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    Gavekal Research

    Europe’s Surest Bet

    As investors fret about the trajectory of US growth and the sustainability of the Trump reflation trade, Europe is getting drawn in. Sovereign yields fell pretty much across the board yesterday on worries that the eurozone’s gathering cyclical upturn could be disrupted. In this case, the thinking is that monetary stimulus by the European Central Bank gets extended. To our mind, such worries are overdone as—absent an external shock—Europe’s pick-...

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    Gavekal Research

    Where The French Center May Fail

    Just five weeks after the deciding second round of France’s presidential election, French voters go to the polls yet again. In another two-round ballot, to be held on successive Sundays in June, the French electorate will vote in a new lower house of parliament. The overwhelming consensus is that voters will choose a centrist in the presidential election. But if they do, their choice may well not allay France’s heightened political risk.

    2
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    Gavekal Research

    The UK Nine Months After The Brexit Vote

    With Theresa May’s government set to begin the formal exit process from the European Union, Charles reckons now is the right time to step back and see just how the UK economy has fared in the nine months since that fateful referendum. In this concise chartbook, he tours Britain’s economic and market landscape and finds that value is to be had across multiple asset classes.

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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...

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    Gavekal Research

    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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    Gavekal Research

    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.

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    Gavekal Research

    When A Less Dovish Dove Is A Hawk

    As changes of tone go, Mario Draghi’s was a muted shift. At yesterday’s meeting, the European Central Bank president said that the sense of urgency driving additional easing had diminished, and dropped his pledge to use all the weapons in the ECB’s arsenal to effect monetary accommodation. Interest rates will still remain negative for an extended period, and quantitative easing will continue at least until the end of the year. But while the...

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    Gavekal Research

    Playing The Eurozone Recovery

    For the first time in years you don’t have to be a swivel-eyed loon to think the eurozone has a fairly bright economic future. Growth is broadening, deepening and frankly becoming less newsworthy. The wrinkle is political tail risk, but we think this threat is containable.

    2
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    Gavekal Research

    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.

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    Gavekal Research

    Video: The Self-Sustaining Eurozone Recovery

    A broadening and deepening of the eurozone’s economic recovery suggests that the expansion has finally become self-sustaining. The worry is that a political shock from upcoming national elections tips the single currency area back into crisis. Nick Andrews does not think such a bearish outcome is likely, and in this video explains his preferred investment strategy.

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    Gavekal Research

    The Upside Of Eurozone Inflation

    As even formerly dovish policymakers on the Federal Open Market Committee have hardened their rhetoric in recent days, the US dollar has strengthened, with the bilateral EUR/USD rate falling back to dip briefly below the US$1.05 mark late Tuesday. Whether the US dollar’s run-up can be sustained is questionable, however. With the market expecting three US rate hikes this year, the US dollar appears priced for a “Trumpflation” outcome that both...

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    Gavekal Research

    The Battle To Command The Logos

    The “Logos” encompasses a society’s language, its way of looking at the world, and its dominant political narrative—he who commands it has his hands on all the levers of political power. Every so often, however, a new communication technology emerges that allows the rise of a new Logos to challenge the old.

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    Gavekal Research

    The Eurozone’s Ongoing Rebalancing

    Yesterday the European Commission criticized Germany for its “persistently high current account surplus”. Berlin should take more steps to boost domestic demand in Germany, Brussels suggested, in order to trim its external surplus and to help the rest of the euro-area rebalance. It is hardly new advice, but the EC does not seem optimistic it will be heeded anytime soon. In the same release, it forecast that Germany’s current account surplus will...

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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.

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    Gavekal Research

    A Methodology For Playing The Eurozone Bond Markets

    In yesterday’s Daily, I argued that a long position in the French CAC 40 stock index, locally funded, versus a short position in Germany’s Dax offers investors a neat “heads I win, tails I don’t lose” hedge against a possible break-up of the euro driven by French politics (see It’s Time To Buy French Equities).

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    Gavekal Research

    The Italian Debt Trap Jaws Tighten

    In the middle ages Venice thrived as the economic, artistic and intellectual leader of the Mediterranean. By 1500 it was in retreat, but the roots of that decline dated to a 1286 decision by the city state’s governing council to vest power in the hands of 40 great families which dominated the trading economy. The cycle of innovation that had driven the “Queen of the Adriatic” ebbed as special interests gradually captured the system.

    2
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    Gavekal Research

    It’s Time To Buy French Equities

    As regular Gavekal readers may remember, I have always maintained that over the long run the returns delivered by two different stock markets— adjusted for exchange rate fluctuations and differences in pay-outs—must be the same. This is just another way of saying that in an open economy the returns on invested capital generated by well diversified stock markets have to be the same.

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    Gavekal Research

    The Eurozone’s Silver Lining

    Just as it has been hard to work up much excitement over the last couple of years about the eurozone’s grinding emergence from economic despond, so investors should not be too downhearted at the latest lackluster growth data. Yesterday Eurostat revised down its flash estimate for 4Q2016 eurozone GDP growth to 0.4% QoQ, compared with its advance estimate of 0.5% released two weeks ago. The downward revision was due mainly to weaker than expected...

    3
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    Gavekal Research

    In Dutch With The Electorate

    There is a tendency to divide Europe into the “serious” beer drinkers of the north and the not so serious wine tipplers of the south. Using such a dichotomy reinforces a common assumption that trouble in modern day Europe always arrives from the Mediterranean regions. It explains why there is a cottage industry of politicos watching developments in Italy, Spain, France and Portugal, while precious little energy is expended on political goings on...

    1
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    Gavekal Research

    Choosing Between Disadvantages

    It was a record that Germany would rather not have announced, at least not this week. Yesterday official data showed that Europe’s über exporter racked up a current account surplus in 2016 of US$281bn versus a mere US$210bn for China. With the US running by far the largest offsetting deficit, such data means that the temperature between Washington and Berlin is likely to get hotter.

    4
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    Gavekal Research

    Germany And The Greek Question

    Last month Cedric Gemehl and I argued that the new geopolitical back-drop offered by Donald Trump had changed the basic strategic equation for Germany. Berlin could respond by doubling down on its mercantilist impulses, or alternatively embrace its eurozone partners. An interesting test case of our hypothesis has just arisen: yes, the Greek problem is back on the agenda.

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    Gavekal Research

    The End Of The European Dream

    Back in 2002 I wrote a book, Lions Led By Donkeys, whose main point was that the euro’s adoption would kill the competitive and heterogeneous Europe that I so loved. It was prefaced by Milton Friedman who predicted that Europe was set to enter a period of rigor mortis. Fifteen years on and it is clear that Europe as a unitary concept is indeed dying.

    4
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    Gavekal Research

    The Eurozone Upturn Continues

    The data flow out of the eurozone—both forward and backward-looking—continues to paint a picture of accelerating activity, subdued core inflation, ongoing monetary accommodation, and—most notably for investors—improving corporate earnings.

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    Gavekal Research

    The Real Political Risk In France

    There are many areas where Anatole and I agree to disagree. But one in which the two of us see eye to eye is the heightened influence political risk may have on markets this year. Consider France, where the political situation threatens to get complicated. The problem is not so much the presidential election, due to be held in two rounds in April and May, but the legislative elections set to be held a month later.

    2
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    Drawing Meaning From 2016, And A Roadmap For 2017

    Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

    0
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    Gavekal Research

    The Return Of German Inflation

    Inflation is re-emerging in Germany, and a tightening labor market implies inflationary pressures will continue to mount in what could promise to become the great German reflation that many have long looked for to rebalance the eurozone economy. Yet rising inflation threatens to erode one of the central tenets of the German economic model.

    0
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    Gavekal Research

    Germany’s Date With Destiny

    Germany, more than any other European economy, has relied on the US-dictated, rules-based international system to define its post-World War II identity. Germany’s highly specialized export-orientated economy has thrived within the World Trade Organization and its security has been ensured by the American nuclear umbrella. It is not clear whether Donald Trump’s recent broadside against Berlin reflects a permanent rupture in that order, but...

    0
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    Gavekal Research

    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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    Gavekal Research

    Audio & Transcript — Gavekal Research January Call

    Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

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    Gavekal Research

    Video: A Coming US-China Trade War?

    In this video interview Arthur explains how a US-China trade war may play out and the implication for capital outflows from China

    0
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    Gavekal Research

    Video: The Dissonance In US-China Relations

    Once Donald Trump occupies the White House he is sure to take aim at China in the form of new tariffs, anti-dumping actions and the labeling of the country as a currency manipulator. What is unclear is whether such actions reflect a tough negotiating stance, or instead a fundamental shift in the strategic equation. In this video interview, Arthur explains why the mixed messages coming out of Washington have the potential to spark a dangerous...

    0
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    Gavekal Research

    Political Fiction

    European economic indicators have turned up in recent months, causing many investors to conclude that the eurozone’s banishment in the desert of economic stagnation is over, and the promised land of a normal recovery beckons. I am not convinced and judging by recent moves in the bond market, I’m wondering if the next eurozone crisis is already upon us.

    2
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    Gavekal Research

    A Very Turkish Mess

    Get into a taxi in Rio de Janeiro, Jakarta or Cape Town, and ask for that day’s US dollar exchange rate, and the chances are that the driver will know the answer to within a decimal point. Try the same thing in Tokyo, London or Berlin and you will likely receive a blank stare. My anecdote reflects a simple reality: most people in emerging markets think in two currencies: their own and the US dollar. This highlights most emerging market consumers...

    5
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    Gavekal Research

    Firing On Three Cylinders

    The upturn in the eurozone continues to gain momentum. The recovery in France which long has been among the European economy's laggards, coupled with brisk activity in Germany and Spain, suggests that the eurozone is now firing on three of its four main cylinders in a cyclical upswing that promises to become self-sustaining.

    1
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    Gavekal Research

    The Gavekal Monthly: Our Top 12 Questions For 2017

    For our first Monthly of the year, we depart from our normal format to offer our thoughts on the dozen most important questions investors must face this year. Not surprisingly, the issues that rose to the top were the impact of the new Trump administration's policies on the dollar and US bond yields, and whether the eurozone will spend the year tearing itself apart. Also,oil prices, the risk of financial implosion in China, and where to...

    2
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    Gavekal Research

    A Higher Headline CPI Does Not Spell ECB Tapering

    According to the financial media, eurozone inflation is “soaring”. The initial estimate released yesterday showed that consumer price index inflation picked up to 1.1% year-on-year in December, from 0.6% the previous month. That is the fastest rate since 2013. What’s more the rise occurred against a background of generally accelerating economic activity. In December, the eurozone composite PMI ticked up to 54.4, its highest reading since May...

    0
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    Gavekal Research

    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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    Gavekal Research

    A €20bn Start In Italy

    Yesterday the Italian government said it would seek the permission of parliament to raise €20bn in new debt to fund the recapitalization of the country’s weakest banks. Although Italy’s politicians had been earnestly hoping to avoid overt state involvement in bank restructuring, this could well turn out to be a positive development. Coupled with encouraging progress towards the private sector clean-up of Italy’s biggest bank, a well managed...

    1
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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

    Our 2016 Holiday Reading List

    “All books are divisible into two classes,” said John Ruskin, “the books of the hour, and the books of all time.” This year’s list of works enjoyed by Gavekal staff in 2016 includes books from both categories; among them are an account of Russian nationalism, an examination of the sharing economy, and a look at the future of Japan. Happy reading.

    2
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    Gavekal Research

    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...

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    Gavekal Research

    For The ECB, Less Really Is More

    Mario Draghi and his colleagues in the European Central Bank had a difficult line to tread yesterday. On one hand the ECB president faced pressure to wind down his program of quantitative easing. On the other, lingering risks in Europe’s periphery argued for a continuation of ECB asset purchases in order to avoid rocking the financial boat heading into next year’s packed political calendar.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research December Call

    Louis and Anatole outlined their views on the new investment environment. Louis focused on the apparent contradictions in investors’ reaction to Donald Trump’s win in the US presidential election. Anatole argued that the US has almost certainly transitioned to a more inflationary growth path, but said it would be a slow build-up.

    0
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    Gavekal Research

    Putting The Boot Into Italy

    Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would...

    5
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    Gavekal Research

    Assessing EMs Vulnerability To The Trump Trade

    Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...

    0
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    Gavekal Research

    The Cost Of Italy’s “No” Vote

    Europe lurched another step towards the eventual break-up of the eurozone yesterday, when the Italian electorate rejected constitutional reforms that would have broken the country’s legislative logjam, allowing much-needed economic restructuring. For European policymakers, the simultaneous rejection across the Alps of far-right candidate Norbert Hofer in Austria’s presidential election was small consolation. Hofer’s defeat shows that the...

    0
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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

    Something's Gotta Give

    Louis Gave held a conference call on December 6 where he discussed the state of global markets as the US gets ready for a Trump presidency. The fundamental challenge for investors is that while equities and the US dollar have rallied strongly and bonds have sold off in a “Trump reflation trade,” it is not clear how long that trade can withstand the reality of Trump’s economic program.

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