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E.g., 25-04-2017
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    Gavekal Research

    Takeaways From France’s First Round

    For once the opinion pollsters got things right. Although the candidates of France’s traditionally dominant left and right wing parties were both eliminated in yesterday’s first round presidential election, the political center held. Independent Europhile centrist Emmanuel Macron emerged with the largest share—23.9%—of the vote, for a second round face-off against nationalist Euroskeptic Marine Le Pen, who captured 21.4%.

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    Gavekal Research

    French Political Trouble Just Started

    Investors cheer the win of centrist Emmanuel Macron in the first round of the French presidential election, presuming a victory in the second round would mark the end of Euroskeptic populism. Charles is not so sure about this benign interpretation and argues that France may in fact be on the cusp of a new era of political instability.

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    Gavekal Research

    Final Thoughts On The French First Round

    Going into Sunday’s first round vote in France’s presidential election, it is widely assumed that yesterday’s tragic events on the Champs Élysées will boost nationalist-populist candidate Marine Le Pen. What is clear is that the race has tightened: centrist outsider Emmanuel Macron is polling at 24%, Le Pen at 22.5%, Republican François Fillon at 19% and firebrand socialist Jean-Luc Mélenchon at 18.5%. Here are some final thoughts for navigating...

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    Gavekal Research

    Target2 Fears Are Wide Of The Mark

    With Euroskeptic candidates showing strongly in the opinion polls ahead of France’s presidential election, Italy’s debt trap as inescapable as ever, and negotiations over the next round of Greece’s bail-out making little headway, talk about a possible break-up of the eurozone is once again doing the rounds. And as it does so, fears are rising about the growing magnitude of the European Central Bank’s Target2 balances, and the financial havoc...

    5
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    Gavekal Research

    Pound’s Rally Based On Flawed Assumptions

    The spring sun was shining on UK prime minister Theresa May yesterday when she stood in Downing Street to announce a cut-and-run general election for June 8. The sun was shining too on sterling, which rallied 2% against the US dollar and 1.3% against the euro on the news. The market clearly expects that a greatly increased parliamentary majority for May’s Conservative government following the vote will boost the chances of a softer Brexit deal...

    2
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    Gavekal Research

    Whether Or Not To Underweight The US

    Charles has been shifting his asset allocation recommendations in recent weeks away from US assets in favor of foreign alternatives. This was squarely valuation-based as his models show the US dollar, corporate bonds and equities to be overvalued. Here, he road tests this view by incorporating non-valuation-based macroeconomic factors into the analysis.

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    Gavekal Research

    Beyond The Election Risk: Upturn Still Favors Eurozone Stocks

    For the next three weeks at least, the upcoming two-round French presidential election will continue to dictate short term sentiment among investors in the eurozone. Following a late surge in the opinion polls from far left candidate Jean-Luc Mélenchon, two of the four leading contenders are now professed Euroskeptics. That knowledge has colored investor attitudes, keeping the spreads between French and German sovereigns elevated—the 10-year...

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    Gavekal Research

    The New EM Intervention Playbook

    In recent years emerging market central banks have taken to intervening to support their currencies against depreciation pressure using non-deliverable forward contracts settled in local currency, a technique that helps preserve the headline value of their foreign exchange reserves. Although the strategy bought time in Brazil and Mexico for more fundamental policy changes to take effect, non-deliverables are no magic bullet.

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    Gavekal Research

    Who The French Will Not Vote For

    All the media commentary on the opinion polls ahead of the French presidential election concentrates on which candidates the electorate intends to vote for. This is the wrong way to analyze the current political situation in France. With just 10 days to go before the April 23 first round, readers should pay no attention whatsoever to the opinion polls. They are almost entirely meaningless: 40% of respondents say that they do not know who they...

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    Gavekal Research

    Video: How To Play A Le Pen Victory

    In this follow-up to yesterday’s interview Charles outlines how investors can position themselves to hedge against a European Union breakup scenario that would likely follow from a Le Pen victory in the French presidential election.

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    Gavekal Research

    Video: The French Election

    In this interview Charles assesses the political situation ahead of France’s two-round presidential election, which kicks off later this month. Topping everyone’s list of questions is whether National Front leader Marine Le Pen will defy the opinion polls to win a surprise victory, and what a Le Pen presidency would mean for France and the European Union.

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    Gavekal Research

    E Pur Si Muove

    Back in early 2011, I argued that the adoption of abnormally low short-term interest rates (in real terms) always leads to a collapse in productivity, followed by a decline in the economy’s structural growth rate. Since late 2010 marked the transition from the acute phase of the financial crisis to something approaching normality, at least in the United States, it is worth examining the US experience in the ensuing period.

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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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    Gavekal Research

    The Dollar In The Coming Quarter

    The first quarter of the year demonstrated once again that there is little more uncertain than a sure thing in the foreign exchange market. Rewind to mid-December, just before markets eased back for the holiday season, and the consensus firmly favored a stronger US dollar in 2017 . Of course, when sentiment is so strongly aligned, it means there are few marginal buyers left to enter the market. As a result, the consensus was confounded, as the...

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    Gavekal Research

    Strategy Monthly: Europe Braces For The French Election

    The macroeconomic stars are aligning for the eurozone. The region’s cyclical recovery is extending itself across economies and sectors alike. Inflation remains modest, reducing the chances of an early monetary tightening. Eurozone equities are relatively cheap in an expensive world. And the euro is fundamentally undervalued against the US dollar. However, the big risk for investors remains the possibility that nationalist euroskeptic Marine Le...

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    Gavekal Research

    Stay Long Ruble Bonds

    Russia has been a consensus overweight among emerging market managers since early 2016. They have been handsomely rewarded. Over the last 12 months, ruble-denominated Russian finance ministry bonds, known as OFZs, have returned 37% in US dollar terms. Small wonder then that over the same time period non-resident holdings of OFZs have increased from 21% of outstanding issuance to 27%. After such an impressive outperformance, it is natural to ask...

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    Gavekal Research

    Regulating Complex Systems

    Everyone will surely agree that today’s financial system is sufficiently complicated and interconnected to qualify as a complex system.And regulating a complex system is by definition almost impossible, because it is in complex systems that Frédéric Bastiat’s observation that there is “what is seen and what is not seen” really comes into its own.

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    Gavekal Research

    Yes To Brexit, No To Rate Hikes

    Tomorrow should see the UK initiate its departure from the European Union by triggering Article 50 and starting the clock on a two year exit negotiation. Yet far from anxiously counting down the days, investors have spent the last week bidding sterling higher, largely on the belief that a robust UK economy may soon spur tighter monetary policy. That is probably a bullish interpretation too far, and the pound’s next significant move will probably...

    0
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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-...

    0
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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.

    0
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    Gavekal Research

    The Risk Picture Diminishes

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

    0
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    Gavekal Research

    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.

    0
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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...

    0
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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.

    7
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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.

    0
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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...

    0
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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.

    6
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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...

    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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    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).

    1
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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.

    6
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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.

    0
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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.

    0
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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.

    0
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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

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