Gavekal Research

History is on the move once more, with old certainties and old alliances having to be rethought. That is forcing policymakers in national capitals to focus on their underlying national interests and ask hard questions about their current policy setup. Louis conducts a review of the changing drivers impacting France, Germany, Great Britain, the United States, Russia, India and China in a bid to identify the direction that all may take in the coming period.

North American automakers have scored a one-month reprieve, but Donald Trump’s all-fronts trade war is still on. The question is not whether he will conduct it, but how. Arthur argues that whereas in Trump's first term, trade strategy was focused and legalistic, this time tariffs are viewed as an all-purpose tool to achieve a multiplicity of ends, all to establish global and political dominance for the US.

From a US viewpoint, Friday’s events were a reminder of Lord Palmerston’s dictum that in geopolitics there are no permanent friends, no enemies and only permanent interests. And clearly, President Donald Trump has decided that ending the financial bleed of the Ukraine war, downgrading the chances of a nuclear holocaust and mending the US’s relationship with China’s biggest provider of raw materials were higher on the list of US interests than keeping a strong relationship with Europe. So how are markets responding to all this?

Louis and Anatole sat down to discuss the outcome of the German election. Chances have improved for a removal of the debt brake, paving the way for big changes in both German and European fiscal policy. At the same time Europe is facing a dramatic shift in its relationship with the US.

It is easy enough to say what the US Federal Reserve will not do when its policy-setting committee meets next Tuesday and Wednesday. It will not cut interest rates. Predicting what it will do is trickier, because with a rate cut off the table the Fed still has other policy-easing options. In particular, it could slow or pause its program of quantitative tightening. Although less meaty than a rate cut, this would still affect US bond and equity markets.

US Treasury Secretary Scott Bessent wants to “reprivatize” the US economy by deleveraging the public sector and releveraging the private sector. If successful, such a change in the national debt profile would reverse the post-2009 trend for government bodies to assume a bigger role in the US economy. It is unlikely that Bessent achieves this overall aim, says Kai Xian yet the “reprivatization” effort may still end up having important economic and market effects.

Is Donald Trump’s administration a mortal threat to US growth? Investors have clearly decided that it is. In the weeks since Trump’s inauguration, US equities, cryptocurrencies and the US dollar have sold off, while US treasuries have rallied, with yields falling steeply. This is a sharp about-turn from the initial market reaction following Trump’s election victory. Will examines whether the markets are justified, and if it will change its mind once more.

Having gotten caught in a market downdraft in the last week of February, crypto-currency investors had been feeling bruised. Then on Sunday, President Donald Trump restated his plan to create a “strategic crypto reserve”. Ahead of a “crypto summit” to be held at the White House on Friday, Will looks at likely funding sources for such a reserve.

Global investors are rightly focused on the potential losers from the United States pursuing an aggressively protectionist trade policy agenda, but there may be winners as well. Tom went in search of such economies last week. Today he explains how such “swing states” are likely to perform in an intensified period of great power rivalry between the US and China.

As the rich world pulls up the protectionist drawbridge, investors risk missing a bigger story in emerging markets. Here, Chinese outbound investment is rebounding after the fallow Covid years, and is driving a new wave of industrialization that promises to lower the cost of the green-energy transition.

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.

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.

Germany’s embrace of fiscal stimulus as a spur for national renewal is raising concerns about its creditworthiness. The economic establishment is worried that bunds will lose their safe-haven status, whereas credit rating agencies reckon the plan will support Germany’s triple-A rating, as it should help revive a stagnant economy. Cedric looks at the German credit question through the lens of the classic debt dynamic equation to try and find answers.

Eurozone sovereign bond yields climbed further on Thursday, even as the European Central Bank cut its policy rate once again. With the probability of a further series of aggressive policy rate cuts now greatly reduced, the question becomes: how much further can long yields rise? The answer is: potentially, quite a lot.

Having enjoyed a long boom that ran with only minor interruptions since the mid-1990s, Sweden has just endured a tough three years as its big firms suffered from Europe's energy-crisis-induced downturn. However, Cedric and August argue that Sweden has weathered that test and is now one of the best-positioned European economies to ride a new industrial cycle.

In a defining moment for German—and European Union—fiscal policy, on Tuesday the party leaders of Germany’s prospective coalition government announced they have agreed to cast aside the country’s constitutional budget constraints in order to jack up government spending on infrastructure and defense. The plan could still face hurdles, but chances are that the proposals will pass.

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.

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.

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.

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.