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Unpicking The Europe-China Deficit

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Unpicking The Europe-China Deficit

Cedric Gemehl, Thomas Gatley
15 Apr 2024
After a blowout during the pandemic, the European Union’s trade deficit with China has almost normalized. So are hawkish European officials preparing punitive trade policies to fix a problem that has taken care of itself? Cedric and Thomas examine the trade data and find the answer is “no.” The improvement in the deficit looks to have run its course and may be about to reverse.
Wars And Inflationary Booms

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Wars And Inflationary Booms

Louis-Vincent Gave
15 Apr 2024
The one thing Gavekal’s founding partners have agreed on since Russia’s invasion of Ukraine is that the world has now moved into an inflationary boom. And since the war, the gold price has risen by a quarter and long-dated US treasuries have fallen by a third. Will the events of the weekend change any of this?

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Global Growth To The Rescue

Wei He
12 Apr 2024
China’s exports are up 5% YoY in Q1, and resilient global demand is obviously good news for the world’s largest exporter. But Wei argues that exports alone may not be enough to generate a rally in Chinese risk assets, especially if the government uses external demand as an excuse to continue to be cautious with its support measures.

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The Limits Of K-Value

Udith Sikand
12 Apr 2024
The standard advice given by economists to politicians is to fix the roof while the sun is shining. But structural reform is hard, and generally can be pushed through only when there is a broad political consensus or if there is no opposition to contend with. The result of Wednesday’s parliamentary election showed that neither of these conditions is in place in South Korea.

The global view

The 2024 Commodity Surge
With the broad commodity complex up some 13% year-to-date, commodities are closing in on their 2022 highs. However, Louis argues there is more to this rally than heightened geopolitical risks, which were responsible for driving the 2022 run-up.
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The Discontinuous CPI: Revisiting An Old Concept
Back in the mid-noughties, Gavekal developed the idea of the “discontinuous CPI” to explain low inflation readings relative to the cost of many input items, which were still rising sharply. What lay behind this phenomenon was globalization, as “platform companies” outsourced most of their production to suppliers in markets like China. Today, Louis seeks to use the same framework to explain inflationary price changes in an era of deglobalization.
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Auditing My US Recession Indicator
Charles was conspicuously absent from last year’s internal Gavekal debate as to whether a US recession would unfold, or not. He spent the last year watching the readings of his US recession indicator to see if the tool remains functional. It does still work and in this report Charles explains what is happening to the US economy.
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What Could Spoil The Inflationary Boom?
Usually when yields and the US dollar rise simultaneously, commodities—and especially gold—tend to trade “heavy.” The exception comes when the economy happens to be in an inflationary boom. And as it turns out, most of the recently published data appear to point to this very scenario.
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Test Your Knowledge
The London Metal Exchange banned new deliveries of Russian copper, aluminum and nickel from April 13. What share of the aluminum stocks in LME warehouses is from Russia?
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Chart of the Week

Week 15, 2024
China’s economy may be struggling to grow, but its electricity industry is not. Power consumption rose by 6.7% in 2023, marking the fourth straight year that electricity use grew faster than GDP. And China is well on its way to becoming the most electrified economy in the world. Guest writer Haixu Qiu argues that China’s attempts to bolster its economy by pushing down energy prices and developing high-tech industries are driving the electricity boom. As in past Chinese investment booms, the most profitable plays are likely to be not the infrastructure builders themselves, but their suppliers.
Open Chart

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Essential Reading: A Book For Every Week Of The Year

Gavekal is often asked for a recommended reading list. So, here it is: a book a week that everyone interested in the world of macro investing—whether hoary veteran or eager apprentice—can benefit from reading.

US economy & markets

US Reflation And The Markets
At the start of 2024, the US seemed to be settling into a disinflationary boom. However, over the first three months of 2024, CPI rose at an annualized rate of 4.6%, while core CPI rose 4.5%. This qualifies as enough of a trend to significantly delay rate cuts, if not take them off the table entirely, and it is time to reassess the outlook for inflation, interest rates and markets.
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The Fed’s Three-Body Problem
The Fed’s mandate requires it to set monetary policy in pursuit of “maximum employment, stable prices, and moderate long-term interest rates." Recognizing the futility of achieving all of them at once, it will have to prioritize. Will reviews the implications for Wednesday’s upcoming CPI release, especially in light of Friday’s blockbuster employment report for March.
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What Are US Banks Saying?
The health of banks—and of bank shares—is an important signal for the broader economy. If bank shares perform well, or poorly, investors should sit up and take notice. And today, despite residual concerns about the health of some US banks following the March 2023 implosion of SVB and the January 2024 collapse in shares of NYCB, bank shares are outperforming handsomely.
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Searching For Growth Drivers
What could spur another US growth surge in 2024? Kai Xian identifies four potential drivers, with two of them likely to cause an inflationary boom, while the other two would probably help extend the current disinflationary boom.
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Webinar: The Coming Age Of Protectionism

Thomas Gatley, Yanmei Xie, Tom Miller
4 Apr 2024
This webinar examines the probable extent of anti-China protectionism around the world, assesses the consequences for China's manufacturing industries and growth outlook, and gauges the risk to other economies of Chinese retaliation.

Emerging markets

Webinar: Animal Spirits In The Emerging Markets
While US tech stocks have been getting all the publicity, capital has quietly been flowing into emerging market investments over recent months. To gauge market prospects over the rest of 2024, Udith Sikand examined the macroeconomic outlook for the major emerging markets ex-China, while Thomas Gatley assessed the chances of a revival of animal spirits in the Middle Kingdom.
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EM Debt Market Issuance Cranks Up
Heightened US bond market volatility has often coincided with emerging-market assets incurring higher risk premiums. That was then. This cycle has differed since emerging markets have survived the most aggressive Fed tightening cycle in a generation with minimal fuss. So what accounts for EMs’ apparent new-found resilience?
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The China-EM Equity Decoupling
Global investors have long treated Chinese and other emerging-market equities as a single asset class. Those days may now be over. Thomas and Udith examine why declining US treasury yields and a weakening dollar have spurred capital flows into emerging markets, but foreign investors continue to pull money out of Chinese equity markets.
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The Near Term Challenge For EMs
Emerging markets have generally avoided the economic volatility that comes with a Federal Reserve tightening cycle. Having stuck to orthodox fiscal and monetary policies, such economies have improved macro prospects and can potentially benefit from an asset price rerating. In the medium term, this outcome is likely but in the near term EMs may not offer a safe harbor in a potentially brewing global storm.
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Latest video

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Video: The Employment-Immigration-Inflation Nexus

Tan Kai Xian
10 Apr 2024
Even as US employment growth has remained strong in recent months, wage growth has continued to ease. Kai Xian attributes this paradox in part to rapid immigration into the US, which is supporting the supply of new workers. This implies that immigration policy will have a significant influence on the US labor market, wage growth and inflation over the coming years.

Middle East

Wars And Inflationary Booms
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India Flexes Its Muscles In The Middle East
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Video: Gulf States In Transition
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China Misses A Trick In The Middle East
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The Long And Short Of Energy Risk
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China’s Red Sea Calculus
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India chartbook

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India Macro Update: Shifting Into Overdrive

Udith Sikand, Tom Miller
27 Mar 2024
India is cementing itself as a reliable engine of growth for the global economy, state Udith and Tom. Although headline GDP figures exaggerate the robustness of India’s growth, there is no denying the favorable tailwinds Private sector capital spending, bonds, and to a lesser extent the rupee, should offer upside in the near term. By contrast, the prospects for Indian stocks—where regulators are looking to curb signs of excess—are less rosy.

China chartbook

Gavekal Dragonomics

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Macro Update: Another Supply-Side Stimulus

Andrew Batson, Dragonomics Team
26 Jan 2024
China managed to avoid entering a full-on deflationary spiral in 2023, but prices are still falling, growth is fragile and confidence is poor. Hopes for 2024 are pinned mostly on the government’s promises of more supply-side stimulus, yet this strategy poses its own challenges. In our latest quarterly chartbook, the Dragonomics team diagnoses the current economic difficulties and analyzes the implications of the response.

Europe's economy

Unpicking The Europe-China Deficit
After a blowout during the pandemic, the European Union’s trade deficit with China has almost normalized. So are hawkish European officials preparing punitive trade policies to fix a problem that has taken care of itself? Cedric and Thomas examine the trade data and find the answer is “no.” The improvement in the deficit looks to have run its course and may be about to reverse.
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Landing At Altitude
Since peaking at 10.6% year-on-year in October 2022, the eurozone’s headline consumer inflation rate has fallen almost without interruption to just 2.4% YoY in March. This brings the European Central Bank’s target rate of 2% into sight. But will inflation sink below that threshold, as it did throughout most of the decade before Covid?
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Are European Equities Cheap?
Spooked by the rich valuations and excessive concentration of the US equity market, investors are increasingly looking towards European markets for attractive valuations and diversification. But although the broad European market is trading at a deep discount to the US, things are not quite so simple.
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From Headwinds To Tailwinds
The dark clouds that have hung over the eurozone’s economy for the last year and more are finally clearing. After a year of stagnation, the three main economic headwinds that held back growth in 2023 have abated, with two now turning into tailwinds. As a result a reacceleration in growth now looks probable in the second half of 2024.
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Oil & commodities

The 2024 Commodity Surge
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How High Will The Oil Price Go?
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Trump 2
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The Long And Short Of Energy Risk
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China’s Red Sea Calculus
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Video: The Middle Eastern Conflict Metastasizes
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China tech

Big Tech’s Rearguard Action
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TikTok, Big Tech And Risk Premiums
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Video: The Importance Of TikTok
The Coming Price War In Chips
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Geopolitical Uncertainty And Record Valuations On Semi Stocks
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An Unusual Friday
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The Inflation Question

US Reflation And The Markets
At the start of 2024, the US seemed to be settling into a disinflationary boom. However, over the first three months of 2024, CPI rose at an annualized rate of 4.6%, while core CPI rose 4.5%. This qualifies as enough of a trend to significantly delay rate cuts, if not take them off the table entirely, and it is time to reassess the outlook for inflation, interest rates and markets.
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Video: The Employment-Immigration-Inflation Nexus
Even as US employment growth has remained strong in recent months, wage growth has continued to ease. Kai Xian attributes this paradox in part to rapid immigration into the US, which is supporting the supply of new workers. This implies that immigration policy will have a significant influence on the US labor market, wage growth and inflation over the coming years.
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Landing At Altitude
Since peaking at 10.6% year-on-year in October 2022, the eurozone’s headline consumer inflation rate has fallen almost without interruption to just 2.4% YoY in March. This brings the European Central Bank’s target rate of 2% into sight. But will inflation sink below that threshold, as it did throughout most of the decade before Covid?
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The Fed’s Three-Body Problem
The Fed’s mandate requires it to set monetary policy in pursuit of “maximum employment, stable prices, and moderate long-term interest rates." Recognizing the futility of achieving all of them at once, it will have to prioritize. Will reviews the implications for Wednesday’s upcoming CPI release, especially in light of Friday’s blockbuster employment report for March.
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From the archives: oldies but goodies

Deficit Deniers Of The World Unite
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Deficit Deniers Of The World Unite

Anatole Kaletsky
In our politically correct age the pressure to bow down before certain popularly accepted and apparently proven “truths” can be overwhelming. In the aftermath of the US elections, two such nostrums are unnecessarily vexing investors—the urgency of deficit reduction and fear of higher taxes. I believe that both of these obsessions will soon be forgotten.
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Are We Entering into Revolutionary Times?
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Are We Entering into Revolutionary Times?

Louis-Vincent Gave
The role of a society’s elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past. But the modus operandi for most leaders is to try and maintain the status quo. But if the problems are large enough, this does not work, and the same challenges reappear until either a solution is found, the elite is replaced by a new elite, or the country, system or civilization disappears.
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The High Cost Of Free Money
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The High Cost Of Free Money

Charles Gave
Perhaps the most famous economic law is the one that there is no such thing as a free lunch. By keeping US short rates at abnormally low levels beyond the financial crisis and as growth bounces back beyond the dreams of the wildest optimists, the Fed increasingly seems to be trying to ‘feed the US economy for nothing’. This is worrying, for extended periods of cheap money typically come back with a hefty price tag.
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