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    Gavekal Research

    Symptoms Of Dysfunction

    If bank shares are the canary in the global economic coalmine, they are currently singing a very alarming tune. In Japan bank shares have cratered -10% since Friday’s decision by the central bank to move to negative interest rates, even though the new -0.1% rate will only apply on the margin to additional deposits at the Bank of Japan. Elsewhere, in Europe, the banking component of the Euro Stoxx index has slumped -16.8% year-to-date, while the...

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    Gavekal Research

    Learning To Love A Weak Ruble

    The oil price may have bounced in recent days and with it the ruble, but Russia’s financial situation looks increasingly perilous. The economy is struggling through a second year of recession and Russian corporates must roll over US$120bn of foreign currency debt by mid-2017. Moreover Russia’s central bank seems to have embraced a policy of benign neglect toward the ruble as it tries to preserve a reduced pile of foreign exchange reserves.

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    Gavekal Research

    Anatomy Of The Bear

    I wish I shared Anatole’s degree of conviction. In yesterday’s Daily he set out his belief that the current sell-off in financial markets is not the start of “a structural ‘bear market’, still less a structural Ursus Magnus likely to last for many years” (see Is Wall Street In A ‘Bear Market’). I am not so sure. I suspect that what we are witnessing may indeed be the emergence of an Ursus Magnus, the sort of bear market so deep and prolonged...

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    Gavekal Research

    The Overlooked Risk In Italy

    What is the biggest threat to European stability this year? The continent’s migrant crisis? The chance that the British will vote in a referendum to leave the European Union? Or the danger of contagion from China’s slowing economy and fragile financial markets? All of these do pose risks, but it is possible that the greatest threat to Europe this year could come from a different quarter altogether: Italy’s banking sector. At first the danger...

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    Gavekal Research

    Looking For The Bright Side

    By most measures, the first two weeks of 2016 have been the worst-ever start of the year for risk assets. With the MSCI All-Countries index down nearly -20% from last May’s high, we are now in a global bear market.

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    Gavekal Research

    Unintended Consequences

    Forget the Brazilian real and the Chinese renminbi. The world’s worst performing major currency over the last month is actually the British pound, which has fallen a painful -4.95% against the US dollar since mid-December. The beating has been especially brutal in recent days. After data released yesterday showed British manufacturing output is still languishing not just below its 2008 level, but even below its 1997 level, sterling slumped...

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    Gavekal Research

    Stronger Macro, Sinking Stocks

    The latest macro indicators leave little doubt about the general direction of the eurozone economy. Both hard and soft data suggest that growth re-accelerated from a meagre 0.3% QoQ (1.2% annualized) in 3Q15, probably to 0.4%-0.5% (1.6%-2.0% annualized) at the turn of the year. Eurozone unemployment declined to a four-year low in December, and the economic sentiment indicator compiled by the European Commission from business and consumer surveys...

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    Gavekal Research

    Forget About Oil And China, Look To The US In 2016

    On the whole, 2015 was a year for investors to forget. US bond and equity prices were both flat, equity gains in Europe were mostly wiped out (for US dollar investors) by the fall of the euro, and commodity plays and high-yield issues crumbled. China sparked a brief panic after a clumsy intervention to cushion a stock-market collapse and an unexpected currency devaluation, but by the end of the year the Shanghai index was still up nearly 5% in...

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    Gavekal Research

    New Economic Realities

    As we close the book on 2015, it is worth sifting through our research to find the patterns that are likely to influence events in 2016 and beyond. Three stand out.

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    Gavekal Research

    The French Patient

    As a Frenchman visiting Italy last week, I had the strong sense that for the first time in decades France was lagging its transalpine neighbor. Italian business and consumer confidence has picked-up over the last two years, and unemployment has declined for four straight quarters. France, by contrast, is the only European country that saw rising unemployment during 2015. Political confidence has evaporated as reinforced by last weekend’s rather...

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    Gavekal Research

    The Clash Over Fossil Fuels

    Over the weekend in Paris, the leaders of 195 nations announced a landmark deal to address climate change that its more optimistic supporters say heralds “the end of the fossil fuel era.” But both market action and many government policies point in the opposite direction. Crude oil prices continue to tumble towards the US$30 mark, and coal prices have also collapsed—both moves that reflect abundant global supplies of fossil fuels. The Paris...

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    Gavekal Research

    The Cure For Low Prices Is Low Prices

    What is the latest rout in commodity prices telling us? Certainly, China’s demand for many commodities is weak—but everyone knows this. The most important signal is rather on the supply side: low prices are finally pushing commodity producers to cut output. It is this restructuring that will eventually bring stability to commodity prices.

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    Gavekal Research

    What A Brexit Means For Markets

    This week David Cameron has been on the road in Eastern Europe arguing that British voters will vote for “Brexit” unless it gets a new deal with the European Union. As polls suggest that Britons are pretty much split down the middle on the issue, the prospect of the UK bidding adieu to Brussels is getting more real by the day. Indeed, with the negotiation expected to reach a head early next year, the question of a British exit is likely to...

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    Gavekal Research

    The Apex Of Market Stupidity

    In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.

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    Gavekal Research

    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...

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    Gavekal Research

    Video: On Brexit

    Nick Andrews discusses the possibility of a "Brexit"

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    Gavekal Research

    On Course Through The Squall

    The market reaction to the European Central Bank’s announcement yesterday of additional monetary easing—including a -10bp cut in the ECB’s deposit rate to -30bp and an extension of its €60bn a month program of bond purchases to at least March 2017—suggested that the central bank’s moves were a massive disappointment. Instead of letting off a firework, the ECB seems to have set fire to the house. In the immediate aftermath of the announcement,...

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    Gavekal Research

    Equities And The Euro

    It is likely that 2015 will be remembered as a strong year for eurozone equities. With only a few weeks of normal trading activity remaining, the MSCI EMU has delivered a solid 17% total return in local currency terms (the benchmark small and mid-cap index is up 24%). Still, we doubt that many investors will be celebrating a bumper year. The standard view was that the European Central Bank’s huge asset purchase program, which started in March,...

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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.

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    Gavekal Research

    Financing Europe’s Soaring Defense Costs

    François Hollande has rightly made it clear that France is at war (see France Under Attack). And wars cost a lot of money, as keeping an army in the field and airplanes in the air is expensive. There is a reason for the military adage “amateurs talk strategy; professionals talk logistics”. Moreover, fighting a terrorist organization involves both military costs and large domestic security costs. As such, the increase in security spending for the...

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    Gavekal Research

    Stick With The Dollar

    With the US set to raise interest rates and the eurozone more likely to ease policy, a long-dollar, short-euro position has been an obvious bet. Yet as the DXY inches closer to its March high, the question is whether a breakout is feasible. After all, the long US dollar trade looks crowded, with the world and its dog convinced that Janet Yellen and Mario Draghi will soon be travelling quite different monetary pathways. Such a comfortable...

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    Gavekal Research

    A Britisher At Heart

    On Monday, Anatole argued that a British exit from the European Union would rank as a foreign policy disaster of historic proportions (see Brexit: A Blunder To Rank With The Boston Tea Party). This is not the first time I have disagreed with my partner on UK matters, and it will likely not be the last. In recent years Anatole worried about the impact of public spending cuts being pushed through by the Conservative-led coalition government; I...

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    Gavekal Research

    Europe’s Equity Bet

    On the face of it, the opportunity in European equities is hardly exciting. US stocks may be close to their high while European equities languish 10% below their April peak, but on a valuation basis the two markets are similar. A comparison of their price-to-earnings ratios, both on a trailing and forward basis, sits near its historical average. Things, however, start to look more interesting when a cyclically-adjusted P/E ratio is applied—CAPE...

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    Gavekal Research

    France Under Attack

    In the worst days of the Northern Ireland troubles, British policymakers spoke of a “tolerable level of violence”. It was taken for granted that senseless and murderous acts would be committed, but what mattered was ensuring that these did not “get out of hand”.

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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.

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    Gavekal Research

    A Happy Apologist

    At Gavekal the conversation with clients never stops and from time to time we like to offer up a taste of debates that strike us as interesting. Louis got into just such a discussion earlier this week with one of our smarter, free-market embracing US clients. The topic of discussion was China and why Louis is such an apologist for the Chinese Communist Party when he clearly has little time for governments meddling with markets elsewhere?

    2
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    Gavekal Research

    Drifting In The Mid-Atlantic

    On the one hand the United Kingdom looks to have similar dynamics to recovering European economies, where growth is picking up nicely even though deflationary pressure still looms—Britain’s headline CPI rate stands at -0.1% and real rates have swung positive from a low of -4.7%. Such a cautious view explains why the Bank of England offered a report last week whose dovishness surprised some. Yet, on the other hand mid-Atlantic Britain in many...

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    Gavekal Research

    The Catastrophe Of Negative Rates

    Yesterday both Reserve Bank of India governor Raghuram Rajan and Bundesbank president Jens Weidmann broke ranks, daring to suggest that ultra-low interest rates may not be such a good thing after all. If rates were held too low for too long, warned Rajan, the risk of financial instability would be greatly heightened, a concern Weidmann shares. Unfortunately, that’s not the half of it.

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    Gavekal Dragonomics

    China And Russia: Locked In Reluctant Embrace

    China’s economic activity is gradually reducing Russian influence in Central Asia. Despite that, shared authoritarian values keep the two countries closely aligned on many issues.

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    Gavekal Dragonomics

    CEQ: China Reshapes Asia

    In the last two years China has made a bold push to expand its influence in Asia, using both the carrot of well-funded infrastructure diplomacy and the stick of forceful assertion of territorial claims in the South and East China Seas. What explains this newly assertive foreign policy, and what are its effects likely to be? This special issue of the China Economic Quarterly tries to answer these questions.

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    Gavekal Research

    Clearer Political Skies In Spain

    For the last three years Spain has been the poster child for the eurozone’s recovery. In its country report published yesterday, the European Commission described Spain’s growth as “robust, underpinned by sustained job creation, improved financing conditions, high confidence and low oil prices”. Yet not everything in the Spanish garden is rosy. The manufacturing PMI suggests the recovery is facing severe challenges, having slowed from a cyclical...

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    Gavekal Research

    Good Enough In Turkey

    Investors have welcomed last weekend’s victory of the Justice and Development Party (AKP) founded by President Recep Tayyip Erdoğan in Turkey’s elections, with the lira and equities both rallying strongly. After June’s inconclusive poll failed to produce a workable government, the concern was that a country with huge economic, security and strategic challenges would become ungovernable. In this context, the election result was the best that...

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    Gavekal Research

    The Fight Against Europe’s Inflation Skeptics

    In recent conversations with Europe-based clients we have been struck by a rising tide of “inflation skepticism”. While many investors back in 2009-2011 fretted that monetary activism must lead to spiraling inflation, many now believe the exact opposite. Their fear is that irrespective of central bank action, inflation is doomed to stay below target. In just a few years, inflation has stopped being commonly thought of as “always and everywhere a...

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    Gavekal Research

    Good Enough In Turkey

    Investors have welcomed last weekend’s victory of the Justice and Development Party (AKP) founded by President Recep Tayyip Erdoğan in Turkey’s elections, with the lira and equities both rallying strongly. After June’s inconclusive poll failed to produce a workable government, the concern was that a country with huge economic, security and strategic challenges would become ungovernable. In this context, the election result was the best that...

    0
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    Gavekal Research

    The Gavekal Monthly: A Possible Return Of US Inflation

    The Gavekal Monthly outlines our highest conviction ideas and summarizes the key economic, market and thematic views held by the firm’s partners and analysts. This report is an attempt to answer a question that we are often asked, but find it hard to answer: "What does Gavekal think?".

    0
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    Gavekal Research

    Middle-East Machinations

    Russia and Turkey are increasingly at loggerheads as Moscow escalates its military engagement in Syria. Earlier this month Turkey’s President Recep Tayyip Erdogan threatened to find another gas supplier after Russian jets breached its air space, and in recent days Ankara initiated legal action against Gazprom over the price it is charged for piped gas.

    2
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    Gavekal Research

    London Seminar Audio And Slides

    We held our main fall seminar on October 27 in London, where Anatole Kaletsky, Francois-Xavier Chauchat, Neil Newman, Tom Miller and Louis-Vincent Gave presented their views on the global economy. Anatole discussed the implications of recent developments in financial markets; Francois examined Europe’s resilience to global headwinds; Neil outlined three major investment themes in Japan; Tom explored China’s regional foreign policy ambitions, and...

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    Gavekal Research

    Why The Ruble Rally May Be Over

    Global investors are bulled up on Russian financial assets with the ruble having outperformed most emerging market currencies since the “junk rally” got going in early September. On a YTD basis Russian bonds have outpaced those from other big EMs. As a result, dedicated Russian funds last month saw a big inflow for the first time in a year. Certainly, the shift in sentiment has been spurred by the Federal Reserve delaying any interest rate move...

    2
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    Gavekal Research

    The Promise Of A More Forceful ECB

    The signal could hardly have been clearer. Although the European Central Bank chose to hold its fire yesterday, bank president Mario Draghi made it plain that he will be prepared to wheel out even bigger weaponry at December’s meeting to overcome the deflationary forces pressing on the eurozone’s economy. If necessary, this could include extending the current quantitative easing program beyond next September, increasing the ECB’s monthly asset...

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  • Gavekal Research

    The Myth Of Secular Stagnation

    When the European Central Bank meets today, discussion will center on whether it should expand quantitative easing in an attempt to stave off deflation and support the eurozone’s painfully slow growth. In Japan too, talk is about whether the Bank of Japan needs to step up its stimulus efforts. And in the US, the Federal Reserve last month decided to delay calling an end to its own zero interest rate policy amid evidence that US growth is in...

    1
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    Gavekal Research

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    0
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    Gavekal Research

    Hong Kong Seminar

    This is the full recording from Gavekal's October Hong Kong seminar featuring Joyce Poon, Andrew Batson and Anatole Kaletsky as well as a Q&A session.

    0
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    Gavekal Research

    Will The ECB Opt For QE-Plus?

    When the governing council of the European Central Bank convenes this Thursday in the Maltese capital Valetta, the assembled policymakers will be forced to contemplate a track record of quantitative easing that at best can be described as “mixed”. True, since the ECB announced its €60bn a month program of asset purchases in March this year, eurozone activity has staged a modest comeback, with growth expected to rise to 1.6% in the third quarter...

    0
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    Gavekal Research

    Could Volkswagen Save Europe?

    Volkswagen's stock price has rebounded more than 20% since its early October low, but there remains uncertainty about the firm’s future. Since news of the diesel polluting scandal broke, US$30bn has been wiped off VW’s market value, and you do not need to be conspiratorial to see a scenario that has the value of the German carmaker’s equity going to zero.

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    Gavekal Research

    Italy’s Debt Trap Escape Bid

    Even though Italy has run primary surpluses for all but one of the last 20 years, public debt has ballooned to 133% of GDP, second only to Greece in the eurozone. Italy’s original profligacy dates to the 1980s, but the real issue has been an inability to bite the bullet on reform, which, according to the International Monetary Fund, has reduced potential economic growth to just 0.4%. The good news is that Italy seems to have woken up and smelt...

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    Gavekal Research

    The Birth Of A Pain Trade?

    The question we have received most in recent days is whether this week’s counter-trend rally in commodities, deep cyclicals and emerging markets can morph into a “melt-up” akin to that seen in 4Q98. Seventeen years ago the blowback from the Asian Financial Crisis culminated in late September with the failure of Long Term Capital Management. Within days of a hurriedly agreed creditor bailout, the Federal Reserve had made the first of three...

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    Gavekal Research

    Why Big Caps Are Still Blighted

    Big cap stocks globally have had a horrible 2015 with the Volkswagen emissions scandal being just the latest “uncorrelated shock” to hit the sector. In Europe, German utilities RWE and E.ON have lost more than half of their market value, while oil and commodity producers everywhere have been hurt by a collapse in the price of their wares. Still, “blue chips” got that reassuring moniker because they tend to be the highest value counters on the...

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    Gavekal Research

    A Worrying Set Of Signals

    Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a...

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    Gavekal Research

    Libor Not Lehman

    With shares in Volkswagen down -28% since the diesel emissions rigging story broke last Friday, VW bond yields up sharply, and the securities of other European automakers hit hard by the news, investors face some uncomfortable questions. Is the risk posed by the scandal idiosyncratic, with the fallout likely to be confined largely to VW itself? Or could the risk prove systemic, with potentially catastrophic implications for the broader European...

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    Gavekal Research

    Gastarbeiter Redux

    The influx of hundreds of thousands of asylum seekers from war torn Syria, Afghanistan, Iraq and parts of Africa has laid bare familiar divisions within the European Union. This week’s deal to relocate 120,000 more refugees from Greece and Italy on top of the 40,000 agreed in May starts to address the problem. Many multiples more are making the trip to Europe, but only one country—Germany—is promising to take large numbers. Commentators often...

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