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How To Devalue The Dollar

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How To Devalue The Dollar

Will Denyer
15 Oct 2024
Donald Trump has complained about how the strength of the US dollar is undermining US competitiveness, while Kamala Harris wants to revitalize US manufacturing, which will be tough with such a richly-valued currency. But what will the incoming president be able to do to weaken the US dollar? Will Denyer assesses the options and their chances of success.
Election Optimism

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Election Optimism

Tan Kai Xian
15 Oct 2024
Investors seem to be gearing up for a surge in US equity prices, with one explanation being that they are betting on a Republican sweep of the White House and Congress. Conversely, US equities could be set for a fall should other election outcomes play out. Hence, a situation where US stocks have downside risk, but limited upside potential calls for investors to put protection into their portfolios.

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Europe And China Face Off

Yanmei Xie, Cedric Gemehl
14 Oct 2024
So what next for the trade war between the European Union and China? The October 4 vote by EU members to duly slap new tariffs on electric vehicles imported from China is not the end of the story. It is possible that a revised deal is reached over EVs which averts an escalatory spiral of measures, but fresh trade frictions are sure to open up in the coming months.

Gavekal Dragonomics

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The Fiscal Strategy Emerges

Wei He
14 Oct 2024
At a press conference on Saturday, Ministry of Finance officials declined to give specific figures for the size of a planned stimulus package but described the structure in some detail. Wei argues that it implies a substantial increase in government debt, probably of around RMB3trn —a sum that, if confirmed, should be large enough to reassure investors of the government’s seriousness of intent.

Gavekal Dragonomics

The Case For Monetary Policy
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Andrew Batson
Officials Decline To Fuel The Market Fire
Wei He, Thomas Gatley
A Reset For The Big Banks
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Xiaoxi Zhang
The Start Of A Stimulus Rally
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Thomas Gatley
What’s Behind The Fiscal Shortfall
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Wei He, Andrew Batson
Catching Up To Expectations
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Andrew Batson, Dragonomics Team
The Returns From Reallocation
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Andrew Batson
A Missing Rate Cut Sows Uncertainty
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Wei He
Growth Risks Build As Policy Stays Cautious
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Wei He, Dragonomics Team
Raising The Retirement Bar
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Ernan Cui

More Research

Towards A More Circumspect Fed
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Will Denyer
Video: The ECB Reaction To A New Era
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Cedric Gemehl
Scenarios For The US Yield Curve
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Tan Kai Xian
Four Quadrants And The Monetary Illusion
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Charles Gave
Stormy Weather
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Louis-Vincent Gave
Participating In China’s Bull Market
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Louis-Vincent Gave
Chinese Stocks Are For Living In
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Louis-Vincent Gave
So Long, Soft Patch
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Will Denyer
Who Is Right About Germany?
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Cedric Gemehl
Conversation: What Could Derail The Inflationary Boom
Louis-Vincent Gave, Anatole Kaletsky

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India Macro Update: On An Even Keel

Udith Sikand, Tom Miller
5 Sep 2024
A slowdown in India’s headline GDP masks an improvement in the underlying drivers of growth, argue Udith and Tom. Now that election-related uncertainty is over, government spending should pick up and aid the incipient recovery in private consumption and investment. Indian bonds and equities should continue to fare well, with monetary easing likely to get underway soon.

The global view

Conversation: What Could Derail The Inflationary Boom
Looking across the macro landscape, Louis and Anatole observe a number of strongly reflationary factors and booming markets. Yet complacency never pays off for investors. So amid the escalating war in the Middle East and the prospect of further trade friction between China and the West, two of Gavekal’s many wise men discuss how investors can protect their portfolios from the risks to the current upbeat sentiment.
Changing Narratives Around The World
John Maynard Keynes famously observed that price discovery in financial markets was akin to a beauty contest. However, the real challenge was not to pick the prettiest lady, but to instead identify which lady the judges would choose as the prettiest. These were not always the same outcome. With this in mind, it seems that the past few weeks have witnessed a number of important “narrative changes” across different economies and markets.
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London Conference, September 2024
At our latest conference in London, Gavekal’s senior partners and analysts discussed the most relevant themes for investors in a series of panels and fireside chats.
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The Asset Allocator’s Dilemma (II)
After five years of positive correlations, over the summer US treasuries went back to hedging US equities once again. But if US equities and the US dollar were to fall simultaneously—which is hardly improbable—US treasuries would be an inadequate hedge. Louis considers some alternatives.
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Test Your Knowledge
What share of China’s electric vehicle market do German automakers account for?
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Chart of the Week

Week 41, 2024
The Bank of Japan has already taken tentative steps towards exiting the easy monetary policy settings of the past decade, but there are lingering questions about how it will manage its balance sheet including its large equity holdings. The BoJ holds just under ¥40trn of ETFs on its books, but the market value of these holdings is likely around ¥70trn. Realizing those gains and transferring the resultant profits to the government could well be considered by the new government led by Shigeru Ishiba, a known fiscal conservative.
Open Chart

Gavekal Research

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

How To Devalue The Dollar
Donald Trump has complained about how the strength of the US dollar is undermining US competitiveness, while Kamala Harris wants to revitalize US manufacturing, which will be tough with such a richly-valued currency. But what will the incoming president be able to do to weaken the US dollar? Will Denyer assesses the options and their chances of success.
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Election Optimism
Investors seem to be gearing up for a surge in US equity prices, with one explanation being that they are betting on a Republican sweep of the White House and Congress. Conversely, US equities could be set for a fall should other election outcomes play out. Hence, a situation where US stocks have downside risk, but limited upside potential calls for investors to put protection into their portfolios.
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Towards A More Circumspect Fed
After September’s US CPI release on Thursday, the futures market is still pricing in -50bp of Federal Reserve interest rate cuts by the end of 2024. Maybe. But although September’s headline CPI inflation figure of 2.4% year-on-year was down a touch from August’s 2.5%, the more finely-grained data is less favorable.
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Scenarios For The US Yield Curve
Following the US Federal Reserve’s -50bp interest rate cut in September, the median projection in the Fed’s dot plot is signaling a further -150bp of cuts through 2025. This means rates at the very short end of the treasury curve are set to fall over the next 15 months along with the Fed funds rate. But beyond the very short end, how will the rest of the US yield curve evolve?
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Gavekal Research

Webinar: What Chinese Stimulus Means For China And The World

Arthur Kroeber, Andrew Batson, Louis-Vincent Gave
3 Oct 2024
Chinese authorities have rolled out a raft of measures aimed at supporting the beaten-down domestic property and equity markets. This support package won’t miraculously revive China’s depressed consumer confidence overnight, but it does mean that China is set to adopt a reflationary policy stance. Our panel discussed what this shift means for growth, currencies, financial assets and commodities.

Emerging markets

Why This Time Has Been Different
During past episodes of risk-off volatility, the correlation between emerging market risk assets has shot up. But early August’s bout of market volatility saw a bifurcation in EMs, and no broader macroeconomic spillover effects—which speaks well of the growing maturity of emerging markets as an asset class.
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Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
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A Budget For Modi 3.0
Concerns that Indian Prime Minister Narendra Modi would take a populist lurch were alleviated on Tuesday, as finance minister Nirmala Sitharaman pledged to reduce the deficit in the new budget, while maintaining healthy levels of infrastructure spending. But three new schemes to boost jobs, largely borrowed from opposition party policies, suggest that the government has heeded the lessons of the election.
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Webinar: Into The Upswing
In this webinar Gavekal’s analysts review the themes driving growth across the world’s major economic regions, and discuss how macro developments are likely to drive financial markets over the remainder of 2024.
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Latest video

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Video: The ECB Reaction To A New Era

Cedric Gemehl
10 Oct 2024
Ahead of next Thursday’s policy meeting of the European Central Bank, the market is betting heavily on an interest rate cut. In this video interview, Cedric argues that the market is probably right in its view but cautions that risks are titled towards hawkish surprises as this economic backdrop does not presage a return to the disinflationary environment seen in the pre-pandemic years.

Middle East

Conversation: What Could Derail The Inflationary Boom
Hedging The Inflationary Bust
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What Next In The Middle East?
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Video: The Israel-Hezbollah Standoff
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Video: Aramco, Oil And Saudi's Economic Transition
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The Energetic Danse Macabre
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India chartbook

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India Macro Update: On An Even Keel

Udith Sikand, Tom Miller
5 Sep 2024
A slowdown in India’s headline GDP masks an improvement in the underlying drivers of growth, argue Udith and Tom. Now that election-related uncertainty is over, government spending should pick up and aid the incipient recovery in private consumption and investment. Indian bonds and equities should continue to fare well, with monetary easing likely to get underway soon.

China chartbook

Gavekal Dragonomics

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The Promise And Peril Of Industrial Policy

Thomas Gatley
21 Aug 2024
Many wonder why China’s government is not doing more to stimulate growth. One reason may be that from Beijing’s perspective, industrial policy is working. In this chartbook, Thomas examines the data: corporate earnings improved in 2023, new funding is going mainly to tech-intensive manufacturing and capital is increasingly flowing to the highest-return firms, who also do most new capex and R&D. But this apparently successful industrial policy comes with significant costs.

Strategy Chartbook

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US Strategy: Trading Politics

Will Denyer, Tan Kai Xian
27 Aug 2024
In November, US voters will decide who controls the White House, Senate and House of Representatives. The two parties differ significantly on key policy positions that will heavily impact the economy and markets. In this Strategy Chartbook, Will and KX compare the parties’ major policy stances and assess what they mean for markets—especially US equities, US bonds and the US dollar.

Equities

Election Optimism
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So Long, Soft Patch
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Conversation: What Could Derail The Inflationary Boom
London Conference, September 2024
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Video: The Market Story Of Modi 3.0
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If The Music Stops
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Currencies

How To Devalue The Dollar
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So Long, Soft Patch
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London Conference, September 2024
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The Direction Of The US Dollar
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Yen Carry Trades And The ‘Strong Dollar’ Myth
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Mapping The Effects Of US Rate Cuts
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Fixed income

Scenarios For The US Yield Curve
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So Long, Soft Patch
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Conversation: What Could Derail The Inflationary Boom
London Conference, September 2024
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The Fed Rate Cut Is Bad For Bonds
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The Asset Allocator’s Dilemma (II)
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Oil & commodities

Conversation: What Could Derail The Inflationary Boom
Hedging The Inflationary Bust
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The Energy Faceplant
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Who Is Going Bust?
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Video: Beyond The Slide In Energy Prices
Will Recent Trends Last?
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China tech

Xi Goes All In On Tech
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Webinar: Setting The Agenda For China's Plenum
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The Localization Drive Steps Up
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After The Melt-Up In Semiconductors
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Vietnam’s Bamboo Diplomacy
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Big Tech’s Rearguard Action
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Then Yen Carry Trade Unwinds

Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
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More Questions Than Answers
It’s a dedicated Frenchman who consents to work in August. But the financial market volatility of the last week has seen Louis hard at it, fielding client questions about the outlook for global markets and economies. In this paper, he sets out the most salient questions, and offers his answers.
The Root Cause Of Summer Ructions
Investors are no longer seeing virtue in a Goldilocks scenario of moderating demand and easing price pressures, but having a summer freak-out over faltering global growth. Udith and Kai Xian diagnose the market jitters and say that the sell-off in high-yield currencies and tech stocks likely stems from movements in Japan rather than disappointing US economic data.
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The Yen And Deindustrialization
There is a theory out there which holds that the extreme undervaluation of the yen is a consequence of Japanese deindustrialization, as Japan Inc. has shipped its factories abroad, pushing Japan's economy into an irreversible trade deficit even while it continues to run a monster current account surplus. Not so fast, says Charles, whose analysis of Japan’s external balances throws up a different explanation—and suggests a compelling investment opportunity.
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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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