Gavekal Research
March 27, 2020
Emerging markets dodged a bullet last week when the US Federal Reserve announced US dollar swap lines with key EM central banks. But although they now have access to US dollar liquidity, EMs still face the twin challenges of greatly diminished global demand and the domestic economic damage of local lockdowns to counter Covid-19.
Gavekal Research
March 27, 2020
In economics there is what you see and what you don’t see, and “there is no such thing as a free lunch.” As the world economy suffers a spasm the likes of which has rarely been seen in peacetime, it may help to go back to first principles to figure out what we are not seeing about this crisis, and who is going to end up paying for it.
Gavekal Research
March 26, 2020
Is the cure worse than the disease? This question is already being asked about the economic lockdowns being imposed in response to Covid-19. It will be asked a lot more in the coming weeks as the economic pain gets worse. The short answer is that the cure is costly, but needed; and well-designed policies can enable a transition to a much lower-cost approach by mid-May if not earlier.
Gavekal Research
March 20, 2020
While most media attention is focused on the Covid-19 outbreak, the energy industry simultaneously faces a solvency crisis and a liquidity seizure of epic proportions is unfolding before us. In short, these events have created a perfect storm. What comes next depends on how this three factors driving markets play out
Gavekal Research
March 20, 2020
Above all, economics is the study of why goods and services have value and why these values are constantly changing. This study is greatly complicated by the fact that there are two different sources of value. In Gavekal-speak, we call these “scarcity” value (think jewels) and “efficiency” value (think tools).
Gavekal Research
March 19, 2020
Policymakers in the world’s biggest economic blocks are responding to the current crisis with fiscal and monetary “shock and awe”. Yet even as the much maligned European Central Bank joined the asset purchase party, markets have continued to crater.
Gavekal Research
March 23, 2020
We are heading into another difficult week. Covid-19 case numbers and fatalities outside China continue to grow rapidly. Social lockdowns are spreading to more US states and European countries. In the short run, fiscal support is on the way.
Gavekal Research
March 19, 2020
The US and Europe are moving towards Hubei-style societal lockdowns. Arthur sifts through the latest epidemiological research, and concludes that while the worst case public health scenarios will be avoided, the coming lockdowns will be severe and last long enough to have an economic impact possibly more damaging than in China.
Gavekal Research
March 18, 2020
“This is not a time for ideology or orthodoxy,” said UK chancellor Rishi Sunak on Tuesday. Policymakers across Europe and in the US agree. They have now thrown orthodoxy out of the window in an all-out attempt to support economies hammered by Covid-19 countermeasures.
Gavekal Dragonomics
March 24, 2020
In the global financial crisis of 2008, China defied economic orthodoxy with its huge debt-financed stimulus. In the coronavirus crisis of 2020, by contrast, it is the US, UK and other Western countries that are throwing the fiscal rulebook out the window. In this piece, Andrew explains what’s behind this surprising role reversal.
Gavekal Dragonomics
March 23, 2020
The economic stress of the Covid-19 outbreak is all but certain to cause a rise in nonperforming loans. Even before the outbreak, China’s rural commercial banks—its smallest and most troubled lenders—were already short of capital and performing poorly. As Xiaoxi shows in this piece, another jump in bad loans will push more of them into distress.
Gavekal Dragonomics
March 20, 2020
Even as China’s property market has experienced an unprecedented decline, central government policymakers have kept a tight leash on official support. However, given growing signs of a lasting disruption to the sector, Rosealea believes that Beijing will tolerate more ambitious municipal efforts to keep local markets afloat.
Gavekal Research
March 12, 2020
The breakup of the Opec+ oil cartel and the ensuing price war between Russia and Saudi Arabia triggered a -30% fall in the price of oil and spooked financial markets. Moscow has upended the monopolistic pricing regime that has supported the price of oil over the last three years.
Gavekal Research
March 12, 2020
Much of the commentary on the -30% downward breakout in the price of oil over the last couple of weeks has focused on the negative fallout for the US economy. The demand destruction caused by Covid-19 which initiated the oil price fall is a clear economic negative. Yet cheaper energy also promises positive effects. KX weighs the forces at work.
Gavekal Research
March 9, 2020
If you ever wondered what would happen if someone lobbed a hand grenade into a bloodbath, now you know. Markets were always going to be shaky on Monday, as it became increasingly clear that the US is set to see a sharp rise in recorded coronavirus cases.
Gavekal Research
March 19, 2020
There is an inevitability to the economic responses being adopted by governments around the world to the current crisis. The real problem is that they follow years of cosseting the financial system through policies intended to deny economic reality.
Gavekal Research
March 17, 2020
Collapsing equity markets, rising bond yields, widening spreads, falling gold—in recent days, there have been few places to hide. When markets act so sick, it usually pays to take a deep breath (in a socially distant manner) and ponder whether we are facing a solvency crisis, or a liquidity crisis.
Gavekal Research
March 13, 2020
In fraught times, Charles has decided to keep it simple and focus only on what he knows. In this piece, he considers changing relationships between oil prices, long-bond rates, US equities and the dollar and offers various approaches that could help investors survive the bear market.
Gavekal Research
March 23, 2020
As national lockdowns upend normal economic activity, conventional economic indicators are being rendered useless to investors. High frequency indicators may be helpful in spotting future turning points and gauging the strength of any eventual recovery. In this short chartbook, KX suggests a range of indicators for monitoring the US economy.
Gavekal Research
March 16, 2020
While other US government agencies tackle the coronavirus crisis, the Federal Reserve has promised ample liquidity and functioning credit markets. Its “whatever it takes” plan is to ensure that US dollars are available at home and abroad, US credit markets remain liquid and solvent companies and individuals are not stopped out.
Gavekal Research
March 13, 2020
Financial markets are now in full-blown panic mode. For investors, the key question is: What will it take for markets to form a bottom, and when will this happen? No one can answer with any precision. However, it is possible to discern the broad conditions needed to allow the markets to find a bottom. We are nowhere near them yet.
Gavekal Dragonomics
March 10, 2020
Plans enacted by US national security hawks to toughen sanctions on Huawei and other Chinese tech firms have run into stiff resistance from both American tech firms and President Trump himself. Dan reports that, amidst this stalemate, both factions are mobilizing for a protracted fight over the fate of restrictions on exports to China.
Gavekal Dragonomics
January 30, 2020
American attempts to kneecap Huawei have run into several setbacks. Internationally, Europe is pushing back on demands to exclude Huawei from 5G networks; domestically, further sanctions have been stymied by bureaucratic infighting. Dan reports that the war is hardly over, and we are likely to see broader rules limiting Chinese access to US tech.
Gavekal Dragonomics
January 13, 2020
Although US President Donald Trump has called a truce in his trade war with China, the strategic tensions in the US-China relationship still remain. Therefore, as Lance explains in this piece, the US defense sector is already taking concrete steps to reduce its reliance on China for some products with direct military applications.
Gavekal Dragonomics
March 9, 2020
Chinese policymakers have announced a wide range of monetary and fiscal measures intended to help the smaller firms hit hardest by the Covid-19 outbreak. The helpfulness of these measures will likely only be marginal; however, Thomas, Xiaoxi and Wei are cautiously optimistic that most SMEs can still weather the ongoing crisis.
Gavekal Dragonomics
March 3, 2020
As the rise in new cases of Covid-19 in China has slowed, provinces are easing their drastic restrictions on movement and businesses are reopening. But the extended shutdown has already imposed great costs on migrant workers. Ernan estimates lost wages will be 3-4% of annual household income, though with a smaller impact on total consumption.
Gavekal Research
February 24, 2020
Asian markets switched to risk-off mode Monday as investors reacted to further coronavirus news outside of China. Yet in onshore markets, investors are optimistic that the economy will quickly normalize as the spread of the virus comes under control, and that the central bank will provide policy easing.
Gavekal Research
March 12, 2020
After the US slapped a 30-day travel ban on visitors from Continental Europe the world’s three biggest economic areas are now effectively cut off from most human contact. As China sees its infection rate level off, the growth dynamic of this pandemic has shifted to Europe. Economic effects will depend on government responses.
Gavekal Research
February 6, 2020
It seems the European economy can’t catch a break. After a grim year in 2019, especially for the manufacturing sector, the old continent entered 2020 with reasons for cautious optimism. Survey-based indexes of business optimism appeared to bottom out late last year. Then the Wuhan coronavirus hit China.
Gavekal Research
January 13, 2020
On the face of it, Germany’s industrial slump is still worsening. The worry has been that a cratering of Europe’s industrial economy proves bad enough to reverse the “internal” recovery spurred by super-easy monetary policy.
Gavekal Research
March 6, 2020
The Reserve Bank of India's rescue of troubled private sector lender Yes Bank highlights the feedback loop between India’s bad-loan-burdened financial system and its stuttering economy, which is now facing its lowest growth rate since the financial crisis.
Gavekal Research
January 27, 2020
Bad debts are clogging the arteries of India’s financial system. Two policy developments at the end of 2019 raised hope of recovery. A Supreme Court judgment set a precedent for resolving bankruptcies more quickly. And the insolvency code was extended to cover non-bank financial companies.
Gavekal Research
January 7, 2020
Few major economies and markets are more exposed to a possible Middle Eastern conflict than heavily oil-import-dependent India.
Gavekal Research
March 17, 2020
The coronavirus pandemic, with its calls for a coordinated European Union-wide fiscal stimulus to counter the inevitable economic ill-effects, would appear to be the ideal opportunity to press forward with the next big step towards European integration by forging a eurozone fiscal union. But things are not so simple.
Gavekal Research
March 12, 2020
The breakup of the Opec+ oil cartel and the ensuing price war between Russia and Saudi Arabia triggered a -30% fall in the price of oil and spooked financial markets. Moscow has upended the monopolistic pricing regime that has supported the price of oil over the last three years.
Gavekal Research
March 5, 2020
This week the US federal Reserve cut interest rates to counter the effects of the coronavirus outbreak, and the European Central Bank promised to follow suit with “appropriate” measures of its own. But eurozone policy rates are already negative, which severely limits the scope for further cuts.
Gavekal Research
February 14, 2020
Ever since turning negative on sterling and the UK economy when Boris Johnson dropped his post-election bombshell announcing a new “No Deal” deadline of December 2020, I have been waiting for a chance to double-down on this bearish position. On Thursday, Johnson provided such an opportunity to extend short positions in sterling.
Gavekal Research
February 13, 2020
A triumphant Boris Johnson is set on consolidating a new electoral coalition through big infrastructure projects that help “level up” forgotten regions, but he faces a weak economy and tough negotiations with the European Union over Britain's trading relationship.
Gavekal Research
January 31, 2020
Despite a worsening coronavirus situation and worries that a Brexit bounce could be short-lived, the Bank of England defied the expectations of many by not cutting interest rates.
Gavekal Research
March 19, 2020
Policymakers in the world’s biggest economic blocks are responding to the current crisis with fiscal and monetary “shock and awe”. Yet even as the much maligned European Central Bank joined the asset purchase party, markets have continued to crater.
Gavekal Research
March 18, 2020
Despite aggressive policy moves in recent days, emerging market asset values have continued to crater. These moves are the result of lost demand and supply chain disruption but also the fear of a financing shock from a squeeze in US dollar funding.
Gavekal Research
February 12, 2020
Economists are still trying to assess how severe the economic fallout from China’s coronavirus outbreak will be for the rest of the region, but local central banks are not waiting to find out, and are already either cutting interest rates or promising to cut them.
Gavekal Research
March 2, 2020
In the last week of February, global investors woke up to the massive effect of China’s coronavirus lockdown and the risks of a global pandemic. The resulting disruption to global supply chains will be widespread and long lasting. But not all is bleak.
Gavekal Research
February 7, 2020
In yesterday’s research call, Vincent Tsui and Tom Holland joined Arthur Kroeber to discuss the coronavirus outbreak, what it means for Chinese and regional economic growth, and how investors should position themselves during this period of rapid news flow and high market volatility.
Gavekal Research
December 4, 2019
After India’s economic growth rate slumped to a six-year low in the third quarter, the government of Narendra Modi is throwing fiscal caution to the winds in an attempt to juice up growth.
Gavekal Dragonomics
February 12, 2020
While the 2003 SARS outbreak had only a transitory impact on China’s housing market, the 2020 coronavirus episode is proving to be much more serious. In this piece, Rosealea argues that the big hit to housing sales will leave developers short of cash and limit their ability to keep projects going. This points to a lingering drag on construction.
Gavekal Dragonomics
January 8, 2020
China’s central bank is moving forward with its interest-rate reforms, ordering mortgages to be reset based on the new loan prime rate. Rosealea explains that this shift will make monetary policy more transparent and effective by re-linking mortgage rates to official policy rates, but it does not herald a cycle of major cuts in mortgage rates.
Gavekal Dragonomics
November 21, 2019
China’s financial regulators are squeezing funding for property developers in order to discourage land speculation and cool down property prices. In this piece, Rosealea argues the crackdown has been fairly successful, and does not pose a big risk to construction. Slightly easier demand-side policies will help offset tough supply-side restrictions.
Gavekal Research
November 23, 2012
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.
Gavekal Research
July 20, 2011
In A Study of History, Toynbee explains that 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.
Gavekal Research
February 28, 2011
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’.