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    Gavekal Research

    When Correlations Reverse

    For decades, portfolio managers have held US treasuries as a hedge for their equity exposure on the grounds that over periods of 12 months or so, treasuries tend to be inversely correlated with the US stock market. For the most part this strategy has worked. But few investors seem to appreciate that the relative performance of US treasuries and stocks depends heavily on the type of inflation the US economy experiences. If inflation is demand-led...

    0
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    Gavekal Research

    Webinar: What To Expect As The Fed Tapers

    The Federal Reserve is planning to wind down its creation of artificial savings just as the US net national savings rate has ticked lower and the Treasury is preparing to rebuild its depleted cash balances. Will and KX set out what these all these shifts—as well as rising inflation, tightening labor markets and deteriorating housing affordability—mean for US stock and bond markets.

    0
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    Gavekal Research

    The US Production Problem

    US manufacturing production data for September released on Monday was a double disappointment. The -0.7% month-on-month decline, down from growth of 0.2% in August, not only fell short of consensus expectations for 0.1% growth. It also dampened hopes that manufacturing is set to emerge as a significant driver of US economic growth. This raises questions over the future strength of the US expansion.

    0
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    Gavekal Research

    The Source Of Discoordination And Inflation

    Today, the global economy lacks its usual order. Each month brings a new shortage that is disrupting supply chains and driving up prices. In short, the right goods are not being delivered at the right time and place. Will examines the drivers of spacial and temporal "discoordination" to determine how investors should allocate assets in this challenging environment.

    3
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    Gavekal Research

    The Troubling Signal In US Savings

    In recent months, the US net national savings rate—the share of income unconsumed—has ticked lower. It may seem a small concern as the Federal Reserve prepares to taper, but if the rate of genuine savings continues to fall over coming quarters, it will be a danger signal both for asset markets and for US economic growth.

    4
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    Gavekal Research

    Persistent Inflation Takes Over

    Some may hope that supply bottlenecks quickly ease and the price-hike scare of 2021 soon fades, but that is not the story of the latest US inflation reading. In short, US inflation is now persistent and the Federal Reserve will soon have to address this reality head-on.

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    Gavekal Research

    Video: Musical Chairs At The Fed

    After the resignation of two regional Federal Reserve branch presidents over potential conflicts of interest, the knives are out in Washington for Jay Powell. In this video interview, Will assesses what personnel changes at the Fed may mean for the trajectory of US monetary policy and for the Fed’s role as US banking supervisor.

    0
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    Gavekal Research

    A Temporary Respite

    Going into 4Q21, a worry for Will had been that asset prices faced the prospect of two tightening moves to US liquidity. Yet, with Congress now punting a debt-ceiling reckoning to December, this could, in turn, delay the Fed’s taper announcement to December, or even January. Thus, yesterday’s deal on Capitol Hill could allow temporary relief on the liquidity front.

    2
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    Gavekal Research

    Volatility In A Changed Economy

    It’s been a chastening, if not decisive, month for investors in US equities. The S&P 500 index has recovered ground, but still endured a -4% fall from its September 2 peak. On a historic basis, the drawdown was small but we have not seen many of them in the last 18 months. Bulls hope that having weathered worries about China and the Federal Reserve’s asset purchase taper, the ground has been set for US equities to hit new highs. My aim today...

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    Gavekal Research

    Liquidity And Shortages

    It is possible the US equity market was simply confused on Wednesday, when it rallied after the Federal Open Markets Committee unfurled its communiqué. Or perhaps it was just oversold. Either way, the Federal Reserve revealed itself to be as hawkish as could have been expected. Asset purchases will be tapered “soon” and likely occur at a faster pace than last time around. Interest rates could be hiked next year and the Treasury will soon become...

    0
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    Gavekal Research

    Squeaky Bum Time For The US Economy

    As Covid cases rise in the US, most indicators point to a slowing economy. After August’s payrolls came in weak, activity measures and nowcasting readings have softened, while conditions in leading sectors like housing and autos have worsened. With the Citi US economic surprise index having fallen to -44.6 from close to zero a month ago, forecasters have been caught off guard by the slowdown. As Sir Alex Ferguson, the former Manchester United...

    0
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    Gavekal Research

    Webinar: Questions Arise As US Growth Slows

    As renewed Covid outbreaks curtail activity and the labor market starts to normalize, the US economy is no longer generating big upside growth surprises. Will the Federal Reserve defer its retreat from super-easy monetary policy, and what will come of the Biden administration's fiscal strategy?

    0
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    Gavekal Research

    Video: Cryptos, NFTs And CyberPunks

    As investors have flipped between euphoria and dejection over the future of crypto-currencies and related digital assets, prices have had a crazy ride. In this video Will outlines a framework for thinking about valuations. Even if digital art sold as NFTs sticks around, the basic economics of their use case means they probably won't be great stores of value.

    0
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    Gavekal Research

    The Economy And Volatility

    US equities have gone almost 18 months without a double-digit drawdown. Such calm is likely to trouble devotees of Hyman Minsky, who showed that excessively long periods of market stability breeds countervailing episodes of violent instability. The question is what will cause the transition to a more volatile market, or dare I say it, what could trigger a “Minsky moment”?

    2
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    Gavekal Research

    Bottlenecks And Corporate Bond Yields

    It seems that not all parts of the US economy are created equal. As the Delta variant outbreak causes US Covid cases to soar, the service sector is taking a hit. In contrast, the less-exposed manufacturing sector saw job growth in August. The question for investors is how these somewhat conflicting forces impact different asset classes.

    0
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    Gavekal Research

    Strategy Monthly: How To Hedge Tighter Liquidity

    So far, markets have not panicked over the prospect of the Federal Reserve tapering its asset purchases. But when it comes, the taper will materially tighten global liquidity conditions. In this calm before the storm, investors running global portfolios should focus on their hedges.

    0
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    Gavekal Research

    Investing Through The Taper

    After all the build-up hype, investors seem to have taken Jerome Powell saying that the Federal Reserve may soon be buying less assets in their stride. They have no doubt taken solace from the Fed chair’s promise that tapering does not mean imminent interest rate hikes, or quantitative tightening. So is the great 2021 “taper whimper” done and dusted? Perhaps not, for while the Fed’s expectation management has been slick, in the months ahead...

    6
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    Gavekal Research

    The End Of The Cash Dump

    The US Treasury is running low on cash. Having massively ramped up its holdings of cash between April and July 2020 at the height of the Covid crisis, the Treasury has been running them down again since February 2021. Normally the Treasury aims to hold cash equal to one week of its outgoings, but it has fallen to less than half that amount.

    6
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    Gavekal Research

    Housing’s Different Drivers

    High house prices may be making headlines in the US, but the homebuilding sector faces headwinds. In July, housing starts and building permit issuance for single family dwellings fell -1.7% month-on-month and -4.5%, respectively. Mortgage applications also fell, which points to weaker construction ahead (see chart below). A positive factor for US housing has been the recent decline in long-term treasury yields, yet there are good reasons to...

    0
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    Gavekal Research

    The Taper Is Coming

    In less than two weeks, Jay Powell will get up to make his speech at the annual Jackson Hole gathering of central bankers. Investors should position for a clear signal that in the coming months the US will begin to taper. It is possible, even likely, that the ever-cautious Federal Reserve chief may decide to delay a few weeks, perhaps until the conclusion of the Fed’s next policy meeting on September 22. But his signal is only a matter of time....

    3
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    Gavekal Research

    The Coming Decline In Earnings Growth

    After 453 of the S&P 500’s constituent companies have reported for the second quarter, aggregate earnings are up 99% year-on-year. Much of this jump is attributable to base effects; the second quarter of 2020 was when lockdowns hit hardest. But not all; even stripping out base effects, earnings growth has been strong. This growth is destined to fade over the second half, as the impact of economic reopening and government stimulus abates, and...

    0
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    Gavekal Research

    Video: A Healing US Labor Market

    Since the depths of the pandemic, the US labor market has recovered remarkably quickly. A key question for investors is how long strong job creation can be sustained before upward wage pressure returns. Ahead of Fridays’ payrolls report, Kai Xian outlines the key drivers of the US labor market.

    0
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    Gavekal Research

    The Sobering Signal In Lumber

    Back in May, an internet meme suggested that if you wanted to impress your date by taking them somewhere really expensive, you should go to a lumber yard. No longer, as the price of US two-by-four has since cratered by two-thirds. KX examines what commodity-price moves such as this can tell us about the broader economy.

    2
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    Gavekal Research

    Risks To The Rally

    US equities have ground higher on strong demand, easy monetary policy, and unattractive bond yields. As long as this situation remains, investors should remain moderately overweight US equities. But they should also carefully monitor three key macro risks that could upend this fairly benign investing environment.

    0
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    Gavekal Research

    Strange Times And The Return Of TINA

    Fresh Covid-19 outbreaks, stunning Chinese regulatory actions and worries over global growth are causing US real bond yields to plumb new depths. So what is the humble investor to do? After all, historically tight US credit spreads means corporate credit is unattractive, while equities keep making new highs, pushing the S&P 500 index up 18% year-to-date. The answer may not be that complicated, as current growth data and market pricing...

    0
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    Gavekal Research

    Webinar: The State Of Global Growth

    The reflation trade has ebbed in recent weeks as investors have gotten more comfortable with the trajectory of US monetary policy and concerns have risen over the Delta variant of Covid disrupting economic opening. At the same time, China continues to crack down on its high-growth internet sector. Our team assessed the market implications of these trends.

    0
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    Gavekal Research

    Did The Equity Rotation And Bond Sell-Off End In May?

    The arrival of Covid-19 vaccines in November sparked a selloff in bonds and significant outperformance of value stocks, at least until mid-May. Having advised a bias to value stocks and keeping duration short in bond portfolios since last November Will was wrong-footed by the market moves of the past two months. Will the new trend last?

    2
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    Gavekal Research

    A High-Pressure Business Cycle

    The US economy may have suffered one of its biggest ever contractions last year, but at just two months, it was one of the shortest due to aggressive policy reactions that spurred an unlikely economic boom. A worry for investors is that late-cycle stresses now emerging cause this expansion to fade as quickly as it started.

    3
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    Gavekal Research

    The Economic Impact Of Delta

    This week saw Gavekal writers address risks to the global reflation trade. Louis explored three reasons for the market shift: (i) the rise of the Delta Covid variant, (ii) tighter-than-expected policy settings in the US, and (iii) China’s tightening measures. My aim is to focus on risks posed by the first of those: another Covid shock to Western economies.

    4
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    Gavekal Research

    Breaking Down US Inflation

    So have hopes that US price pressures are merely a transitory effect faded like a mirage on an Oregon highway? The higher-than-expected jump in June’s consumer price index to a 5.4% year-on-year gain certainly dented investors’ belief that US price pressures will prove fleeting. They are probably right in that view. For while some factors driving US prices higher will abate, new pressures are waiting in the wings. Therefore, in the medium term,...

    0
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    Gavekal Research

    Demographics And Prices

    Starting in the early 1980s, the world became increasingly flush with people in their prime working and saving years. That trend, however, has largely run its course and may now be going into reverse. As a result, investors should consider what economic trends have demographic drivers, making them vulnerable to a structural shift occurring.

    9
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    Gavekal Research

    Webinar: Can Things Really Keep Getting Better?

    The US economy continues to break growth records as it reopens and other big regions may be set to go the same way, while Asia continues to prosper from a strong export outlook. The question is not whether the world economy slumps back into a funk, but whether growth expectations are now set too bullish.

    0
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    Gavekal Research

    Strategy Monthly: Dialing Down Expectations For US Growth

    Growth in the US economy is set to go from great to good. The easy pickings of releasing pent-up demand and re-employing idle workers are almost used up. Growth should stay above trend, but by a smaller margin. Investors should prepare for growth to undershoot expectations that are now too high.

    0
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    Gavekal Research

    Peak US Growth

    The US economy has been on a tear and it could be assumed that a bipartisan Congressional deal to spend US$1.2rn on roads, bridges and tunnels would spur even more growth. Yet, surprising as it may seem, we may have seen the top of the US growth cycle as activity goes from great to good in the second half of this year.

    0
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    Gavekal Research

    Video: The US Housing Sector Rolls Over

    The US housing market has been booming for the past year, with prices setting a record-high in data released this week. However, a decline in affordability, coupled with the potential for higher mortgage rates, is weighing on demand and has started to force a shift from a buyer-led market to a renter-led market.

    0
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    Gavekal Research

    The Dollar’s Temporary Fillip

    Currency markets must process information on many factors impacting an economy and then judge how it stack ups against another economy, yet from time to time the focus switches to just one thing. The Fed's hawkish statement last week sparked a monomaniacal focus on the timing of a taper to asset purchases. Yet there are already signs that this unitary focus is waning.

    0
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    Gavekal Research

    Webinar: The Market Impact Of US Policymakers

    In yesterday’s webinar, our team of US analysts considered what the Federal Reserve's tentative moves to normalize monetary policy means for growth and asset values. They also offered updates on US fiscal policy and anti-trust developments.

    0
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    Gavekal Research

    Fed Talks Of Tapering

    It should not be shocking but the Federal Reserve is getting set to return to a more normal monetary policy. To avert a 2013-style “taper tantrum”, Jay Powell wrapped cotton wool around his “tightening” message on Wednesday but the fact is that the Fed is talking about tapering its asset purchases.

    4
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    Gavekal Research

    Peak Inflation Expectations

    Despite warning signs, it is now clear that investors were too relaxed about US pricing pressures at the start of this year. That much was clear from the consumer price index rising 5.0% year-on-year in May and at an annual rate of 5.9% over the last six months. Yet with the market measure of forward inflation expectations just below a 10-year high, the scope for these numbers to keep shocking has waned.

    8
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    Gavekal Research

    Video: Weighing The Fed’s Unconventional Options

    The Federal Reserve’s next move is likely to be verbal guidance over a tapering of asset purchases, argues Will. That is increasingly a consensus market position, so in this interview he explores other policy options that the Fed could choose to pursue.

    0
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    Gavekal Research

    Here Comes The US Capex Boom

    Amazing as it sounds given all that has happened in the last 15 months, the US economy is already entering a “mid-cycle” phase that should change the drivers of growth. Sectors like housing and durable goods have enjoyed double-digit growth over the last year, but now face head winds. In contrast, firms across the US seem set to go on a capital spending binge.

    0
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    Gavekal Research

    Accomplishing The Fed’s Mission

    Another week, another discourse on US inflation, this time triggered by the personal consumption expenditures index rising 3.6% year-over-year in April, the fastest gain since 2008. Some of that is base effects, but not all: since the Federal Reserve refined its 2% inflation target to an “average” 2% last August, the PCE index has risen at an annualized 3.5%. The point of the Fed’s change was to “make up” for misses and better anchor long-term...

    1
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    Gavekal Research

    A Cooling Market For Cars and Houses

    With stimulus checks having been sent and the jobs market recovering, last month saw the biggest jump in US car sales for at least 35 years. Will Denyer and I have been bullish on autos (and for similar reasons, housing) for the last year. Yet just as the punch bowl fills up, it looks time to get more cautious.

    4
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    Gavekal Research

    Video: Buy The Crypto Dip?

    Crypto-currency prices have plunged in the last two weeks on a bad brew of news. Will wants to believe in crypto-currencies as an alternative form of money. However, he has struggled to see how such tokens make the jump to being “money”, with all that entails. The question is whether after such a big price drawdown, this skepticism is now discounted into the price.

    0
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    Gavekal Research

    No Reason To Reverse A Weak Dollar Call

    The US dollar is nearing the bottom of its trading range, so does it bounce back, or break lower? In 1Q21, the US’s rapid vaccination rollout and improving economic outlook spurred the dollar’s rebound. In early April KX argued that as other nations followed a similar path, the relative strength of these factors would wane. This has played out, and there are other reasons to fade the dollar.

    0
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    Gavekal Research

    Profits And The US Reshoring Plan

    In selling his US$2.3trn infrastructure investment plan, US President Joe Biden says it will create millions of secure manufacturing jobs: “There is simply no reason why the blades for wind turbines can’t be built in Pittsburgh instead of Beijing,” he recently opined. While not successful, the reshoring of US manufacturing jobs was a key justification for Donald Trump’s mercantilist trade policy. Now, as Biden seeks Congressional votes for his...

    5
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    Gavekal Research

    Webinar: Inflation And Its Global Impacts

    Markets have been roiled by rising US inflation that seems to be returning sooner than expected, and similar inflationary dynamics are starting to be seen in Europe. Our team of analysts addressed the inflation outlook in the US, Europe and emerging markets, and offered views on what it means for asset prices in these markets.

    0
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    Gavekal Research

    The Data Against The Fed Stacks Up

    The US Federal Reserve prides itself on being “data dependent.” If it is truly data dependent, the Fed is going to find it increasingly difficult to justify its extremely easy monetary policy stance. The latest of the data points to stack up against it are professional forecasters’ inflation expectations, which the Fed has often lent weight to in the past. For the last two years, these have been subdued. Now—the last piece of the inflation...

    0
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    Gavekal Research

    Hardly Transitory, But Not A Spiral

    After headline and core CPI readings hit multi-year highs for April, investors have inflation on their minds. The rise in US bond yields and continued fall in equities reflects fears that the Federal Reserve is behind the curve, and could be about to slam on the monetary brakes. My view is that these price pressures are far from transitory, but a spiral higher does not beckon.

    4
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    Gavekal Research

    Playing The Inflation Rotation

    It seems wherever you look today, there are inflation signals. If the Federal Reserve is right, and the signaled burst of inflation proves transitory, then all will be well. The risk is that inflation proves stickier than policymakers expect. If so, Monday’s -2.6% sell-off in the Nasdaq is just a taste of a rotation that still has further to run.

    2
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    Gavekal Research

    Webinar: Global Investment Roundtable, May 2021

    Joe Biden's enormous fiscal initiatives mark a potential sea change in the US government’s role in the economy. They may yet get watered down as the US president negotiates with more conservative members of his party, but tax and spend is clearly the new mantra in Washington DC. The question for investors is what this means for assets in the US and around the world.

    0
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    Gavekal Research

    The Changing State Of US Liquidity

    When it comes to creating and distributing US money, there are three main players: the Federal Reserve, the US Treasury and commercial banks. Recent events call for a status update on the prospects for money flows from each, and what it all means for the bond market.

    4
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    Gavekal Research

    Fighting The Fed Over Wages

    Recent rollbacks of Covid restrictions in the US should spur consumer demand, adding to an inflationary brew. Most policymakers continue to claim such pricing pressure is “transitory”. Perhaps, but the employment cost index shows US wages having accelerated for the last two quarters and the balance of evidence points to this uptrend continuing.

    2
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    Gavekal Research

    Webinar: Biden Ups The Ante On Tax And Spend

    President Joe Biden has said that the US will make sweeping cuts to carbon dioxide emissions and impose tax hikes on the wealthy. For now, the US economy is recovering, but can this continue if risk takers pull in their horns as they will get less of the rewards?

    0
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    Gavekal Research

    The Case Against TIPS, From An Inflation Worrier

    Jerome Powell made it clear on Wednesday that the Federal Reserve is not even ready to talk about tapering its asset purchases. Understandably, most questions from journalists ran something like: “Why so, given the strong economic data?”. When it comes to inflation, there is a similar disconnect between the Fed and the bond market, with big implications for investors.

    5
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    Gavekal Research

    Video: Towards A Sustainable Boom?

    With a shoot-the-lights-out number universally expected when the US reports first quarter GDP data this week, Tan Kai Xian looks at the drivers propelling growth to determine whether US performance is sustainable, or just a flash in the pan. As a number of risks continue to loom large on the radar screen, in this video interview he assesses the implications of US growth for investors in risk assets.

    0
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    Gavekal Research

    A Renter’s Housing Market?

    When GDP for 1Q21 is released on Thursday, the US economy will be shown to be booming. An exception to this cheery trend is the US residential property market, which, having led the recovery, now looks pretty anemic. The worry is that a pronounced housing downturn could even choke off the broader recovery.

    1
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    Gavekal Research

    Taxing Capital

    Next week Joe Biden will set out plans to double the rate of capital gains tax for Americans making over US$1mn a year. The president’s proposal is the latest element of his initiative to levy higher taxes, from one direction or another, on the elusive earnings of multinational corporations and wealthy individuals in order to help fund higher government spending. Whatever the political merits of Biden’s plan, his multi-pronged approach will be...

    13
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    Gavekal Research

    Trading The Vaccination S-Curve

    Vaccination programs around the world have gotten off the ground at widely varying speeds. But everywhere they tend to follow a similar S-curve trajectory. While most countries are still in the early stages of their vaccination programs, a very few are in their late stages, where the S-curves begin to flatten. Their experience provides an investible roadmap.

    0
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    Gavekal Research

    US Inflation Not Just A base Effect

    Even adjusting for base effects, US consumer price inflation is accelerating. This is not surprising, as expansionary factors like fast money supply growth and strong demand are driving up prices. In this context, it is also not surprising that real assets (equities, commodities, TIPS) have outpaced nominal assets (cash, nominal bonds). But how long-lasting will inflation’s rise prove to be, and when will the Federal Reserve start to normalize...

    9
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    Gavekal Research

    Living In A Stock Picker’s Market

    When only one major factor affects equities, correlations rise. At such points, the name of the game is not to pick the best stocks, but to get the ebb and flow of that key factor right. At other times, multiple factors are in play and these affect different stocks differently; in such periods, picking winners is vital. For most of last year, the US market was macro-dominated as the Covid-induced economic collapse caused equity correlations to...

    4
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    Gavekal Research

    Webinar: Global Investment Roundtable, April 2021

    In the long years between the 2008-09 financial crash and the 2020 Covid crisis the US stock market massively outperformed equities in the rest of the world. In recent quarters, however, the US market has lost its edge. Yesterday, Louis, KX and Udith weighed the merits of ex-US equities versus US stocks in a post-pandemic world.

    0
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    Gavekal Research

    Living With The Next Covid Wave

    Global markets are looking ahead to a post-pandemic world, but Covid-19 is still very much with us. Globally, new infection rates have risen sharply since late February, reversing their earlier decline. In the last few weeks, the US has experienced an alarming uptick in infections. The European Union is struggling to contain its latest Covid wave, which in several major countries compares with November’s for severity. And across the developing...

    2
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    Gavekal Research

    When Do We Begin To Worry About Cost Pressures?

    For the last 13 months or so, ever since the Covid pandemic started to grip, the broad US equity market has been driven above all by fears and hopes for top-line revenue growth. Last spring, as investors anticipated a collapse in revenues, the market collapsed. Policy support halted the slide, and over recent months, as investors have looked forward to the end of the pandemic and a rebound in revenues, the broad market has scaled new highs.

    1
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    Gavekal Research

    Strategy Monthly: The Case For Ex-US Equities

    The US trade deficit cycle suggests the world is heading towards a protracted period of US dollar depreciation. With valuations outside the US relatively attractive, and deglobalization meaning ex-US equities will offer greater diversification benefits in future, investors should consider increasing their exposure to ex-US equities.

    0
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    Gavekal Research

    The Costs Of Biden’s Spending Plan

    On Wednesday, Joe Biden unveiled an ambitious US$2trn program of public infrastructure investment, to be funded by corporate tax hikes. In a nutshell, the plan is a proposal to transfer wealth from the broad US market to sectors favored by the government. The sectors that benefit from this largesse stand to enjoy a multi-year boom, with the cost to be borne by the rest of the market. However, the extent of this cost should not be exaggerated....

    2
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    Gavekal Research

    Video: Unpacking The NFT Hype

    What’s a “non-fungible token”? Why would anyone pay millions of dollars for one? And what do they have to do with blockchains? In this video interview, Will unpacks the latest craze to explain what buying an NFT actually gets you, and considers whether this is a useful new technology or yet another case of blockchain hype.

    0
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    Gavekal Research

    Webinar: The Future Of The Great US Rotation

    Much has happened in the US in the last eight weeks. More than 80mn Americans have been vaccinated against Covid, Congress has passed a stimulus bill worth 9% of GDP, and the Fed has confirmed its determination to remain among the most peaceable of inflation doves. In response, 10-year US treasury yields have leapt, and the rotation from growth stocks to value has grown more violent even as the broad equity market has ascended new heights. In...

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    The Short And Long For The US Dollar

    After ending 2020 amid heavily negative sentiment, the US dollar has confounded near-term bears by edging higher year-to-date. The DXY dollar index has gained 2.75%, clawing back just over a third of its -7.5% decline in 2020. Perhaps this should not be too surprising. First, by the end of 2020, the US dollar was no longer blatantly overvalued. Second, the DXY found support at 90, its low of early 2018. Third, the near-term outlook for nominal...

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    The Strengthening Case For Value

    In the last two weeks, US value stocks have given up some of the outperformance relative to growth that they racked up over the previous five. So has value’s spurt of outperformance now run its course, leaving the S&P 500 value index’s 11pp of outperformance relative to growth since the beginning of February as just a counter-trend blip against a backdrop of more than a decade’s underperformance? Or are the relative gains in value since the...

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    Markets After The Fed

    The Federal Reserve saw no need to ease monetary policy any further at its March meeting which concluded Wednesday. That’s no surprise. Policy is already extremely easy, and growth and inflation are already looking up. Indeed, the Fed has pumped so much money into the system that the one policy change it felt compelled to make was to increase counterparty limits on its reverse repo facility from US$30bn to US$80bn in response to concerns that...

    0
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    Let's Twist Again

    When they sit down on Wednesday, the members of the Federal Open Market Committee will face a couple of knotty questions. Should they attempt to do anything about rising bond yields? And if so, what?

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    Video: US Equities In A Changed Macro Environment

    US tech stocks have been hit hard, as attention focuses on the underlying quality of themes like the migration to electric vehicles. Yet this shakeup is also happening against the backdrop of a fast-changing investment environment due to a strengthening US growth outlook, rising inflationary pressure and an unnerved bond market which is driving yields higher. In this video interview, Will seeks to unpack these dynamics in order to navigate a...

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    Bond Vigilantes Keep Fighting The Fed

    Jerome Powell tried to calm the bond market yesterday by repeating that it’s likely to be a while before policy normalization begins. Growth and inflation indicators are up, but the Fed expects much of this to be “transitory”. In short, Powell remains a steadfast dove. So why are bond yields, real and nominal, still ticking higher?

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    Enduring Cognitive Dissonance

    As yields continue to test new highs, Jay Powell is set to deliver a speech today reasserting the Federal Reserve’s view that inflation can push above its 2% target due to base effects and pent-up demand without monetary tightening being needed. This could offer temporary relief to equity investors, but resulting uncertainty in the bond market is likely to ensure an unstable trading environment.

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    Strategy Monthly: The Threat Of Rising Inflation And Yields

    The roll-out of vaccines in the US is upending the investment environment, as the focus shifts beyond the pandemic to full-throttled economic recovery. With both monetary and fiscal policy set to remain loose, nominal growth could soon rip. Hopes for “normalization” have driven up inflation expectations and freaked out bond investors. Those getting fixed interest are right to be unnerved, as production capacity is fairly tight, inventories are...

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    Video: Bitcoin—Money Or Snakeoil?

    Will Denyer examines the forces behind the eye-watering run-up and eye-popping volatility of bitcoin, and delves behind the near-term moves in crypto-currency markets to ask whether bitcoin and its ilk will ever gain traction as a unit of account, means of exchange or store of value.

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    Gavekal Research

    It’s A Policy-Driven Market

    US bond yields are rising as the growth outlook is boosted by the vaccine roll-out and sustained monetary and fiscal stimulus. US value stocks and the sectors hit by Covid restrictions are ripping. Growth investors, in contrast, are spooked about this situation, as much of their worth comes from earnings discounted far into the future. The investors' reactions to Federal Reserve Chair Jay Powell’s Congressional testimony on Tuesday reminded...

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    The Changing Composition Of US Inflation

    Investors are all in a tizz about US inflation as the economy begins to normalize and the effect of a huge fiscal stimulus is factored into calculations. Inflation expectations are above the Federal Reserve’s target at 2.2% and energy base effects mean the personal consumption expenditure reading is sure to rise from December’s 1.3%. So far, market action has been focused in the bond market (see A Discussion On Treasury Yields) but equity...

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    Webinar: The Economic Impact Of A New Era

    Vaccines, fiscal stimulus and cheap money are working together to bolster the outlook for growth and inflation in the United States. The US is also under new leadership with new priorities. Our US team of analysts explained what this all means for the economy and asset markets.

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    US Inflation Has Many Fathers

    As the economics adage goes, inflation happens when “too much money chases too few goods”. This is an oversimplification but it does contain a core truth: the monetary price of goods is dictated by supply and demand factors that impact both the goods in question, and money itself.

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    US Banks And The Steepening Curve

    The brightening of the US economic outlook and the steepening of the US yield curve over the last three months have been positive for the shares of US commercial banks. The prospect of a return to normal as vaccination quells the pandemic means banks are more willing to extend credit. According to the Federal Reserve’s January senior loan officer survey, far fewer banks are now tightening their lending standards. Experience suggests this will...

    5
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    Will Stimulus Cause US Overheating?

    The US Democrats are declining to cut the size of their stimulus proposals enough to secure bipartisan support, and are instead proposing to push the bulk of their US$1.9trn package through Congress using the reconciliation process (see The State Of Biden’s Stimulus). Their determination has raised fears that pressing ahead with such a large fiscal stimulus at a time when the US output gap appears to be closing fast could prove uncomfortably...

    4
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    After GameStop

    Yesterday saw Treasury Secretary Janet Yellen chair a meeting of US financial regulators to assess the fallout of recent frenzied trading in “meme stocks”. There is unlikely to be a Dodd-Frank type response to this episode but a new administration may be motivated to act decisively. Yet the effect of GameStop may go wider, so consider the effect on the four key actors in the saga.

    1
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    The US Turns A Corner

    It was not surprising that the US economy grew at a mere 4% quarter-on-quarter annualized in the final period of 2020, but there was a grim recognition that the next phase of the recovery will be hard fought. There are, however, reason to be optimistic.

    0
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    A Tactical Turn In The Dollar?

    Neither the United States nor the European Union got off to a flying start, but the US is out front with its vaccination program. This points to longer Covid disruption in Europe, which—in the short term—should support the US dollar versus the euro. Yet, in the longer term there remain many reasons to underweight the dollar, certainly against cheaper “risk-on” currencies.

    2
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    Follow The Money

    After last spring’s lockdowns, the Federal Reserve undertook a huge liquidity response and the US government borrowed hand over fist to keep a range of economic actors afloat: US companies got forgivable loans, households received cash grants and the jobless were offered enhanced unemployment payments. Even after this splurge, the Treasury is still left with wheelbarrow-loads of cash. In the year ahead, how these record sums of money are...

    6
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    Biden’s Spending Plan

    In a speech late Thursday, US President-Elect Joe Biden called on Congress to approve an additional US$1.9trn of federal spending to tackle the Covid-19 pandemic and support the US economy. If approved, Biden’s package will bring US government stimulus spending since the start of the pandemic to more than US$5trn. Heavy on support for households, Biden’s proposal would avert the risk of a first quarter contraction in the US economy and prime the...

    0
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    The Road Ahead For US Yields

    Friday’s US labor market figures showing a surprise 140,000 contraction in December’s non-farm payrolls emphasized just how tough the winter months are going to be for the world’s largest economy as coronavirus infection rates and resulting hospitalizations continue to accelerate. Yet the grim near-term economic outlook notwithstanding, the first week of 2021 saw inflation expectations push higher, with the 10-year breakeven inflation rate...

    0
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    Bitcoin, Gold Or Fiat?

    Governments and central banks are giving users of fiat money reason to consider alternative mediums of exchange and stores of value. And it seems entirely possible that Bitcoin can rally even harder than it already has. But are there the makings of a good money? Because if the answer is “no”, then bitcoin is running on fumes.

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    The Senate Upheaval

    With some trepidation, Yanmei and Will offer their view on the economic consequences of Georgia, assuming that the Democrats have indeed secured a wafer-thin majority in the Senate. While the fiscal restraints will now surely be released and tax hikes are more likely, the real winners of this election will be centrists in the Democratic Party, who in effect wield veto power over its more liberal instincts.

    3
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    An Unfavorable Risk-Reward Bet

    Today sees the US vaccination program initiated, and investors are enthused that some kind of return to normal life is finally becoming visible. Nowhere has this “glass half full” view been stronger than in the US corporate credit market, as yield spreads for both investment-grade and high-yield bonds have broken new lows. These moves have occurred despite treasury yields creeping higher, and are starting to look overcooked.

    0
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    Rising Yields And US Housing

    Investors are looking ahead to us economic growth picking up as vaccines are deployed and restrictions dialed back. With the Federal Reserve having anchored short rates near zero, this dynamic is causing a yield-curve steepening. The question is whether higher yields feed back into a still vulnerable US economy and choke off the recovery.

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    Video: The Treasury’s Liquidity Programs And Markets

    US Treasury Secretary Steven Mnuchin has come under fire for failing to extend a number of the Treasury’s liquidity support programs into 2021. But as Will outlines in this short video interview, while the existence of the facilities that are set to expire helped to shore up sentiment back in March and April, they have been little used, and are now largely irrelevant in practical terms.

    0
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    Georgia On My Mind

    In the four weeks since the US election, the S&P 500 has climbed 7.5%. The bulk of that run-up can be attributed to hopes for an early vaccine roll-out, but at least some is due to the perceived decline in US political risk, Yet although US electoral risk may have diminished, it has not disappeared, and may yet return to affect investor positioning in markets over the coming weeks.

    0
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    Strategy Monthly: Two Equity Rotations For A Post-Covid World

    The impending rollout of vaccines in the United States is spurring two big equity rotations. With investors looking ahead to a post-Covid world, a rotation has begun from stocks that thrived in the pandemic to those that merely clung on. Second, the expectation that a robust economic recovery will push interest rates up has caused beaten-down value stocks to recover some mojo. Investors should play these rotations at a granular, sub-sector level...

    0
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    Gavekal Research

    Two Equity Rotations In The Making

    Investors are bulled up on hopes that successful vaccine roll-outs will end the Covid-19 pandemic before next spring and the US will get a smooth transition of power that leaves an investor-friendly divided government. Since Pfizer announced its successful stage-three vaccine trials on November 9, managers have been forced to reassess their US portfolio positioning. That process has likely only just got going.

    2
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    A Boost From US Restocking

    As the latest wave of US coronavirus infections continues to worsen, the probability of a modest contraction in fourth quarter GDP is rising. However, there are solid arguments for believing that the worst case scenario for 4Q remains no worse than a mild contraction in output.

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    The Brake On US Growth

    Hopes for effective coronavirus vaccination programs in 2021 propelled both the S&P 500 and the Russell 2000 small cap index to record high, but on the ground in the US, accelerating infections and rising hospitalization rates prompted more state and local governments to order additional restrictions in a bid to slow the spread of the virus.

    0
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    Time To Look Beyond The US

    Heading into the US elections, there were three big reasons to be bearish on the US dollar. With the results as they stand, one of those concerns has diminished. But the other two continue to weigh on the US currency. Meanwhile, the US equity market is looking extremely expensive compared with equity markets elsewhere. Together, these factors favor unhedged positions in selected non-US equity markets.

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