More constructive rhetoric suggests the US and China may be about to strike a truce on tariffs and market access. However, that does not mean they are about to bury the hatchet. Powerful groups in Washington want to contain China’s rise as a technological power, and the US has many tools at its disposal even if it drops tariffs.
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Gavekal Research
February 15, 2019
Video: Containing China's Tech Ambitions
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Gavekal Research
February 15, 2019
The QT Endgame
A voting member of the FOMC said yesterday that the Federal Reserve should quit shrinking its balance sheet later this year. This was the clearest indication yet that the US central bank will end quantitative tightening one or two years sooner than the 2020-2021 estimate put forward by Chairman Jay Powell last July. I suspect Brainard will get her wish.
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Gavekal Research
February 14, 2019
Thirty Years Later: Tiananmen's Long Shadow
On Monday we published a piece from Louis in which he assessed the three economic fronts where the US and China are doing battle. In this second part of the series, Louis steps back and considers the chief monetary priorities that China has settled on since the tumultuous events at Tiananmen Square almost 30 years ago.
Global Strategy
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Gavekal Research
February 8, 2019
The Global Car Industry Catches Chinese Flu
If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad.
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Gavekal Research
January 30, 2019
The Recession Of 2019: Revisited
Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).
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Gavekal Research
January 7, 2019
This Century's Suez Crisis
China’s “Belt and Road” initiative is a clear bid by Beijing to challenge the incumbent imperial power: the US. And in an age when the highest-value commodities are not physical goods, but the binary digits zipping around the world at the speed of light, the battleground of this struggle for dominance will be telecommunication networks.
Trade wars
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Gavekal Research
January 29, 2019
A Huawei-Scale Problem
The charges that US prosecutors have now filed against telecom equipment supplier Huawei are similar to those thrown at two other Chinese tech firms last year. The eventual outcome is likely to be similar: the imposition of export controls that will threaten Huawei’s survival and force it to accede to a restrictive deal with the US government.
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Gavekal Research
January 17, 2019
Trump's Next Trade Target
Just when the risk from trade politics seemed to be dying down, it’s getting complicated again. Trade talks between the United States and China are in full swing, but just as important are imminent negotiations between the US and the European Union, which are clouded by the US threat to impose tariffs on cars and car parts.
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Gavekal Dragonomics
January 4, 2019
China And The US Still Hold The Keys To Markets' Fate
In 2018 liquidity tightening in the US and China combined with trade war fears to make a miserable year for markets. In 2019 the same forces will be at work but the outcomes may differ. The key questions are: can the US and China work out a trade deal? How bad is the Chinese slowdown and how will Beijing respond? And how much will the Fed tighten?
The US economy and markets
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Gavekal Research
February 5, 2019
A Looser Fed And Tighter Banks
News flow from the US and beyond over recent months has pointed to an easing of financial conditions. A notable exception has, however, emerged: US commercial banks have stopped loosening lending standards and have started to tighten them—just a touch. I remain constructive, but have gotten more cautious about US risk assets.
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Gavekal Research
January 31, 2019
Fed To The Rescue
It was no surprise on Wednesday that the US Federal Reserve promised to be “patient” about further interest hikes and flexible on the pace and extent of its balance sheet reduction. The Fed’s more dovish stance had been clearly signaled in a series of speeches ahead of yesterday’s policy meeting.
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Gavekal Research
January 30, 2019
Don't Fear Corporate Leverage (Yet)
With Brexit, the US-China trade war and a synchronous global slowdown, these are anxious times for investors. But apparently, all these concerns pale in comparison with worries about US corporate leverage. According to a BofAML survey this month, corporate indebtedness is the biggest single worry among fund managers. We beg to differ.
The eurozone's political agonies
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Gavekal Research
January 15, 2019
Macron Is Muddling Through
As the economy weakens, yellow-vested agitators show no sign of giving up on their campaign to block President Emmanuel Macron’s effort to change the way France works.
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Gavekal Research
December 14, 2018
Europe's Changed Policy Mix
Until last week it was possible to make the case that the EU could still push ahead with major structural reform under the current political configuration. After a continuity candidate took over as head of Germany’s governing party and Macron turned on the fiscal spigots in France to buy off political dissent, that is no longer the case.
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Gavekal Research
December 5, 2018
Macron’s Reform Program Lives On
At first sight, the French government’s decision to postpone its proposed fuel tax increases in the face of popular gilet jaune street protests looks a lot like the climb-downs of 1996, 2006 and 2016, all of which saw attempts at economic reform derailed by mass opposition. Cedric argues such a conclusion would be overly hasty.
China Tech
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Gavekal Research
January 29, 2019
A Huawei-Scale Problem
The charges that US prosecutors have now filed against telecom equipment supplier Huawei are similar to those thrown at two other Chinese tech firms last year. The eventual outcome is likely to be similar: the imposition of export controls that will threaten Huawei’s survival and force it to accede to a restrictive deal with the US government.
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Gavekal Dragonomics
December 19, 2018
Why China Can Succeed In Tech
Technology is at the heart of the US-China trade conflict. The US fears that China will challenge its technological leadership, and those fears are not without foundation. In this piece, Dan argues that China is in fact likely to succeed in many of its technological goals—but because of successful companies rather than big government plans.
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Gavekal Dragonomics
December 12, 2018
The Supply-Chain Migration Begins
The US-China trade conflict has changed the equation for multinational companies’ supply chains in China. Higher tariffs and increased uncertainty are pushing some firms to invest more in other locations. But Dan argues that most firms have strong reasons to stay in China, so the shift in supply chains will be more of a trickle than a flood.
China's economic cycle
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Gavekal Dragonomics
February 7, 2019
It’s Not 2015 All Over Again
The profits of China’s industrial sector are turning down—but as Thomas argues in this piece, a repeat of the traumatic downturn of 2014-15 is not in the cards for 2019. Heavy industry will hold up better this time around, but consumer-facing sectors will do worse. This downcycle will be more broad-based, but less severe, than the last one.
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Gavekal Dragonomics
January 31, 2019
The Large Print Giveth, The Small Print Taketh Away
China’s government has made a cut in personal-income taxes, rushed out in August 2018, a centerpiece of its response to a slowing economy. Additional tax deductions were unveiled in January, but as Ernan explains, the new details are not that bullish for consumer spending. Enforcement is tightening, and some tax breaks will be phased out.
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Gavekal Dragonomics
January 23, 2019
The Next Liquidity Squeeze On Private Firms
China’s private firms suffered a big liquidity squeeze in 2018 as regulators cracked down on shadow financing. But in 2019 they must also contend with the threat of another liquidity squeeze: state-owned enterprises hoarding cash and delaying payments. Unless officials force them to stop, SOEs could squeeze another RMB1trn from private firms.
Europe's softening growth picture
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Gavekal Research
February 11, 2019
Not Such An Ugly Duckling
A spate of weak data releases last week confirmed Europe as the ugly duckling of key economic regions, and things may soon get worse. The worry is that a weakening external sector negatively impacts the domestic recovery through lower investment and job creation at a time when policymakers face both technical and political constraints.
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Gavekal Research
January 24, 2019
Germany's Industrial Slump
With leading indicators in Germany pointing south, and a host of external macro factors looming, things are likely to get worse before they get better. However, much of the potential bad news is already priced into the German stock market.
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Gavekal Research
January 22, 2019
The Future Of Italian Yields
Since it became clear Rome and Brussels were moving towards a compromise to end their budget stand-off, Italian assets have outperformed. The yield on 10-year BTPs has fallen, narrowing the spread over bunds.
Energy and commodities
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Gavekal Dragonomics
December 10, 2018
Steel Prices Have Overshot
Chinese steel prices suffered their biggest decline in two years in November, falling about 20% over the course of the month. That correction was driven by a combination of a big increase in supply along with worries about future demand. In this piece, Rosealea argues that both problems will be short-lived, and that steel prices can rebound.
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Gavekal Research
November 28, 2018
What If Oil Stays At US$50?
Since early October, oil prices have plunged more than -30%, while the US equity benchmark is down -8%. You don’t have to be Inspector Clouseau to wonder if these moves are related.
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Gavekal Research
November 8, 2018
What's Changed In The Oil Market
“Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.
India
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Gavekal Research
February 4, 2019
The Politics Of Indian Largesse
India aspires to be a US$10trn economy by 2030. It’s fine to dream, but first the ruling BJP must win a general election. After recent defeats in three state elections and a resurgent opposition, it faces a tough race.
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Gavekal Research
January 10, 2019
Awaiting India's Electoral Boost
Two recent events have changed the calculus for investors in India. First, the ruling BJP took an electoral battering in three heartland states, imperiling its bid for general re-election. Second, in December the government appointed a new RBI governor.
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Gavekal Research
November 28, 2018
India Macro Update: Post-Rout Uncertainty
India is beset with economic problems that range from a deepening credit crunch, a worrying stand-off between the government and central bank and a capital spending cycle that has never really gotten going. Yet despite these challenges, the economy keeps chugging along and should hit 7.5% growth in the current fiscal year.
Video
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Gavekal Research
February 4, 2019
Video: Conflicting Signals From The US Labor Market
The US labor market is sending apparently contradictory signals. On one hand the unemployment rate ticked higher in January. On the other, job creation was much stronger than expected.
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Gavekal Research
January 24, 2019
Video: Skirting Recession In Europe?
This week the IMF has cut its GDP forecasts for European economies exposed to a synchronous global growth slowdown. Nick gauges the probability that core eurozone economies will fall into recession, examines the scope for stimulative policy responses and explores what the slowdown means for Europe’s financial markets.
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Gavekal Research
January 17, 2019
Video: Beyond The Government Shutdown
As the US government shutdown threatens to enter its fifth week, Will looks back at previous shutdowns to weigh the likely impact on America’s economy and financial markets, against the backdrop of an aging economic cycle, flattening yield curve and tighter financial conditions.
Brexit and the UK economy
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Gavekal Research
February 7, 2019
Gaming Out Theresa May’s Gamble
Given that the UK prime minister has apparently outfoxed her opponents, why has the pound fallen back below US$1.30? The obvious reason is that Theresa May’s unexpected wins in the UK parliament last week look to have increased the chances of a disorderly “no deal” rupture.
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Gavekal Research
January 17, 2019
Musings On Brexit
With the UK’s elite intent on frustrating the democratically-expressed will of the British people to quit the EU, the lesson for the rest of the continent is that there can be no legal or peaceful exit from the technocratic super-state.
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Gavekal Research
January 16, 2019
Brexageddon
It should have been no surprise that sterling rallied after the overwhelming defeat of Theresa May’s Brexit plan. The disorderly “no deal” rupture with Europe rightly terrifies the markets and the business community is now much less likely. As a result, sterling is likely to rise eventually back towards its long term average real exchange rate.
US dollar liquidity and emerging markets
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Gavekal Research
February 8, 2019
EM Balance Sheet Vs Income Statement
Emerging market investors face a dilemma in 2019. Softer relative growth prospects in the US as the initial effects of 2018’s tax cuts wear off, coupled with the easing of the US dollar liquidity squeeze implied by a more dovish Federal Reserve and softer oil price, favor emerging market assets. The question is: how best to implement this view?
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Gavekal Research
January 28, 2019
Favor Local Bonds Over EM Equities
After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date.
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Gavekal Research
January 18, 2019
Mexico 1, Brazil 0
When Brazil met Mexico in last year’s football world cup, the Brazilian team walked away the victors by two goals to nil. In financial markets too, Brazil has lately been beating Mexico. In recent weeks each country has installed as its president a fiery populist—although they hail from different ends of the ideological spectrum.
Deep Dives
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Gavekal Research
February 5, 2019
Audio & Transcript — Gavekal Research Call February 2019
In the call yesterday, Charles Gave and Cedric Gemehl presented their views on the economic and political situation in Europe. Cedric outlined key risks facing Europe’s economy. If the worst is avoided, he thinks Europe could get a soft landing. Charles took a different view, arguing that the eurozone was now an irretrievably diverging system.
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Gavekal Research
February 1, 2019
Strategy Monthly: Europe's Containable Risks
As China slows and the US expansion limps into its dotage, a heavily export-dependent Europe looks vulnerable to another downturn. The latest growth numbers from Italy and Germany make for especially grim reading. Potential shocks loom in the shape of a hard Brexit, populist discontent in France and Italy and the threat of auto tariffs from the US.
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Gavekal Research
November 28, 2018
India Macro Update: Post-Rout Uncertainty
India is beset with economic problems that range from a deepening credit crunch, a worrying stand-off between the government and central bank and a capital spending cycle that has never really gotten going. Yet despite these challenges, the economy keeps chugging along and should hit 7.5% growth in the current fiscal year.
Chinese property
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Gavekal Dragonomics
January 30, 2019
The Long Plateau In Housing Demand
While many forecasters had expected China’s steel demand to enter long-term decline as housing construction peaks, in fact it has stayed surprisingly strong. In this piece, Rosealea revisits her housing model, and finds it is consistent with recent trends. Construction should peak in 2020-22, so steel demand can stay elevated for a few more years.
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Gavekal Dragonomics
January 14, 2019
It's Not All Bad News In Property
China’s property market keeps delivering bad news: declines in housing sales, land sales and prices have deepened in recent months. But Rosealea sees some positive signs in easing local government policies, lower bank funding costs, and strong momentum in construction. In this piece, she explains why she is not joining the property-market bears.
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Gavekal Dragonomics
November 19, 2018
Housing & Construction Review 2018
China’s property market has had a record-breaking run, but where is it headed next? In this concise chartbook, Rosealea delivers her annual overview of the key drivers of housing sales and construction activity and explains the outlook for 2019. An overdue correction in sales is coming, but construction should hold up relatively well.
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’.