The price of Brent crude oil has doubled in the past six weeks, supported by the beginning of a recovery in demand as economies come out of lockdown and by expectations that the Opec+ cartel will extend the deep production cuts it agreed in April. Tom weighs the forces likely to drive the oil market over the coming months.
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Gavekal Research
June 4, 2020
Video: The Upsurge In Oil
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Gavekal Research
June 4, 2020
Europe Flexes Its Fiscal Muscles
Another day, another big fiscal expansion from Germany. Yesterday, Berlin outlined a €130bn stimulus package, representing 3.8% of GDP. If there was any doubt, Europe has clearly ditched its decade-long infatuation with austerity and is back in the Keynesian camp. This situation is bullish for eurozone stocks and in time could yet spur a long-forgotten problem—inflation.
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Gavekal Dragonomics
June 3, 2020
Webinar: China's Economic Outlook After The NPC
China research director Andrew Batson was joined by China macroeconomist Wei He and Asia analyst Vincent Tsui to discuss the news from the National People's Congress and what it means for China's economic recovery, the likely direction of fiscal and monetary policy, and the consequences of Hong Kong's national security law.
Hong Kong
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Gavekal Research
May 26, 2020
Hong Kong Q&A (Part III)
China has responded to prolonged political dissent in Hong Kong by proposing a tough anti-subversion law that threatens the city’s role as an international financial center. It remains unclear how this will be imposed on a common law-based legal system with a polar opposite jurisprudence to that on the Mainland.
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Gavekal Research
May 26, 2020
Hong Kong And The Ethic Of Responsibility
German sociologist Max Weber made the distinction between the ethic of conviction, based on the philosophy of Immanuel Kant, and the ethic of responsibility, based on consequentialist philosophy, a grandchild of Aristotelian logic. The distinction between the two may help investors to determine their response to developments in Hong Kong.
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Gavekal Research
May 25, 2020
The Death Of Old Hong Kong
On Monday morning, the streets around Gavekal’s offices in Hong Kong’s Wan Chai district teemed with harried commuters rather than baton-charging police and political protesters. Unfortunately, uncertainty about Hong Kong’s future as a free society will linger longer than the tear gas that had drenched the area a few hours earlier.
Covid-19: Markets
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Gavekal Research
May 14, 2020
The World Has Changed, Quick! Buy More Of The Same
As countries around the world, and some US states, are starting to emerge from their enforced Covid-19 hibernation, investors have to choose between one of three potential outcomes.
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Gavekal Research
May 4, 2020
Down -16% And Still 30% Overvalued
It seems the world has entered a new era, in which the principal function of central banks is to try to prevent markets from going down. So, after the gold standard and the dollar standard, we now appear to have the S&P 500 standard, in which a desperate central bank tries to manage the financial markets.
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Gavekal Research
April 27, 2020
The Short, Medium And Long Term Outlook
At the end of March, just after the collapse of global stock markets and non-dollar currencies had reached its climax, I argued that it was too early to buy equities but probably a good time to sell US dollars. The first of these ideas turned out to be wrong, the second irrelevant.
Covid-19: Global impact
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Gavekal Research
April 22, 2020
Some Details On The Shape Of Things To Come
On Monday, Arthur laid out the core scenario for the exit from social lockdowns in both Europe and the US: a gradual relaxation of the most severe restrictions between now and mid-June, followed by several months or more of significant, but less onerous, restrictions.
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Gavekal Research
April 20, 2020
The Shape Of Things To Come
As the US and Europe prepare to enter their second month of lockdown, the good news is that social controls, where they are imposed, are working. The less good news is that the exit from lockdowns is going to be long and arduous.
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Gavekal Research
April 17, 2020
Asia Goes Unconventional
China just unveiled a -6.8% year-on-year fall in 1Q20 output and the ricochet effect is being felt beyond its borders. Neighboring economies face shrunken demand and are being forced to ditch fiscal rectitude and other economic orthodoxies. In some cases, monetary responses look a lot like quantitative easing.
Covid-19: China
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Gavekal Dragonomics
May 15, 2020
April’s Fitful Recovery
China released economic data for April showing a continued recovery in industry and investment as well as a surprising recovery in exports. In this Quick Take, Thomas argues that with exports headed for a substantial decline, this upwards trajectory is likely to plateau in May.
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Gavekal Research
May 13, 2020
The Chinese Bond Rally Is Not Over Yet
China’s bond market is selling off on rising optimism about the nation’s recovery from the Covid-19 lockdown. But Wei argues that this rise in bond yields looks like a false alarm: China’s economy is not about to begin a V-shaped recovery and its central bank is not yet finished with monetary easing. The bond bull market still has some way to run.
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Gavekal Dragonomics
May 11, 2020
The Services Recovery Gets Back On Track
China’s government is substantially relaxing restrictions on travel, retail and other consumer services as its Covid-19 outbreak gets further under control. In this Quick Take, Rosealea outlines the near-term outlook for a recovery in consumer services, as well as the factors still weighing on that recovery.
Oil
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Gavekal Research
April 23, 2020
Whale Watching In The Gulf
Gavekal’s dynamite fishing analogy maintains that the biggest impact of a market shock only shows up after a delay, much like the effects of an underwater explosion. First the small fry float to the top, then the mid-size fish. Only much later does the dead whale break surface.
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Gavekal Research
April 21, 2020
Of Cows And Negative Oil
A friend has a sizable dairy farm in France. He usually sells his cows’ milk to local makers of yogurt and cheese for anywhere between €250 and €350 per 1,000 liters. Today, with most local cheesemakers shut down, buyers are offering just €1 per 1,000 liters for his milk. It could be worse, though. He could be in oil.
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Gavekal Research
April 3, 2020
The Truth In Trump’s Tweets
Oil market pundits were quick to dismiss Donald Trump’s tweeted claim Thursday that Saudi Arabia and Russia are ready to agree crude production cuts of 10-15mn bpd as “absurd” and “incredible”. But oil production cuts of the magnitude flagged by Trump are certainly in the pipeline—whether as the result of a new Opec+ agreement or not.
Global Strategy
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Gavekal Research
May 8, 2020
The Kitsune Market (Part III)
In this third part of a series assessing risks thrown up by massive government interventions to stop Covid-19 lockdowns turning into an economic depression, Louis turns his sights on efforts to prevent bankruptcies at all costs.
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Gavekal Research
May 1, 2020
The Truth About Banks And Bonds
As I elucidated last week Knut Wicksell’s key idea was that in any market economy there are not one, but two key interest rates, whose relative position drives the cycle. The theory makes good sense, but computing the two rates is tricky.
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Gavekal Research
April 23, 2020
On The Next Banking Crisis
For Charles, the last 100 years has seen three standout banking crises; the 1930s depression in the US, Japan’s post-1990 bust and the slow-motion implosion of the eurozone, which has yet to see a denouement. In this piece, he dusts off one of his favorite frameworks for assessing economic cycles and asks what can be learned from these episodes.
The US economy and markets
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Gavekal Research
May 18, 2020
The Upside For Autos And Housing
As the US begins to reopen for business, some segments of the economy will bounce back faster than others. Among the more vigorous will be the auto and housing sectors, where activity will be lifted by a favorable combination of tailwinds.
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Gavekal Research
May 11, 2020
Breasting The Trough
The apparent divergence between the stock market and economic reality continues to widen. Equity investors are focusing on the expected effects of the Federal Reserve’s massive liquidity injections once states emerge from lockdown.
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Gavekal Research
May 5, 2020
US Labor And The New Economy
US states are moving to end stay-at-home orders and slowly resume activity. With some 30mn workers having been laid off, they will do so in an economy that has been profoundly changed by Covid-19. At a macro level, a fairly swift recovery is likely.
China Tech
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Gavekal Research
May 18, 2020
A US Full-Court Press Against China
The US-China relationship has deteriorated rapidly, and the main reason seems to be that Donald Trump has decided that a “tough on China” approach should be central to his reelection campaign. Acrimony between the two countries is likely to get much worse between now and November, and US actions are starting to spread from technology to finance.
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Gavekal Dragonomics
May 5, 2020
Military Fusion Sparks US Reaction
The US government has unveiled new rules that will make it more difficult for US companies to sell high technology to Chinese firms with any military connections. In this piece, Dan explains the risks of these new rules for both US companies and the many Chinese firms participating in their government’s “military-civil fusion” campaign.
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Gavekal Dragonomics
April 29, 2020
New Infrastructure, Old Problems
China is promising a boost in so-called “new infrastructure,” of which 5G network development is a major component. Dan explains how the scale of spending involved in building 5G infrastructure is too small to provide a meaningful boost to growth, and why any possible economic benefits from a faster mobile network will not be realized anytime soon.
China's economic cycle
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Gavekal Dragonomics
March 9, 2020
Limited Help For Struggling SMEs
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.
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Gavekal Dragonomics
March 3, 2020
A Month Of Lost Wages
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.
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Gavekal Research
February 24, 2020
Far From Priced In
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.
Europe's economy
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Gavekal Research
May 19, 2020
Europe’s Hamiltonian Moment
If there was a rational explanation for Monday’s global risk-on rally, it would be the genuinely exciting news from Europe. It is possible—just possible—that the Franco-German proposal for a €500bn coronavirus Recovery Fund announced yesterday will turn out to be the most important historic consequence of the coronavirus.
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Gavekal Research
May 15, 2020
Phase Two Beckons
Europeans have spent big to freeze their economies as if held in suspended animation since mid-March. On the whole, this plan is working quite well but EU member states must now agree to a post-pandemic plan for demand stimulus if they are to avoid an all-too-predictable double-dip downturn.
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Gavekal Research
May 6, 2020
‘No Limits’ Now ‘No, Limits’
Markets have largely taken in their stride Tuesday’s decision by the German Constitutional Court that the European Central Bank exceeded its mandate by launching quantitative easing in 2015. The euro's move against the US dollar and the 10bp uptick in Italian 10-year yields were modest by the standards of recent volatility.
India
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Gavekal Research
May 14, 2020
India's Mini Bazooka
India’s finance minister yesterday outlined a US$265bn fiscal package to save the economy. It looks to be just enough to stop a slide into depression but not much more. A worrying factor in its response is an apparent lurch towards protectionism, which would undermine any gains made from much-needed reforms to land and labor markets
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Gavekal Research
April 28, 2020
Three Big Questions For India
Under one of the world’s most stringent lockdowns, the prospect that India will be devastated by the coronavirus pandemic is receding, and attention is shifting from saving lives to saving the economy. Tom examines the three big questions hanging over the Indian economy to determine how successful the country's recovery is likely to be.
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Gavekal Research
April 2, 2020
India And The Virus
India is in the early stages of its Covid-19 epidemic. The economic fallout in the world’s fifth-largest economy will be severe, with well over 100mn casual jobs at risk. Like many emerging economies, India is vulnerable due to a weak medical sector and a lack of fiscal firepower to counter resulting economic shocks.
Video
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Gavekal Research
May 28, 2020
Video: Will The Bank Of England Go Negative?
Having long resisted the lure of negative interest rates, policymakers at the Bank of England have recently admitted that they are considering a cut in the UK’s main bank rate to below zero.Nick examines the pros and cons of negative interest rates, and weighs the probability that the Bank of England will indeed enter negative rate territory for th
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Gavekal Research
May 20, 2020
Video: Pressure Points In Emerging Markets
Emerging markets have broadly weathered the liquidity squeeze that threatened to engulf them in March, however Udith is not convinced they are out of the woods.
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Gavekal Research
May 13, 2020
Video: In Defense Of US Equities
With most big US firms having reported their first quarter earnings, the picture is not pretty and worse may follow in 2Q20. Yet the stock market rally of the last six weeks suggests that investors have a fairly cheery view about US firms’ prospects. So what gives?
Brexit and the UK economy
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Gavekal Research
February 14, 2020
The Downing Street Putsch
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.
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Gavekal Research
February 13, 2020
Paying Your Way In The UK
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.
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Gavekal Research
January 31, 2020
Britain’s Soggy Prospects
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.
Emerging markets
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Gavekal Research
Armando Castelar
May 12, 2020
Brazil's Burning House
As President Jair Bolsonaro fuels anti-lockdown protests, Brazil is having a rough Covid-19 crisis. Its public health response has been weak and investors are horrified at the economic costs of such bungling. Fortunately, Brazil’s federal structure does mean the country can handle the crisis in spite of weak central leadership.
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Gavekal Research
May 7, 2020
The Threat From Turkey
Turkey increasingly looks like a basket case that may spark a broader move out of emerging markets. Despite its efforts to squeeze short-sellers by stopping banks from swapping currency with foreign counterparties, the lira is hitting new lows against the US dollar.
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Gavekal Research
May 1, 2020
The Benefit Of Panicking Early
Among industrialized nations, Taiwan stands out as the least affected by the Covid-19 pandemic. Taiwan chose to “panic early” by barring entry to foreign travelers, enforcing strict quarantines and assiduously tracking potential infections.
Deep Dives
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Gavekal Research
May 15, 2020
Webinar: China And The US Race Toward The Precipice
The rivalry between the US and China has taken a turn for the worse during the Covid-19 pandemic. In yesterday’s webinar, Tom Miller talked about how China has attempted to use the pandemic in its global influence strategy. Dan Wang updated viewers on the technology rivalry.
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Gavekal Research
May 4, 2020
Strategy Monthly: Emerging Markets Under Pressure
Aside from China, emerging markets have not been hit as hard as rich countries by Covid-19, but their asset markets have been hammered. An optimistic view holds that undervalued EM assets can now bounce back.
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Gavekal Research
March 6, 2020
India Macro Update: A Fragile Stabilization
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.
Chinese property
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Gavekal Dragonomics
February 12, 2020
The Lingering Impact On Property
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.
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Gavekal Dragonomics
January 8, 2020
The Mortgage Rate Reset
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.
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Gavekal Dragonomics
November 21, 2019
The Crackdown On Developer Financing
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.
From the archives: oldies but goodies
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Gavekal Research
November 23, 2012
Deficit Deniers Of The World Unite
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.
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Gavekal Research
July 20, 2011
Are We Entering Into Revolutionary Times?
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.
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Gavekal Research
February 28, 2011
The High Cost Of Free Money
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’.