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E.g., 22-10-2017
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    Gavekal Research

    A Free Hedge In Hong Kong

    Cost effective hedges are getting increasingly hard to find. However, the US dollar-Hong Kong dollar forward market offers a cost-free hedge against global volatility, explains Joyce, with 12-month forwards likely to move from their current discount to a handsome premium over spot in the event of a general risk-off move.

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    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...

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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.

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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...

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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...

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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 Gavekal Monthly: Shall We Dance?

    In a world in which the Fed shows no inclination to get ahead of the curve on inflation and in which both the ECB and the BoJ are in full quantitative easing mode, investors everywhere are on the hunt for yield. But the chase is a nervous one. Investors are all too aware that equities and bonds are sending conflicting signals, and that the favorable trends that have lifted most assets over the last six months could be disrupted by a sudden spike...

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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

    The Next Monetary Move

    Shinzo Abe was today scheduled to meet with Ben Bernanke, the chief architect of unconventional monetary policy responses following the 2008 crisis, with the issue of Japan’s adoption of so called helicopter money expected to top the agenda. In this piece Joyce asks would Japan do it and more importantly could money drops make any difference in the land of the stagnant price index.

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    Gavekal Research

    Ignore Japan’s Banks At Your Peril

    Any investors contemplating adding to their Japanese equity exposure following Shinzo Abe’s weekend election victory and the subsequent market rally should look closely at the performance of Japanese bank shares. Their signal, argues Joyce, is anything but encouraging.

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    Gavekal Research

    The Gavekal Monthly: Life After The Brexit Vote

    The world is now a considerably more uncertain place than a month ago. Following the UK’s referendum vote in favor of Brexit, a near-term recession in the UK is more likely than not, the European Union faces the possibility of a renewed economic slowdown, and investors find themselves forced to reassess the probability that Donald Trump will win November’s US presidential election. In this edition of the Gavekal Monthly, our analysts set out to...

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    Gavekal Research

    What Constitutes A Certain Investment In Today’s Market?

    What concerns investors most in these tricky post-Brexit times is the sheer uncertainty of it all. No matter whether the “Leave” camp can work out a non-ruinous strategy for Britain to exit the European Union or “Remain” can exercise some kind of parliamentary blocking action against this “terrible mistake”, there is agreement that things will get messier before the picture clears. Even if the UK-EU “divorce” proves a rational end to a...

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    Gavekal Research

    Japan: Twice Bitten, Thrice Shy

    It was a case of twice bitten, thrice shy. This week Shinzo Abe announced he will postpone next April’s planned 2pp increase in Japan’s sales tax until October 2019—a step the prime minister had previously sworn he would only take in a Lehman-scale crisis. Despite Abe’s protestations to the contrary at last weekend’s G-7 meeting, the world economy is facing no such meltdown. Nevertheless, deferring the tax hike makes sense. Previous increases in...

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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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    Gavekal Research

    The Message From Gold And Silver

    A simple rule of thumb that we at Gavekal use is to categorize assets depending whether their value derives from scarcity or a productive capacity to generate positive cash flows. A good proxy for investors’ preference for scarcity over productive assets is the gold/silver ratio, which stands close to a 20 year high. The implication of this extreme positioning is that the end of the world really is nigh, or alternatively a pull–back in the ratio...

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    Gavekal Research

    The Chinese Debt Resolution

    China’s chosen development approach of investment-led industrialization meant it was fated to face an eventual debt crisis. Like Taiwan 30 years ago, China has moved from an export-driven economy to one motored by domestically-focused investment spending. Its challenge has been to “rebalance” toward consumption and in the process stop an escalating build-up of debt which funds projects with ever lower returns. Yet so long as China has a...

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    Gavekal Research

    The Gavekal Monthly: Glass Half Full Or Glass Half Empty?

    The past month has seen the US dollar seemingly top out, the oil price settle into a trading range and China’s economic outlook stabilize. Emerging markets in particular have bolted higher despite weak global trade, an oversupplied commodity complex and worries about high levels of leverage. In this edition of The Gavekal Monthly we ask a pressing question for EM investors: is the glass now half full, or half empty?

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    Gavekal Research

    Can The BoJ Ever Do The Right Thing?

    Another Bank of Japan meeting, another market slump. Yesterday saw investors mortified by a BoJ tease which came to nothing, while in January the same market response followed an activist move to charge a negative interest rate on a small part of banks’ reserves. In response to the disappointment the yen soared against the US dollar with its biggest daily move in seven years, while the ensuing six hours saw a 7% peak-to-trough move in Nikkei...

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    Gavekal Research

    Emerging Markets Reality Check

    Emerging market assets have enjoyed a powerful momentum-driven rally over the last two months. A more dovish stance from the US Federal Reserve, falling yields, acceptance that the US dollar is no longer strengthening, and a pick-up in commodity prices combined to quell the market’s worst fears and persuade investors that emerging markets were not in fact facing Armageddon. More recently last week’s release of relatively upbeat economic data...

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