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The Promise Of Loose Fiscal, Tight Monetary Policy In EMs

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The Promise Of Loose Fiscal, Tight Monetary Policy In EMs

Udith Sikand
19 Jul 2024
Across the emerging markets, political leaders with populist leanings are calling for looser fiscal policy. Many are also berating local central banks for failing to do more to support growth, and leaning on them to loosen monetary policy. For the most part, central bankers are keeping monetary conditions relatively tight to counter inflation. This raises the prospect of loose fiscal, tight monetary policy settings in a number of key emerging markets.
A Fertile Macro Combination For Emerging Markets

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A Fertile Macro Combination For Emerging Markets

Didier Darcet
18 Jul 2024
Equity market dynamics stem from millions of microeconomic interactions and decisions. Conversely, the valuation of different forms of money such as bills, bonds and gold is largely influenced by the decisions of a few key financial players—especially central bankers. For Didier, this means the “offensive” part of a portfolio (equities) should be managed in a different way than the defensive part (money).

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Trump And The Dollar

Charles Gave
18 Jul 2024
I have nothing to say about the US political scene. Instead, I will focus on what is the most important point to me: the role of the US dollar as a reserve currency. If the next administration tries to maintain US monetary preeminence, the economy is doomed. But if it starts managing the economy in order to lift the return on invested capital in risk-taking industrial activities, the sky will be the limit.

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Video: Towards A Trade War On All Fronts

Yanmei Xie
17 Jul 2024
A new spirit of mercantilism is abroad in the US, with Donald Trump’s Republican Party proposing a “baseline tariff” on all goods imports, as well as targeted higher tariffs on imports from China, should it capture the White House in November’s election. In this interview, Yanmei assesses what this means.

Gavekal Dragonomics

Another Warning To Bond Markets
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Wei He
Growth Decelerates
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Wei He, Dragonomics Team
The Localization Drive Steps Up
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Tilly Zhang
Dealing With The Next Wave Of Bad Loans
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Xiaoxi Zhang
Food Security Is Back
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Ernan Cui
The PBOC’s New Yield Floor
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Wei He
The Missing Consumer Stimulus
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Andrew Batson
How To Get Households Back Into The Stock Market
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Xiaoxi Zhang, Thomas Gatley, Wei He
Hopes For The Third Plenum
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Andrew Batson, Wei He
The Policy Support For Property Prices
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Rosealea Yao

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The Trump Trade Around The World
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Tan Kai Xian, Cedric Gemehl, Thomas Gatley, Udith Sikand
Conversation: Where Trump 2.0 Might Surprise Markets
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Louis-Vincent Gave, Anatole Kaletsky
The Underperformance Of Energy Names
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Louis-Vincent Gave
The Two Types Of Asset
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Charles Gave
After The Trump Shooting
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Louis-Vincent Gave
Assessing Market Reactions To Softer US Inflation
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Will Denyer
Was That Unusual Day The Start Of Something Different?
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Louis-Vincent Gave
Webinar: Setting The Agenda For China's Plenum
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Andrew Batson, Thomas Gatley, Tilly Zhang
Video: US Property In Purgatory
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Tan Kai Xian
Shine On You Crazy Geopolitics
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Tom Miller

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Where Will US Inflation Settle?

Will Denyer, Tan Kai Xian
9 Jul 2024
In recent months, Will and Kai Xian have spilled much ink opining about the US’s near-term inflation outlook. In this report, they instead focus on where US inflation is likely to settle in the medium term. They continue to see the Federal Reserve as the dominant actor in this great game, but explore other factors that could upset the apple cart.

The global view

The Underperformance Of Energy Names
Over the last three months, the S&P energy index has underperformed the S&P technology index by -25pp. A share price is a stream of earnings, discounted by an interest rate, onto which investors tack a risk premium. There are few reasons to think energy companies will face an earnings collapse, or be affected by interest rates. So as energy stocks derate, the most likely culprit seems to be the risk premium linked to global investors’ outlook.
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The Two Types Of Asset
There are two types of asset in the world: real assets and monetary assets. In the past, both have had their places in investors’ portfolios—in proportions determined by Gavekal’s Four Quadrants framework. But today, Charles worries that monetary assets in major developed economies will fail to ensure the return of investors’ capital, let alone a return on their capital.
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Was That Unusual Day The Start Of Something Different?
For anyone positive on emerging markets, China, commodities, and underweight large-cap US tech, the past three months have been even more brutal—to the point that one forgot what green on a screen looked like. However, yesterday saw a sharp reversal in all of the above mentioned trades. Louis ponders the possible implications from yesterday's market moves.
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The Anomalies In Today’s World
Heading into the summer months, Louis’s concern is that a number of current price trends and market developments look to be unsustainable. In this report, he reviews the most striking of these anomalies and seeks to identify how they came about in the first place. Should they continue, he asks what the likely effects will be for investors. Perhaps most importantly, he seeks to identify triggers for potential reversals.
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Test Your Knowledge
Which country is the world’s biggest exporter of cotton?
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Chart of the Week

Week 29, 2024
In the late 1990s, the Chinese government created four central state-owned asset-management companies to buy bad loans from teetering commercial banks. Now those companies are basically out of action. Two have seen their equity drop substantially, in part due to property-sector losses. The other two are in better shape, but have largely moved out of the business of buying bad loans.
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

The Trump Trade Around The World
Since Joe Biden’s dismal debate performance and last weekend’s attempted shooting of Donald Trump, investors have had to price in a greater probability of a Trump victory come November’s election. While this is generally seen as bullish for US equities, the implications for other markets around the world are less positive.
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US Infrastructure Is Still Worth A Bet
Given the euphoria surrounding AI, it can be hard to recall a time when the US equity market was not fired up by tech dreams. Yet go back a couple of years and the hottest story in town after Biden’s Infrastructure Investment and Jobs Act became law was reinvigorated old-world engineering plays. It could be that this most grounded of sectors in the resource-constrained real world gets another shot to shine.
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Where Will US Inflation Settle?
In recent months, Will and Kai Xian have spilled much ink opining about the US’s near-term inflation outlook. In this report, they instead focus on where US inflation is likely to settle in the medium term. They continue to see the Federal Reserve as the dominant actor in this great game, but explore other factors that could upset the apple cart.
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Winners And Losers From A Widening US Trade Deficit
With the US dollar having traded strongly over the last two years, the US trade deficit is expected to expand for the rest of 2024. Kai Xian dives into the details of the widening deficit and who stands to win or lose as a result.
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Webinar: Setting The Agenda For China's Plenum

Andrew Batson, Thomas Gatley, Tilly Zhang
12 Jul 2024
China's Communist Party is gearing up to hold its Third Plenum later this month, an event where top leader Xi Jinping will have a platform to articulate and possibly revise his vision for the economy. With domestic consumers in the doldrums, and trade tensions escalating, is a course correction for China coming? In this webinar our team of China experts explained what to expect, and not to expect, from this high-level conclave.

Latest video

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Video: Towards A Trade War On All Fronts

Yanmei Xie
17 Jul 2024
A new spirit of mercantilism is abroad in the US, with Donald Trump’s Republican Party proposing a “baseline tariff” on all goods imports, as well as targeted higher tariffs on imports from China, should it capture the White House in November’s election. In this interview, Yanmei assesses what this means.

Middle East

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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Honestly, Why Bother With Sanctions?
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Wars And Inflationary Booms
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India Flexes Its Muscles In The Middle East
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India chartbook

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India Strategy: Resetting Expectations

Udith Sikand, Tom Miller
13 Jun 2024
Indian prime minister Narendra Modi has been sworn in for a third consecutive term in office, but his policy agenda will be constrained by the pressures of running a coalition government. The worry is that a hitherto pro-business government will become more captive to labor interests, and hence Indian assets may now be derated.

China chartbook

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The Financial Risk Report 2024

Xiaoxi Zhang
10 Jun 2024
China's property-market downturn exacerbated debt strains last year among the two biggest financial weak points: local-government financing vehicles and real-estate developers. But the fortunes of the two groups of borrowers have since diverged substantially. This chartbook assesses that divergence, and explores the implications for the government, commercial banks, bond markets and other creditors.

Europe's economy

The Trump Trade Around The World
Since Joe Biden’s dismal debate performance and last weekend’s attempted shooting of Donald Trump, investors have had to price in a greater probability of a Trump victory come November’s election. While this is generally seen as bullish for US equities, the implications for other markets around the world are less positive.
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Assessing France’s Indecisive Election
Sunday’s vote showed a growing French fondness for a political ménage à trois. The result of the election affirmed a three-way split, with all parties being well short of the 289 deputies needed for a majority. So what next? It is the president’s prerogative to choose the prime minister and in the coming days—and possibly weeks—Macron will consult with political leaders to see if one of three options can fly.
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‘Change Election’ Changes Nothing
The Labour Party has achieved the biggest swing in British parliamentary history, while the Conservatives have suffered a near-extinction event. This electoral revolution was propelled by the one-word title on Labour’s manifesto cover page: “Change”. But the main result of Labour’s triumph will be to keep everything that matters in Britain pretty much the same as before.
Outcomes From France’s Second Round
On Sunday, July 7, French voters will go to the polls again in the second and final round of a snap election. Although the results of the first round came in much as the pollsters had projected, subsequent political realignments have significantly affected the probabilities of various possible outcomes. Markets are already pricing in these changes.
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Oil & commodities

Video: Aramco, Oil And Saudi's Economic Transition
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The Relationship Between Energy And Financial Markets
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A Barrel Half Empty
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The Metals Boom And Electrification
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Got Commodities?
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The Energetic Danse Macabre
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China tech

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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TikTok, Big Tech And Risk Premiums
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The Inflation Question

Where Will US Inflation Settle?
In recent months, Will and Kai Xian have spilled much ink opining about the US’s near-term inflation outlook. In this report, they instead focus on where US inflation is likely to settle in the medium term. They continue to see the Federal Reserve as the dominant actor in this great game, but explore other factors that could upset the apple cart.
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Inflation Complacence Is Misguided—Again
Even though Friday’s PCE print showed US inflation dipped further in May, Anatole warns that markets continue to underprice inflation risks. Beyond base effects which mean inflation is highly likely to tick higher in the short run, powerful structural forces will continue to exert upward pressure on global prices for at least the medium term.
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Consequences Of A US Slowdown
The US economy faces what looks like a soft patch. After booming in 2023, GDP expanded at an annualized rate of just 1.3% in the first quarter of this year, the slowest rate since the second quarter of 2022. More timely data have been mixed but overall, measures of growth have ebbed in the last month. So what does this mean for monetary policy?
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Webinar: The Return Of Goldilocks? Or Trump?
After a worrying rebound in the first quarter, US inflation cooled off a little in April, rekindling hopes of interest rate cuts later this year. Are those hopes well placed? And what does it mean for markets? Meanwhile, the opinion polls suggest that Donald Trump may prevail in November’s election. Chief US Economist Will Denyer and US Analyst Tan Kai Xian address all these issues and more.
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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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