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E.g., 21-09-2018
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    Gavekal Research

    A Very British Tightening

    Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...

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    Gavekal Research

    EMs And The Global Cycle

    The market correction of the last two weeks has been centered on the US, but also hit emerging markets pretty hard. A year ago, I argued that the sustainability of the EM run-up depended on continued strong global growth, more oil price gains and a further fall in tail risks associated with the financial system. The issue is whether the newly volatile conditions in global markets are a game-changer for the emerging world. That conundrum depends...

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    Five Ways To Play European Equities

    After a traumatic couple of weeks in the equity markets, Nick and Cedric take this opportunity to revisit their longstanding advice that investors should overweight European mid-caps exposed to the eurozone’s cyclical upturn. As they explain in this report, that call still holds, and they suggest three sectors where investors should look to buy the dip, and two that portfolio managers would do well to avoid.

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    Behind The Market’s Inability To Rally

    “A week is a long time in politics”, Harold Wilson was said to have once quipped to a young aide. The former British prime minister should have tried working in the US equity market. In recent days, it has sometimes felt as if time stood still. So what should we make of stocks’ inability to mount a rally after they again closed on their lows?

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    Gavekal Research

    The End Of Germany’s ‘Nein’ Policy?

    On the face of it, yesterday’s coalition deal between Angela Merkel’s center -right grouping and the Social Democratic Party differed little from that agreed last month. In addition to domestic stimulus measures it backed more European integration. Yet look closer and the German political landscape may just have been roiled by an earthquake, for while Merkel should stay chancellor the new man at the finance ministry is set to be Olaf Scholz, the...

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    Gavekal Research

    Nobody Rings A Bell At The Top Of A Market

    Let’s start with a hypothesis. For the purposes of this note, let’s assume that the bull market that started in the second half of 2011 ended in January 2018, and that a bear market is now under way. The obvious follow-on question is what variety of the Ursus genus is emerging from its lair.

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    Gavekal Research

    Parsing The Market Sell-Off

    One of the first things Charles taught me is that in a bear market you should never do on the Monday what you wish you had done on the Friday. As bad news piles up, investors brood, sleep poorly, snap at their spouses or children, and go in first thing Monday morning and start to liquidate positions. Undeniably the picture for the now rather stretched equity bull market has been deteriorating for a while, with spiking bond yields, creeping...

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    Gavekal Research

    Real Yields, The Euro And The Dollar

    The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.

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    Gavekal Research

    Eastern Europe's Equity Sweet Spot

    The big issue facing investors globally is whether inflation makes a Lazarus-like comeback. But in one significant economic region, it is already alive and kicking. Eastern Europe experienced a painful deflation and repricing after the 2008 crisis, but inflation is now well above 2.5%. Having underperformed for many years, Cedric argues that its financial-heavy equity indexes should continue to do well in an environment of strong domestic demand...

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    Gavekal Research

    The German Coalition And Europe

    Late Sunday, party delegates of Germany’s social democrat SPD voted 362 to 279 to begin formal coalition talks with chancellor Angela Merkel’s CDU/CSU conservatives. Hurdles still remain, but our base case is that the weekend’s vote paves the way for the formation of a Grand Coalition by April. After months without a stable government, any reduction in uncertainty will naturally be positive for markets. But for investors, the most significant...

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    Gavekal Research

    From Recovery To Expansion

    Perception is a funny thing. Yesterday President Emmanuel Macron pitched up in London and wowed the British by loaning them a 70 meter piece of embroidered propaganda that celebrates their conquest 950 years ago. By contrast, the last French president to visit Britain had a pint of warm beer with David Cameron in a pub and no one noticed. A similarly discombobulated dynamic can be seen in European equity markets, where years of pessimism have...

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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%?

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    Gavekal Research

    Don’t Fear The End Of The Bond Bull Market

    Bond bears have been given succor in the opening days of 2018. First the Bank of Japan trimmed buying of long-dated Japanese government bonds, indirectly causing 10-year treasury yields to surge to 2.6%. Then European Central Bank policymakers were yesterday shown to be bulled up on the state of the eurozone recovery. On the face of it, central banks seem to be whistling a very different tune. In fact, it is investors who have caught up with...

    1
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    Gavekal Research

    Spending Again In Germany

    Picture the typical German consumer. The image that comes to mind is almost certainly of a deeply conservative individual: cautious, thrifty in his or her spending habits, and with a deep-seated aversion to maxing out the credit card. As with most stereotypes, this one has some foundation in experience. But like many, it also looks increasingly out of date. While Germany’s booming export sector has got most of the attention recently, it is...

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    Gavekal Research

    France: Believe The Hype

    A basic assumption among Anglo-Saxon investors has been that France, for all its nice food, good wine and smart infrastructure, was the unreformable economy. Then Emmanuel Macron came along promising to fix things, duly got elected president, orchestrated a thumping parliamentary majority and actually began to deliver on promises.

    1
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    Gavekal Research

    The Drains On Liquidity

    For ease of math, assume that the world consumes 100mn barrels of oil a day. Then further assume an inventory across the system equal to about 100-days’ usage (in pipelines, ships and refineries). Thus, when the price of oil rises by US$10/bbl in three months—as occurred in 4Q17—a “liquidity drain” of about US$100bn is created.

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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.

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    Gavekal Research

    German Overheating? No, Eurozone Rebalancing

    In early November, Germany’s Council of Economic Experts, a panel of five heavyweights that advises the government, declared there were clear signs that Europe’s largest economy was running above potential and at risk of overheating. Three weeks later inflation data showed that consumer prices rose by a faster than expected 1.8% year-on-year in October, up from 1.5% in September, with the core ex-energy and food inflation rate also surprising to...

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    Gavekal Research

    The Persistence Of European Political Risk

    This was supposed to be the year that European political risk was laid to rest by the spring defeats of populist Euro-skeptic parties in the Dutch and French elections. But as 2017 draws to a close, anyone glancing at the headlines from Europe is likely to come away with the impression that reports of the demise of political risk were ludicrously premature. A rundown of this week’s news, from today’s regional election in Catalonia, through...

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    Cui Bono?

    Today, with European growth humming along and Beijing having (again) shown an ability to keep China’s economy on a sustained expansion path, no one seems fazed about a possible economic downturn. Apart from the UK (where the obsession is Brexit), concern centers on geopolitical risks. Yet depending on their region, investors are worrying about very different things.

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