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    Gavekal Research

    Gold Signals A System Failure

    To make the point that gold is the only monetary asset that is not someone else’s liability, John Pierpont Morgan used to say that “gold is money, the rest is credit”. For simplicity’s sake, let’s assume that this quip corresponds to reality—the implication is that the relationship between the gold price and the credit system must be full of information.

    4
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    Strategy Monthly: Towards A Dollar Decline

    The last five years have been an era of US dollar strength. That era may now be coming to an end. After the US Federal Reserve halted its balance sheet contraction and last month resumed buying T-bills at a rate of US$60bn a month, the Fed is now printing money faster than the other central banks. As a result, relative liquidity growth now favors US dollar weakness.

    0
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    Gavekal Research

    Easy Money And Robust Growth

    No wonder the S&P 500 closed at a new high yesterday. On the same day the Federal Reserve cut interest rates by 25bp, US GDP growth for 3Q19 came in at a robust 1.9%. For its part, the Fed gave no indication of paring down its new asset purchase program (quantitative easing in all but name). This is bullish for risk assets and bearish for the US dollar.

    0
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    Video: China's Private Financing Woes

    Chinese credit growth picked up in September, which is good news at the margin for private sector liquidity. However, a continued crackdown on shadow finance and private firms’ difficultly rolling over bond obligations will retard capital spending and lead to more bond defaults into next year.

    0
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    A Swedish Canary In The Coal Mine

    Sweden’s Riksbank plans to raise its main policy rate to zero from -0.25%. A relieved governor, Stefan Ingves, said last week it would be a “bonus” to return to parity in December and warned against staying negative for too long. The Swedish recantation follows the European Central Bank’s controversial move last month to further cut rates to -0.5%. Investors should take note because the Swedish canary may be signaling a shift in attitudes to...

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    Gavekal Dragonomics

    Housing & Construction Review 2019

    China’s property market has held up surprisingly well in 2019, but will that strength last? In her annual chartbook, Rosealea examines key market trends and explains the outlook for 2020. Flexible policy can probably continue to avoid a deep decline in housing sales, but construction activity and materials demand are almost certain to slow.

    0
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    Gavekal Research

    Where Will Growth Come From Now?

    In the spring of 2003 Gavekal posited that China would become the new locomotive of world growth. But now, the days when China could be counted upon to gear up its balance sheet and pull global growth up by its bootstraps are coming to an end. And as global activity slows investors are asking “where will the growth come from"?

    2
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    China-Bashing In A Political Season

    Signs are growing that the US and China will have a mini-deal on trade ready by the time Trump and Xi meet at the mid-November APEC summit. The key questions are whether opposition from US hardliners could derail the deal at the last moment, and whether the campaign to “decouple” the two economies will be knocked back if there is a deal.

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    US Dollar Under Fire

    The richly-valued US dollar is finally starting to look vulnerable. While still in its post-2015 trading range, the DXY index has given up -1.5% in the last 11 trading days; broader trade-weighted measures have also swooned. A range of factors are now weighing on the US currency and if they persist the unit could see a pronounced decline in the coming months.

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    Gavekal Research

    Video: Playing The Un-inversion

    Having inverted over the summer, the US yield curve has steepened sharply. In the past such a move has often presaged recession—but not always. Twice since the 1960s an inversion and steepening was not followed by recession. Then, as now, the return on invested corporate capital was higher than the cost of that capital.

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    Gavekal Research

    Draghi's Potent Legacy

    Mario Draghi threw the cat among the pigeons at last month’s fiery policy meeting of the European Central Bank by cutting interest rates and cranking up asset purchases. Today’s general council meeting and sign-off by the outgoing president should be quieter, but the circumstances of the baton-handing show how much the ECB’s reaction function changed under Draghi. That legacy poses a big challenge for his successor, Christine Lagarde, but he...

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    Solving India's Water Crisis

    Experts predict that half of India’s demand for water will be unmet by 2030, threatening livelihoods and the country’s development prospects. Yet water scarcity need not be a disaster for India. With more efficient agricultural practices and better management, India has sufficient water resources both to feed itself and keep its economy on track.

    0
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    Gavekal Dragonomics

    The Bills Come Due In Tianjin

    On paper, the northern port city of Tianjin was once the richest place in China. But now its financial center lies empty, its statistics have been exposed as falsified, and the local government and firms are close to running out of cash. In this report, Ernan explains why Tianjin’s long-running problems have finally burst into the open.

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    Culling The Pessimists

    A series of head-spinning flip-flops in the on-again-off-again trade war over the summer has caused US businesses to delay fresh investment. As a result, business surveys have been giving readings consistent with a US recession. Yet it seems likely that any damage wrought by the trade war remains ephemeral—at least hard data suggests this.

    0
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    Gavekal Research

    A Japanese Price Taker

    The yen has long been a fairly reliable indicator of global risk appetite. Over the summer, trade war fears pushed the yen up to ¥105 to the US dollar, before recent cheerier developments saw it weaken again. If the BoJ can deliver on its promise to match other central banks’ easing moves, that weakening trend could be worth following. Alas, the BoJ probably can’t.

    1
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    Gavekal Research

    Three Swing Factors For Chinese Growth

    China’s recent economic figures do not paint a bright picture. Yet some of the problems weighing on growth are moving closer to resolution. So how much of a bounce in the data can we expect from these positive developments? Three possible sources of good news can help answer this question: exports, domestic investment and autos.

    0
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    Gavekal Research

    A Canadian Election

    Today sees Canadians go to the polls to choose a new government. The ruling Liberal Party faces an electoral squeeze, but it is not clear that the outcome of the election will unduly impact Canada’s economic prospects. Louis runs through the outlook for an economy that most people he speaks to are down on.

    0
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    Gavekal Research

    Europe's Brexit Booster

    Boris Johnson has secured a revised Brexit deal and the stage is set for a key Saturday vote in the House of Commons. On balance, there is a 70% chance of the vote passing as Labour leader Jeremy Corbyn seems unable to control his Brexit-supporting rebels, while Johnson looks to have persuaded his Brexiteer wing that it could be now or never.

    0
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    Gavekal Research

    Video: The End Of The Trend?

    For the past few years, US treasuries, the US dollar and the oil price have all broadly traded in a range. In fact, the only bankable trend for investors has been the outperformance of US equities, without which global stock indexes would still be trading at 2006 levels. However, there are signs that the investment environment is changing.

    0
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    Gavekal Research

    The Paris Project In A Keynesian Time

    Some time ago, I had gathered a team in Paris to develop a new venture that would apply macro research analysis to portfolio construction in a systematic way. Things are progressing well and I wanted to update readers on the initiative. The common thread is a rejection of forecasting and a reliance on market prices and economic data.

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    Gavekal Dragonomics

    The Case Of The Mysterious Vanishing Statistics

    Problems with China’s economic statistics are often blamed on falsification by local officials. But they are not the only ones causing trouble. In this piece, Thomas and Ernan document how central government agencies, including the National Bureau of Statistics and the central bank, have recently stopped publishing some important data series.

    0
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    Gavekal Research

    The Asian Currency Bounce

    Despite few underlying tensions being settled, the interim US-China trade deal has cheered up investors. The view has been that the US president now wants to bag a political win ahead of next year’s election and move on. This outcome should support trade-dependent Asian currencies—but perhaps not equally.

    0
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    Gavekal Research

    The Age Of Range Trading

    It is a Gavekal adage that 10-year treasury yields, crude oil prices and the US dollar exchange rate are “master prices” that have an outsized impact on economic activity and financial markets. Yet as Louis notes, in recent years, these three prices have shown little by way of a structural trend. In this piece, he seeks to understand the meaning from this range-trading phenomenon.

    6
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    Gavekal Research

    The Fed Goes On The Offensive

    Grocery shoppers get perturbed when they buy produce labeled as “organic” but get something from the agro-industrial complex. Investors, on the other hand, should welcome the Federal Reserve’s balance sheet boost, that was described on Friday as nothing more than “organic” growth. As it turns out, this is a heavily engineered offering by the custodians of money.

    0
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    Gavekal Research

    Modi Shifts From Tub-thumping To Stimulus

    After spending the first few months of his second term on nationalist politics, Indian Prime Minister Narendra Modi is shifting his government’s attention to the economy. The substantial corporate tax cut announced last month was welcome news. However, Modi will have an uphill battle to get the economy moving before ballooning twin deficits begin to bite.

    8
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    Gavekal Research

    Trump’s Unreal Deal With China

    The US-China trade cease-fire shows that President Trump needs a quick deal: facing a soft economy and likely impeachment, he wants to bank a win as soon as possible. The two sides are moving toward a deal in November, but that will not change China's economic model or end US efforts to constrain China's technological rise.

    1
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    Gavekal Research

    Sizing Up The Brexit Risks

    The pound surged after Boris Johnson and Irish Prime Minister Leo Varadkar achieved a negotiating breakthrough on Thursday over arrangements for the Irish border. The question is: What next? Anatole argues that while these moves still point to a multi-pronged set of outcomes, at least there is now a measurable set of permutations.

    2
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    Gavekal Research

    Watching For Signs Of A US Spillover

    Is the rot spreading? In the eurozone, there are signs that this year’s slump in manufacturing may be beginning to spill over to weigh on activity in the broader economy. Plenty of observers believe the US economy is destined to follow a similar path. Their fears may yet be realized, but so far there is no evidence the US economy is heading that way.

    0
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    Gavekal Research

    Please, Your Majesty, Do Nothing

    Western democracies in the early 1990s stood unchallenged in the battle of big ideas. Alas, everything that has gone wrong in western economies over the last decade or so stems from the lessons that the technocracy took from this victory. Charles considers the mistakes and examines the investment consequences that must now follow.

    2
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call October 2019

    Vincent outlined EM Asia's "great moderation", as inflation is diverging from other emerging markets, creating opportunities in bonds. Udith argued that Indian growth may be bottoming out but a bad banking picture means that equities may have more downside. Tom addressed the remaking of Asian supply chains in light of the US-China trade war.

    0
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    Gavekal Dragonomics

    The Banks Still At Risk

    The first wave of Chinese bank failures will not be the last. Over the summer, three smaller Chinese banks had to receive official assistance to continue operating. The problems that brought down those banks were not isolated issues, and there are other smaller banks still at risk. This report identifies the most troubled institutions.

    0
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    Gavekal Research

    At Home In The Range

    Almost a month after missile attacks on key Saudi Arabian oil production and processing facilities pushed benchmark global oil prices up by 20% overnight, the market has moved on. Saudi Arabia has defied industry expectations by continuing to supply oil to the market in abundant quantities. The current market pricing reflects that.

    0
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    Gavekal Research

    Video: India's Banking Blues

    A tweet by the Reserve Bank of India caused a bit of a stir last week, saying that the “…Indian banking system is safe and stable and there is no need to panic…”. It was after a small regional bank had been effectively put into receivership. While this doesn't pose a systemic risk, it's another consequence of Indian banks’ decade-old bad loan problem.

    0
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    Gavekal Research

    Back To Balance Sheet Expansion

    On Tuesday, Jay Powell confirmed that the US Federal Reserve will go back to growing its balance sheet once again following its meeting at the end of October. The aim is for the balance sheet to grow gradually along with the economy. While the Fed’s planned move is clearly positive for liquidity growth, it is likely to disappoint investors for two reasons.

    7
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    Gavekal Dragonomics

    The Belt And Road Slims Down

    China is still signing up more countries for its Belt and Road Initiative, but money for Xi Jinping’s signature foreign policy is getting tighter. Growth in China’s overseas lending has ground to a halt, and overseas construction projects are declining. In this piece, Tom explains why a slimmer Belt and Road has become an economic necessity.

    2
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    Gavekal Research

    To Impeachment And Beyond

    What will determine whether the global economic expansion and equity bull market will continue in the year ahead? The political upheavals which dominated in the past three years, such as the trade war, Iran oil sanctions and Brexit, have seemed to subside or become priced in. But new political noise is being generated by the threatened impeachment of President Donald Trump.

    0
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    Hong Kong’s Core Problem

    The Hong Kong government’s stated aim is to drive a wedge between radical protesters who are resigned to jail or worse, and a less committed group that it thinks will be cowed by increased penalties. Initial evidence suggests the strategy is a busted flush. Sunday saw large-scale illegal marches by mask-clad demonstrators before the now predictable violence unfolded.

    6
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    Gavekal Research

    The German Spillover

    Perhaps the most remarkable thing about this year’s slump in manufacturing is how few negative spillover effects it has had on demand in the broader economy—until now. Services PMIs for both the eurozone as a whole and for Germany took a sharp turn south in September. In Germany, the deterioration is making a technical recession all but inevitable.

    0
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    Video: Where The Fed Stands

    Investors are nervous about weak US data and a liquidity squeeze in the US repo markets. They are now looking to the Federal Reserve for reassurance. In this video, Will tells us what policy changes to expect from the Fed at the end of this month and why.

    0
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    Gavekal Research

    Echoes Of 2000 Strike A False Note

    First there was the WeWork IPO failure and a string of other flops. Now the S&P 500 has slumped -3% in just two days, leaving the index down -4.6% from its July high. As a result, nervous investors are wondering whether the US may be seeing the beginning of the bursting of a bubble, just as in 2000. Are the fears justified?

    2
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    Gavekal Dragonomics

    The China Inc. Annual Report 2019

    In the latest edition of his annual chartbook, Thomas outlines the fundamentals of China’s corporate sector. The latest downcycle in sales and profits was less severe than previous episodes, but private firms are still suffering from financial strains. The anemic bounce in credit growth points to little recovery in profits or capex in 2020.

    0
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    Gavekal Research

    The Greater Good Versus Individual Liberty

    Yesterday Hong Kong's streets were again the stage for violent clashes between protesters and police. At the heart of the conflict is a showdown between the shared identity in Hong Kong shaped by the common law system inherited by the British and the common narrative in China emphasizing the "greater good" over individual liberties.

    8
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    Gavekal Research

    Strategy Monthly: An Asian Repricing

    Asian inflation has decoupled from other emerging market regions and may be settling at a new permanently lower level. At the same time, lower Asian inflation also reflects weak capital spending and slower economic growth due to the global trade downturn. The best way to play this new low-inflation, low-growth era is with regional bonds.

    0
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    Gavekal Research

    The Upside For Europe

    The euro is trading at its weakest against the US dollar since May 2017. Whether it falls further from here or finds support around current levels to establish a base for a rebound will depend mainly on whether Europe’s economic performance continues to deteriorate, or whether upside surprises are likely in the months ahead.

    1
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    Gavekal Research

    US-China Impressionism

    It is sometimes said that getting a clear view of Chinese policy is impossible; the best you can hope for is an “impressionist” picture of what broadly is going on. Increasingly it looks as if this impressionism is catching. As if understanding China wasn’t hard enough, lately figuring out US policy towards Beijing has become a lot more complicated.

    1
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    Gavekal Research

    Quantifying Trade War Risk

    Investors seem to have grown somewhat blasé about the US-China trade war lately. Over 12 months after the outbreak of hostilities, the S&P 500 is up 2.2% year-on-year. Part of the reason for this nonchalance appears to be a belief that US growth and domestic profits are invulnerable to any escalation of the conflict. This belief may be mistaken.

    2
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    Gavekal Research

    Reasons To Truly Love Malaysia

    In a bid to lessen currency depreciation pressure, three years ago Malaysia effectively closed down offshore trading in the ringgit. It won the battle but has been losing the war. Its asset markets remain unloved and Malaysia has a higher cost of capital than most regional rivals. Yet the time may be right to look again at Malaysia, at least from a fixed income stance.

    0
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    Gavekal Dragonomics

    Macro Update: The Return Of Selective Easing

    After a rocky few months of trade troubles, disappointing data and hawkish policy, China has shifted back to a more decisive focus on growth-supporting measures. This move should help support markets and the economy through end-2019. But as Andrew explains in this chartbook, the boost from this cautious “selective easing” is still limited.

    0
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    Gavekal Research

    Legal Is Not The Same As Legitimate

    Democracy is in trouble. Everywhere the cause is the same: a massive conflict between legitimacy and legality. For the last 100 years or more, the split between left and right left anchored the legitimacy of any democratic government. Unfortunately, over the last couple of decades or so, the left has betrayed the people, while the right has betrayed the nation.

    10
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    Gavekal Research

    Video: Where Next Hong Kong?

    Hong Kong’s leader Carrie Lam today begins a process of civic engagement aimed at bridging the divide between an unpopular government and a diffuse movement that has engaged in 17 weeks of violent protest. Simon discusses whether economic goodies can buy off dissent and assesses the chances of a compromise political settlement.

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