election, four Gavekal partners debate the outlook for the US dollar should Donald Trump emerge victorious and set about his promised remaking of the international security order and global trading system.

    25
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    Gavekal Research

    Prepare For Hurricanes

    After months of contented lethargy, Friday’s big sell-off seemed to confirm the main points that Louis and I made in our conference call two days earlier. Firstly, the faith in “lower forever” bond yields is not a reason for reassurance, but a cause for concern. Secondly, political risks have not been eliminated by the summer’s market rally, merely ignored. Thirdly, what I call the “financial hurricane season” usually starts in early autumn—and...

    8
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    Gavekal Research

    A Brexit-Induced Recantation

    Exactly two months have now passed since the Brexit referendum. It is now an appropriate time to review what has happened, and what hasn’t, since June 23. As a quintessential member of the elite that was angrily repudiated by a majority of British voters, this referendum was a profound emotional trauma. Therefore, my initial reaction turned out to be completely wrong.

    10
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    Why Brexit Still May Not Happen

    With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.

    8
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    Politics Trumps Jobs

    So, it was a false alarm. By that I do not mean the Brexit vote, which remains, for reasons explained at the end of this note, the biggest threat to the world economy and to risk assets since the global financial crisis. The false alarm was the brief panic about a US recession caused by the slump in employment growth reported last month. As I said at the time there were four possible explanations for the shockingly weak May payrolls (see...

    0
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    Everything Just Changed

    There are moments in history when the impossible becomes inevitable without ever passing through improbable. The period after the Lehman Brothers bankruptcy was such a time. Last night’s unexpected repudiation by British voters of 40 years of European Union membership is another. The outcome of the referendum is a shock fully comparable to the Lehman collapse. Rarely, if ever, has a G7 currency fallen by -10% in a single trading session, as the...

    6
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    Brexit Tail Wags The Dog

    If anyone still doubted the claim expressed here on May 25 that politics is now driving global financial markets far more than economics (see The Brexit Vote As Harbinger Of A Populist Age, Or Not), those doubts should have been dispelled by Monday’s trading. From the moment that currency trading started in the New Zealand morning, through the Nikkei and Hang Seng openings in Asia, to the main forex business in London and finally the stock...

    0
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    Populism And A New Financial Crisis

    The febrile behavior of financial markets ahead of Britain’s EU referendum shows that the voting on June 23 will influence economic and political conditions around the world far more profoundly than Britain’s share of 4% in global GDP might suggest. This outsize impact has at least three explanations.

    7
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    Gavekal Research

    Thinking Dark Thoughts

    You can put lipstick on a pig, but there is no way of disguising that the US payrolls last Friday were pig-ugly. For those of us of the bullish persuasion, May’s job growth of only 38,000, the weakest monthly figure since the post-recession employment recovery began in October 2010, sent the first credible signal that Charles’s call for a US recession and full-scale equity bear market could be right after all.

    1
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    The Brexit Vote As Harbinger Of A Populist Age, Or Not

    The biggest threat to the world economy is no longer slumping industry in China, failing banks in Italy, unpredictable monetary policies or seesawing oil prices. All these familiar economic problems now pale compared with the political risks of Brexit, a Trump presidency and resurgent nationalism in Germany. Given the common underlying tensions driving political populism in the big advanced economies, Anatole argues that Britons will on June 23...

    9
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    The Next Big Move In Oil

    With Brent crude approaching US$50 a barrel, analysts upgrading their bearish year-end forecasts and many hedge funds adding to already long energy positions, it seems a good time to re-examine the likelihood that US$50 or thereabouts will be a long-term ceiling for the price of oil. In December 2014, when we first proposed this view (see Oil: Lower For Longer and Will US$50 Be Oil’s Floor, Or Its Ceiling?) it provoked derision from bullish...

    0
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    Time To Bet On Sterling And Against Brexit

    If Britain votes to remain a member of the European Union, the moment when the tide turned against Brexit will probably be remembered as Barack Obama’s London press conference on Friday. With a single phrase Obama demolished the Brexiteers’ most powerful economic argument when he noted, with a friendly but remorseless grin, that if Britain chose to detach itself from Europe it would wait “at the back of the queue” for any special US trade deal....

    1
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    The Case For Sterling

    What was the weakest major currency in the world in the first quarter? It was not the Brazilian real nor the Australian dollar nor any of the other usual suspects among the emerging market and commodity currencies. That accolade went to the British pound, which managed to depreciate by -4%, from US$1.48 to US$1.42, even while the dollar itself fell another -5% on its trade-weighted index.

    2
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    Things Fall Apart

    Over the past century periods of social breakdown have swung the pendulum of power from markets to governments and back. Each crisis ended with a transformation in economic and political thinking. Today, voter anger is a response to the 2008 breakdown of deregulated capitalism. This time, argues Anatole, politicians must reconsider the market fundamentalism that has prevailed in recent decades and design a new system of checks and balances to...

    12
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    Gavekal Research

    Super Mario: Hero To Zero To Hero

    As markets plunged following Thursday’s European Central Bank meeting, it seemed as if Super Mario had turned into Dumb Draghi.But by Friday morning Draghi had again gone from Zero to Hero, with risk-on assets racing ahead in virtually every market around the world.

    2
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    Why Brexit Won't Happen

    Among the multiple existential challenges facing the European Union this year—refugees, populist politics, German-inspired austerity, government bankruptcy in Greece and perhaps Portugal—one crisis is well on its way to resolution. Britain will not vote to leave the EU.

    24
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    Gavekal Research

    The Dollar That Didn’t Bark

    Sherlock Holmes would have loved it. In trying to unravel the unsolved mystery of how US$20trn suddenly vanished from the vaults of international investors in early 2016, the most intriguing clue was the dog that didn’t bark. When the Federal Reserve started its hiking cycle back on December 16, 2015, a rampantly-rising US dollar was generally considered to be among the biggest risks to the global financial outlook. Two months later, the dollar...

    0
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    Crisis? What Crisis?

    Two weeks ago I published an article dissenting from the near-universal view among my Gavekal colleagues, and also probably among our clients, that the global equity markets had entered a severe bear market (see Is Wall Street In A “Bear Market”?). Since I expressed this relatively optimistic view on January 27, the S&P 500 has fallen another -2.7%, the world MSCI-ex US by -3% and the Nikkei by a whopping -8.5% in yen terms. It may therefore...

    4
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    Is Wall Street In A “Bear Market”?

    Charles has boldly defined a serious bear market as a downtrend in which investors who buy at the top do not recover their money for four years or more. By contrast, he dismissed a -15% to -20% decline lasting less than 18 months as a mere bear cub that could equally well be described as a “pause that refreshes”. In my view the present decline it looks rather more like “cub” than an Ursus Magnus.

    4
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    The Oil Market Confusion

    Enough is enough. The oil price collapse that began in the autumn of 2014 may have hit rock-bottom, at least for the time being. Having stayed stubbornly bearish ever since the oil market’s transition from a Saudi monopoly to a normal competitive pricing regime (see Oil: Lower For Longer) it is appropriate to regularly review our assumptions. After the huge price moves of the past two weeks, this review now suggests turning neutral or even...

    5
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    Believe The Hype

    So far so good. Two hours’ trading, which was all the time New York markets had to react to the Federal Reserve rate hike, is hardly a significant sample, but the steadiness and consistency of that brief response must have left Janet Yellen satisfied. The most predictable and predicted event in financial history, turned out to be exactly that. The Fed did exactly what Yellen had suggested all year and what everyone by now expected—announcing a...

    3
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    A Year-Defining Week

    Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organization of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were...

    1
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    Gavekal Research

    Osborne’s Masterful Tack

    “Since 2010, no economy in the G7 has grown faster than Britain,” boasted George Osborne, the Chancellor of the Exchequer, presenting his autumn public spending review yesterday. Indeed it is true that, according to the latest estimates, GDP in both Britain and the US has increased by exactly the same number, 12.4%, since the first quarter of 2010.

    0
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    Gavekal Research

    Brexit: A Blunder To Rank With The Boston Tea Party

    Ask any divorced couple whether their relationship would have been different had they never married. Actually, don’t bother asking, since the answer is obvious. Strangely, most conservative politicians do not seem to understand this—and neither do 48% of British voters. That is the number, according to recent opinion polls, who want a divorce from the European Union.

    2
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    Preparing For Fed Lift-Off

    Now that Friday’s payroll figures have confirmed the US economy’s apparent slowdown as nothing more than a statistical blip, similar to the summer “soft-patches” of 2011 and 2012 and the winter weather hits of 2013 and 2014, the Federal Reserve is near-certain to start its tightening cycle on December 16—which was what Janet Yellen suggested all along. Apart from praising Yellen for consistency and foresight, instead of castigating her for...

    6
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    The Fed And The US Dollar

    Now that the Federal Reserve has calmed down about the risk of a financial meltdown in China, only one further condition appears to be necessary for a December rate hike: October’s payroll figures, out on Friday, must show an appreciable reversion towards this year’s mean monthly growth of 198,000. That would imply September’s surprisingly weak number was a statistical aberration, which seems a reasonable expectation, since most high-frequency...

    0
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    The Best Financial News In Months

    To our relief, China’s latest reserve statistics showed a significantly smaller than expected decline, confirming that capital flight out of China has eased substantially. The threat to the global economy generated by the summer turmoil has now lifted, and markets all over the world should therefore return to risk-on mode.

    0
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    Gavekal Research

    Not The Obvious Payroll Conclusion

    Is the US economy sliding towards recession? After six years of steady expansion, it would not be unusual for the business cycle to start rolling over. This possibility, suggested by Charles’s time-tested recession indicators (see Positioning For A US Recession), caused equities and the dollar to swoon right after Friday’s unexpectedly weak payroll report. Until this release it was tempting to dismiss such historic cyclical indicators that rely...

    0
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    The Fed Throws EMs A Lifeline

    The Federal Reserve’s decision to keep on procrastinating over a rate hike should have come as no surprise to anyone who has paid attention to the comments of Janet Yellen. And indeed it didn’t come as much of a surprise to the markets, to judge by their reaction yesterday. After a brief flurry of activity following the announcement, the US equity market closed little changed on the day. Currency and bond markets proved a bit more excitable, but...

    0
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