Gavekal Research

In a dangerous world, the reason for the US dollar’s super-charged performance over the last year has been investors’ view that it is the “cleanest dirty shirt” in a smelly pile of laundry. But Louis is not persuaded by this relativist argument.

At the end of Elizabeth II’s long reign, Louis ruefully recalls the advice he gave in early 2020 that investors should prefer to hold assets in currencies with the Queen’s head on their banknotes. Given the woeful recent performance of sterling, the loonie, the Aussie and the kiwi, his argument may be looking shaky to some. But on consideration, Louis maintains that those currencies which from now on will display with the King’s head on their banknotes will still offer a better long-term bet for investors.

Anatole outlined the global growth and inflation outlook, and why financial markets have yet to fully adjust; Charles presented his thinking on the dissolution of the post-World-War-Two order and what this means for assets; and Arthur gave an update on China ahead of the 20th Party Congress.

Heading into the Jackson Hole symposium, investors are waiting with bated breath on the prepared remarks of Jay Powell to see if the Federal Reserve is sounding hawkish or dovish. But it is worth looking beyond the Fed’s pronouncements to other trends that will dictate the direction of markets.

The US dollar has been on a tear this year against all major currencies, with the DXY dollar index at its highest level since May 2002. Of the three largest pairs in that index, the dollar is up 18% against the euro, and 26% against both the Japanese yen and British pound. What explains this dollar strength, and how long can it last?

If there were any remaining doubts that the US Federal Reserve is focused above all on meeting its inflation target, they were laid to rest on Wednesday. Following the conclusion of September’s FOMC meeting, it is now abundantly clear that if the cost of getting inflation back down to target is economic pain, then it is a cost the Fed is willing to accept.

The hopes for a pick-up in the US economy which helped sustain a rally in the stock market through much of the summer are fast fading. Sell-side economists are also cutting their forecasts, although the consensus still expects growth thanks to a narrower trade deficit and continued inventory building.

On Tuesday, as the S&P 500 sold off so abruptly, the Vix index, derived from the implied volatility on S&P 500 options, climbed from 23.87 to 27.27. This illustrates the utility of exposure to Vix futures as a hedge for US equity portfolios.

In light of a collapsing pound and gilt market, the recklessness of Britain’s new prime minister, Liz Truss, has become a market cliché. A few weeks back Anatole argued that her high-risk experiment in ultra-Keynesian demand management could actually work, so how does he feel about that call now?

The market is giving the new UK government's budget no benefit of the doubt. On Monday in Asia, sterling slumped past its February 1985 bottom against the US dollar to set a new record low at US$1.035.

Brussels’ plan to alleviate the effects of the energy price shock on European Union economies didn’t come off quite as intended. Sure, under the proposals advanced last Wednesday, the European Commission approved liquidity support for power generator. But that was the easy bit.

There has been much wailing and gnashing of teeth in Europe since Friday, when Gazprom announced it would indefinitely halt all flows of natural gas through the Nord Stream 1 pipeline—the worst case scenario. However, now that the nightmare has come true, Europeans may find that it is not quite as scary as they had feared.

After the US Federal Reserve raised interest rates Wednesday, a spate of central banks have followed suit. This mass tightening threw an unwelcome spotlight on the central banks that have not joined the general trend, and all this has detracted attention from the mounting stresses in the world’s frontier economies.

It has been a tough few weeks for emerging East Asia’s currencies. Yet, even as some regional currencies have tracked the yen lower, the headwinds that have battered others have abated. In short, some Asian currencies are more attractive than others.

With international sympathy for China at a low ebb, Beijing is redoubling its program to promote its national self-interest via engagement with multilateral organizations. Tom Miller assesses its efforts.

Amid a broad-based tightening of global financial conditions, there are fears that emerging markets as an asset class could get caught in the downdraft. Yet notably, EM assets have not underperformed those in developed markets; in the case of currencies, they have outperformed.

Hong Kong is finally moving towards reopening to the wider world, if not yet to mainland China. Yet Hong Kong’s economy and assets are getting squeezed by higher US interest rates imported via the Hong Kong dollar’s peg to the US dollar. In this interview, Vincent examines the different forces at work driving Hong Kong’s macro and markets.

China's economy faces two critical challenges: A property sector is in its worst slump in years. And the economic impact of persistent Covid lockdowns caused by sporadic outbreaks from more transmissible Covid variants. In this webinar, Dragonomics analysts discussed the challenges.

The old rule of dinner party conversation was never to bring up religion or politics. Add Covid to the list. That said, it is worth examining how different health care systems have dealt with the pandemic, and what that may mean for the coming winter.

Investor sentiment towards China has flipped from exuberance to dismissal as more and more people consider the world's second-largest economy to be "uninvestible." Louis disagrees, hypothesizing that China might in fact lead the way out of today's bearish global environment.