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    Gavekal Research

    5C Overview: A Changed Energy Dynamic

    As we see it the big developments impacting the global economy over the summer would roughly run as follows:

    3
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    Gavekal Research

    The Rise In Volatility

    First it was the foreign exchange markets, then commodities, followed by fixed income markets. Now it’s the equity markets. Wherever we look, volatility has been creeping higher. To some extent, this is not surprising. At the end of the US Federal Reserve’s first round of quantitative easing, and at the end of QE2, the markets wobbled. So with QE3 now winding to a close (and with the ECB still behind the curve), a period of uncertainty and...

    2
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    Gavekal Research

    5C Europe: The Triple Merit Of Lower Energy Prices - François-Xavier Chauchat

    At this stage, the jury is out on whether the decline in oil prices is cyclical or structural. Economic growth in big areas of the world economy such as Europe and China has slowed below expectations, which for now points to a cyclical answer. Europe’s economy has become increasingly dependent on oil imports so the relief from lower prices is acting as a very welcome automatic stabilizer. In 2013, net oil imports amounted to 3.5% of the...

    0
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    Gavekal Research

    Italy’s Intergenerational Struggle

    Recession has become a way of life in Italy with 11 of the last 12 quarters seeing negative economic growth. The gloom was reinforced yesterday with the release of industrial orders for July showing a 0.7% YoY contraction. The sad thing for the one-time precocious catch-up kid of Europe’s post-war miracle has been Italy’s complete embrace of its dribbling dotage. Far from raging against the fading of its economic youth, Italy’s power elites have...

    4
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    Gavekal Research

    The ECB's Damp Squib

    To the surprise of the market, the first round of the European Central Bank’s keenly anticipated Targeted Longer Term Refinancing Operations turned out to be a damp squib, generating only half the expected level of demand. In the event, banks borrowed just €83bn, well short of the €167bn Bloomberg consensus. Given that in the last three months European banks have repaid more than €80bn borrowed through the earlier 3-year LTROs, the net...

    2
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    Gavekal Research

    Five Corners (17 September): World Bond Markets

    In our latest bi-weekly review of global economics, we take a searching look at the state of global bond markets. As the US Federal Reserve inches closer to a tightening bias, bond investors must climb a wall of fear. Recent weeks have seen yields rise globally. The issue is whether this represents a nervous short-term move or a bigger shift in the cycle. Gavekal Dragonomics analysts consider the picture from the major economic regions.

    0
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    Gavekal Research

    The End Of The UK’s Haven Status

    The outcome of Thursday’s Scottish referendum is officially “too close to call”, since the difference between ‘Yes’ and ‘No’ has been inside the margin of error of almost all the polls published since the sudden swing towards independence last weekend. But markets are priced for near certainty of the status quo winning, with sterling stronger than a month ago against the euro, yen, Swiss franc and every other major currency save the dollar—and...

    4
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    Gavekal Research

    5C Overview: Weatherproofing Bond Portfolios

    For much of this year bond investors have been in ‘risk-on’ mode. When in April the European Central Bank first hinted it was preparing to embark on its own unconventional easing measures, investors concluded that with all the world’s major central banks now offering a put on growth, it was safe to head out in search of extra yield. Global bond markets duly rallied across the board, with volatility falling to near-record lows.

    0
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    Gavekal Research

    5C Europe: Short Term Volatility, Medium Term Strength

    Expectation of higher US short-rates has, over the last few weeks, reversed a portion of the big gains achieved in European bond markets. Just as in May 2013 when the Federal Reserve pre-announced its “tapering”, the key question is whether European bonds can resist a shift toward higher US bond yields.

    0
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    Gavekal Research

    Putin’s Tolerable Victory

    The ceasefire in Ukraine agreed last Friday has now lasted almost a week. So far there have been no serious signs of a break-down, despite some sporadic shelling and localised attacks of the sort that undermined previous attempts to stop the fighting. Nevertheless, most media analysts and political consultants argue that this ceasefire will not hold, either because Russian president Vladimir Putin is a deceitful and ruthless monster greedy for...

    0
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    Gavekal Research

    Putin's Tolerable Victory

    The ceasefire in Ukraine agreed last Friday has now lasted almost a week. So far there have been no serious signs of a break-down, despite some sporadic shelling and localised attacks of the sort that undermined previous attempts to stop the fighting. Nevertheless, most media analysts and political consultants argue that this ceasefire will not hold, either because Russian president Vladimir Putin is a deceitful and ruthless monster greedy for...

    0
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    Gavekal Research

    Russia's Stagflation Dilemma

    Given the escalation of East-West tensions in Europe it is hard to consider Russia’s prospects without obsessing about the impact of economic sanctions. However, the exogenous shock from Ukraine has hit an economy that was already reaching the limits of its chosen development model. In particular, Russia faces a stagflation problem which is pitting a sensible monetary policy against an increasingly cavalier fiscal approach.

    0
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    Gavekal Research

    Quarterly Strategy Chart Book - Three Views of A Fragile Europe

    As we see it, the most significant investment development over the last two quarters has been a renewed bout of economic weakness in the eurozone. This is all the more worrying since the rest of the world economy looks to be set on a recovery path. As a result, European growth assets have performed miserably, while eurozone bond yields keep making new lows. As we consider the path ahead for Europe, we can see three distinct scenarios: (i) Slow...

    4
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    Gavekal Research

    QE & Bull Markets

    A client recently asked a deceptively simple question: does quantitative easing always lead to a bull market in financial assets? There was, of course, a background context to the enquiry which was last week’s much anticipated deflation-slaying action by the European Central Bank.

    3
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    Gavekal Research

    The UK Now Faces Years Of Volatility

    The probability that the United Kingdom will break apart now appears to be at least 50%. The weekend’s crop of opinion polls agree with each other, and support last Tuesday’s poll showing a powerful swing in favor of a ‘Yes’ vote in next week’s referendum on Scottish independence. Given that up until last Tuesday most investors and analysts (including me) saw no more than a 10%-20% probability of independence, what has happened in the past few...

    3
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    Gavekal Research

    The Tipping Point

    The European Central Bank has reacted strongly to weaker than expected growth and inflation numbers, just as ECB president Mario Draghi repeatedly promised it would (see Believe in the ECB). The reflationary package delivered in June and substantially augmented and enhanced yesterday should finally convince most investors that the ECB is ready to do whatever it takes to reflate the economy, with or without Bundesbank approval. Fussier observers...

    0
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    Gavekal Research

    From Grandmaster To Grand Farce

    At first glance, Vladimir Putin’s strongman status was confirmed by the release of a seven point peace plan yesterday that reputedly had him call for Ukrainian troops to withdraw from areas of their own country. This followed Putin’s demand over the weekend that Kiev begin independence talks for southeastern Ukraine. These are the new realities that NATO leaders must chew over during a summit that starts today and is being billed as the most...

    12
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    Gavekal Research

    Scottish Poll A 'Yes' Vote For Volatility

    Until this week almost nobody outside Scotland took very seriously the possibility that Europe’s most stable and durable nation, the only big country on earth not to have suffered invasion, revolution or civil war in the past 300 years, might soon be wiped off the map. It now seems quite conceivable, however, that the United Kingdom of Great Britain and Northern Ireland will cease to exist within two or three years of the referendum on Scottish...

    4
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    Gavekal Research

    Europe: A Republic Of Voices

    Another year, another eurozone crisis. Perhaps crisis is too strong a word, but the economic news from Europe over the summer has been consistently disappointing. In his speech at the Jackson Hole central bank conference a couple of weeks ago, European Central Bank chief Mario Draghi sounded the alarm, demanding that European governments adopt more active fiscal policies to push up aggregate demand and boost growth. His call stoked expectations...

    1
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    Gavekal Research

    Five Corners (3 September): World Labor Markets

    In our latest bi-weekly review of global economics, we take a searching look at the forces affecting labor markets in the world’s major economies. How robust are the medium term prospects for wage growth? And how will the longer term forces of ageing populations and increasing automation affect the outlook for jobs? Overview: Arthur Kroeber examines how the wage-positive influence of developed world demographics will balance the job-negative...

    1
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    Gavekal Research

    Market Review: A Summer Series

    In late July and early August Anatole went up the mountain so to speak and penned a series of articles that aimed to explain where we were in the current market cycle, and more importantly where we are likely headed. With most major asset classes continuing to head higher we thought it worth republishing Anatole’s consolidated thinking in a single document. Please click on the pdf link above, or, alternatively, the articles can be read...

    2
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    Gavekal Research

    Growth & Markets Monthly (September 2014)

    This month we note a slight deterioration in our global growth indicators, which probably mirrors the significant economic deceleration seen in Europe. On the risk side, markets do not appear stressed, although there has been a slight widening in the US corporate spread (albeit from very low levels). On the question of inflation vs deflation our indicators offer a mixed picture: on the one hand our diffusion index of US CPI components keeps...

    0
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    Gavekal Research

    5C Europe: The ECB Effectively Has A Dual Mandate

    It has been a recurrent demand of Keynesians that the European Central Bank switch to a US-style dual mandate that targets inflation and unemployment. But at a time when price deflation seriously threatens, such a distinction becomes merely one of semantics. If the eurozone really is to return to the official [2%] definition of price stability then unemployment will necessarily need to decline sharply (see the chart below).

    0
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    Gavekal Research

    The Eurozone Funk Deepens

    Europe’s political leaders may be talking about fresh sanctions on Moscow, but the continent’s remaining economic optimists are fast capitulating in the face of Russian aggression in Eastern Ukraine. Both the European Commission’s eurozone economic confidence survey and the INSEE French business confidence survey, released late last week, deteriorated in August, with the EC survey slumping to its gloomiest reading this year. This decline in...

    4
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    Gavekal Research

    5C Overview: Demography vs Technology

    We have written a lot about two trends with big potential impacts on the balance of power between labor and capital. The first is demography, which since World War II has been a tailwind for growth, but is now turning into a headwind. Virtually every major economy faces a steep fall in its worker-to-retiree ratio, even the US which is often thought to be exempt from demographic destiny because of its relatively high birth rate and openness to...

    0
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    Gavekal Research

    A Less Stressful Way To Short The Euro

    The euro has now been ‘oversold’ on an RSI basis for more than a month, and the downside momentum seems to be accelerating. That should be no surprise given the poor relative economic performance of the eurozone, the increasing likelihood that the European Central Bank will soon be forced to embrace quantitative easing, and the chances that France, Italy and Portugal will resort to more aggressive fiscal stimulus. What’s more, German bund...

    2
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    Gavekal Research

    Some LBJ Wisdom Applied To France

    Lyndon B Johnson once said: “Did you ever think that giving a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else”. The same may be true of writing about French politics. Yesterday, the French government resigned and the CAC 40 jumped more than 2% while French bond yields made new lows. Clearly, the market was unfazed. Perhaps it was even cheering the departure of economy minister...

    2
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    Gavekal Research

    Stagnation, Default Or Devaluation

    Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Meanwhile, Europe’s already high (and rising) government debt levels and large budget deficits raise the question whether we should worry...

    0
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    Gavekal Research

    Europe’s Equity Outlook

    The ugly GDP numbers reported in the eurozone over recent weeks have shocked forecasters and unnerved policymakers. Growth averaged only 0.5% annualized in 1H14, which is about half the consensus estimate (including my own view). And given heightened geopolitical tensions it is clear that the growth outlook may be clouded for a while.

    0
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    Gavekal Research

    The US Dollar Breaks Out

    Is there a more consensus trade then being bullish on the US dollar? With a) the US economy outperforming those of Europe and Japan, with b) the Federal Reserve looking to withdraw some of the extra-ordinary stimulus that it has deployed in the past five years, just as the need for the European Central Bank, and possibly the Bank of Japan, to become a lot more aggressive becomes ever starker, with c) the Pentagon limiting its defense spending...

    5
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    Gavekal Research

    Five Corners (20 August): Velocity Of Money

    In the latest bi-weekly review of global economics and investment we focus on the velocity of money and the credit cycle in the major economic regions: Overview: Charles Gave notes with concern the downturn in the Gavekal Velocity Indicator. US: Will Denyer looks where the US is in the credit cycle and argues it looks more like 2004 than 2007. Europe: François Chauchat argues that contrary to popular belief Europe’s long credit crunch is...

    0
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    Gavekal Research

    The Cantillon Effect (And The Inevitable Demise of Financials)

    Richard Cantillon, an Irishman who spent much of his life in France, only wrote one book (Essai sur la Nature du Commerce) that was published after his death in the early 18th century. It proved a groundbreaking text in the history of political economy and had a huge influence on the likes of Knut Wicksell, the Austrian school and the great Irving Fisher.

    5
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    Gavekal Research

    A Spectacular Eur-Asian Divergence

    Financial markets are nothing if not a real time survey of real people playing with real money. Hence, no one can seriously doubt that markets contain a huge amount of highly pertinent information. The problem for the investor is how can this be profitably extracted?

    6
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    Gavekal Research

    What Smart ETFs Really Mean

    Anatole recently made the case that the world’s equity markets will likely be driven by valuations in the near to medium future (see A Return to Valuation-Driven Markets). Such a shift would mark a stark contrast to the last five years, when markets moved almost exclusively on changes in investors’ perception of economic growth and from shifts in global liquidity (especially central bank policies).

    1
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    Gavekal Research

    France By The Numbers

    It is sometimes said that France has 60mn subjects and twice that number if subjects of discontent are counted. Unfortunately, the ranks of the miserable were likely swollen by yesterday’s bad French GDP numbers. The data reflects the growing unhappiness among businesses that was nearly captured last month by the head of France’s biggest private sector employer’s group. “No more investments are being made and there is no job growth. What I see...

    10
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    Gavekal Research

    How To Play QE In Europe

    The string of dismal second quarter data that emerged from the eurozone’s core on Thursday has left investors facing a quandary. Clearly the woeful GDP prints from Germany—down -0.2% quarter-on-quarter—and France—which stagnated for the second quarter in a row—make it more likely that the European Central Bank will embark on full-blown quantitative easing in the coming months, and sooner rather than later. But while the probability of QE is...

    4
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    Gavekal Research

    5C Europe: The End Of The Credit Crunch

    While markets are already speculating on how much more the European Central Bank must do to address the risks of prolonged economic stagnation, there is at least one key area where its policy is bringing results. After years of banks recapitalizations, two years of collapsing funding costs, and ahead of the publication of the asset quality review at the end of October, the ECB’s strategy for restoring the conditions for credit growth seems to be...

    1
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    Gavekal Research

    Hearing Echoes Of 1987

    In the first four articles in this series, I explained why I believe that a structural bull market in equities began in late 2012 and is likely to continue well into the next decade (see The Case For A Structural Bull Market). But bull markets do not just keep rising without interruption. Sooner or later, equity investors are certain to suffer some large and painful losses, even if I am absolutely right about the economic, monetary and...

    8
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    Gavekal Research

    What Is The ECB Waiting For?

    Banking networks have typically been built on two elements: confidence, and capital. Historically, confidence was often based on the common background of the bankers—the Lombards in Italy and France, Jews in Spain. Otherwise it relied on an institution willing to take on transfer risks (for a fee) and large enough to reassure payers that it was ‘too big too fail’; for example, the great monastic orders of the Middle Ages.

    1
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    Gavekal Research

    The European Equity Blues

    The relative performance of European stocks has been disappointing lately. Even though the European Central Bank delivered its promised easing, triggering both a further decline in peripheral bond yields and a weakening of the euro, eurozone stock markets have underperformed the US by 6% since early June in local currency terms, and by 7.25% in US dollars. However, as Louis noted in yesterday’s Daily, there are two ways of looking at any sell-...

    1
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    Gavekal Research

    Momentum Shifts From Europe To Asia

    European equity markets have taken a beating in the last 50 days. The average eurozone stock is down 6%, while Portugal and Austria are both down more than 10%, putting them in correction territory. Germany and France are not far behind, down almost 9%. However, this broad underperformance masks a lot of intense individual pain: 20% of eurozone companies have fallen more than 20%. As always with a large sell-off, there are two approaches one...

    0
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    Gavekal Research

    A Return To Valuation-Driven Markets

    In the earlier articles in this series I argued that the medium term outlook for economic fundamentals and monetary policy is more predictable now than at any time since 2008, and possibly since the late 1990s. If I am right, then over the next year or two asset prices will no longer be driven by the economic statistics and monetary policy decisions which have dominated the post-crisis financial debate and which still obsess market and media...

    0
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    Gavekal Research

    The Problematic Pound

    The United Kingdom may be the world’s fastest-growing major advanced economy, having notched up a year-on-year growth rate of 3.1% in the second quarter. But it suffers from a clutch of seemingly intractable problems: weak productivity and wage growth, a lightweight manufacturing sector, underperforming exporters and an overdependence on domestic consumers and a frothy housing market. Behind each of these problems lies the persistent strength...

    1
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    Gavekal Research

    Five Corners (6 August): Central Bank Balance Sheets

    In our latest bi-weekly review of global economics and investment, we examine the bloated balance sheets of the world’s major central banks. We ask what exit strategies the central bankers have prepared to slim them down again, or whether expanded balance sheets are here to stay. If so, how will central bank bloat will affect investors in the coming years? Overview: Anatole Kaletsky argues persuasively that the US Federal Reserve and other...

    0
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    Gavekal Research

    Growth & Markets Monthly (August 2014)

    This month saw a further improvement, albeit a small one, in our growth indicators. Risk appetite, on the other hand, now looks much more mixed compared with last month’s strong positive tendency. Also noteworthy is the recent spike in our diffusion index of US CPI components, which highlights the abatement of US deflationary pressures. On the asset side, government bonds continue to look expensive, especially in France. Meanwhile, equities are...

    2
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    Gavekal Research

    Wider Spreads And Weaker Equities

    Over the past five weeks, the spread between US high yield debt and US Treasuries has widened by almost a full percentage point. Admittedly, this move could be dismissed as an overdue correction after spreads for high yield debt narrowed to unsustainably tight levels. Unfortunately, it seems that equities markets are no longer in such a forgiving mood. In the past week, the widening of high yield spreads has weighed heavily enough on equity...

    2
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    Gavekal Research

    Monetary Policy Is No Threat To Markets

    In the first two articles of this series, I argued that the US economy has now clearly reached ‘escape velocity’ and that, with little prospect of a renewed recession in the next year or two, investors are forgetting their earlier fears of secular stagnation and becoming increasingly confident about the extraordinary monetary and fiscal policies adopted by all the major world economies (see The Case For A Structural Bull Market and The Global...

    1
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    Gavekal Research

    5C Europe: Targeted Tinkering

    The European Central Bank’s balance sheet has been shrinking since the beginning of 2013, as eurozone banks have moved to repay funds borrowed via the ECB’s long term refinancing (LTRO) facility. The ECB has trumpeted the repayments as an encouraging symptom of a banking system on the mend. But as we pointed out last year, the balance sheet contraction represented a relative tightening of monetary conditions (see Draghi’s Need For Action). As...

    0
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    Gavekal Research

    5C Overview: Central Banks Are Happy With Their Balance Sheet Bloat

    With the end of the US Federal Reserve’s QE3 round of quantitative easing scheduled for October, this is a good time to consider the ‘exit strategies’ central banks might follow as they think about normalizing monetary policy. While the technicalities of each country’s monetary management are different, there are two broad questions that all central banks have to answer: Can monetary policy rely solely on interest rate management, as in the pre-...

    0
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    Gavekal Research

    The Unintended Effects Of Sanctions

    “I know of no instances in world practice and previous experience in which sanctions have achieved their aim and proved effective,” declared Sergei Ivanov in 2006. At the time Ivanov—then Russia’s defense minister—was criticizing US sanctions on Iran. Today he is even better placed to observe the effectiveness or otherwise of economic sanctions. As Vladimir Putin’s chief of staff, Ivanov was among the Russian president’s intimates targeted by...

    2
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    Gavekal Research

    The Euro Has Turned

    This week the euro broke decisively below 1.35 to the US dollar to set a new year-to-date low. The last time the euro fell below 1.35 was in January, but that sell-off proved fleeting, with the currency rebounding strongly to reach a three and a half year high just of shy of 1.40 in May. In an economy battling to regain its competitiveness, that rally hurt, weighing heavily on exports and pushing inflation down to just 0.5%. In contrast, this...

    1
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    Gavekal Research

    How And When To Short French Bonds

    Earlier this month I recommended—for the first time in my career—an unhedged short position in the French bond market (see It’s Time To Go Short French Bonds). For investors who are uncomfortable with such ‘naked’ shorts, there may be an alternative. They could go short the French OAT and go long the German bund. This Daily sets out the risks involved, together with a decision rule to determine timing.

    2
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    Gavekal Research

    The Price Of A Diminished US Dollar

    Nature, it is said, abhors a vacuum. In much the same way, geopolitics cannot tolerate a power vacuum. So it is small surprise that as a chastened and diminished United States has retreated from direct involvement in the Middle East and adopted a less interventionist diplomatic and military stance elsewhere in the world, ambitious opportunists have stepped forward to fill the gap. In East Asia, China has assumed a far more assertive attitude...

    2
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    Gavekal Research

    5C Europe: It's All About Earnings, Not Valuation

    With continental European equities trading on a forward P/E ratio that is nearing a 10-year high of almost 14.5, compared with 8-10 in early 2012, valuation has clearly ceased to be a driver of market performance. European stocks may be 10% cheaper than their US equivalents, but compared with their average historical discount of 15%, they are not cheap.

    0
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    Gavekal Research

    The Pound's Rally Runs Out Of Road

    Sterling has been on a tear lately. Over the last three months the pound ranks as the world’s best performing major currency. Supported by the relatively strong growth of the UK economy—gross domestic product grew at a 3% rate in the first quarter—a buoyant property market, and hints from Bank of England governor Mark Carney that he could begin to raise interest rates before the end of this year, the pound has climbed 2.25% since mid-April to...

    0
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    Gavekal Research

    A Fore-Tremor Of Shocks To Come

    It is tempting to dismiss yesterday’s spasm in financial markets as a summer ‘silly season’ over-reaction to a little local problem, easily contained. After all, the problems at Portugal’s Banco Espirito Santo are hardly a new phenomenon. The bank insists its capital buffer is more than big enough to cover any potential losses. The Portuguese authorities still have €6bn in their financial rescue fund. And the European Central Bank has declared...

    0
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    Gavekal Research

    It's Time To Go Short French Bonds

    Monday is le quatorze juillet, July 14, France’s national day. In Paris a grand military parade will march along the Avenue des Champs-Élysées as air force jets streak overhead to mark the 225th anniversary of the French Revolution. Yet, behind the pageantry celebrating the glories of the republic, all is not well. For two years I have maintained that France has been facing a secondary depression. As expected, the economy is now getting worse,...

    6
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    Gavekal Research

    Five Corners (9 July 2014)

    Nothing should stay the same and so we are tweaking the format of Five Corners to make the whole report focus on a key thematic issue that impacts all major centers of the global economy. We kick off with an in depth look at inflation which is again rearing its head even as the specter of deflation continues to haunt the most growth-challenged regions.

    0
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    Gavekal Research

    Italy’s Irrational Optimism

    “Optimism is the madness of insisting that all is well when we are miserable.” Voltaire’s words are relevant to eurozone asset markets as monetary policy has allowed the band to keep on playing, even as the economic superstructure takes on water. Those underlying problems are reemerging with France’s July PMI falling to 48.1 and industrial production in Germany down 3% since February. But arguably the most vivid display of hope triumphing over...

    0
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    Gavekal Research

    Europe's Growth Plateau

    It looks as if the eurozone’s growth rate has reached a plateau. Purchasing managers’ indexes in Germany and France have slumped as exports have hit a soft patch and fiscal retrenchment has begun to bite. Meanwhile, with borrowing rates for Spanish and Italian businesses stubbornly high, activity in the euro-area’s periphery remains subdued. Although gross domestic product growth in the second quarter could still edge fractionally higher from...

    2
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    Gavekal Research

    Growth & Markets Monthly (July 2014)

    Having watched our growth indicators soften over recent months, we are now witnessing a momentum shift since our economic activity indicators have perked up markedly. Moreover, the velocity of money has risen rapidly, while our price indicators continue to show lessening deflationary pressure. Hence, it was not surprising to see that bonds are getting more expensive. Unfortunately, equities are not cheap, and this makes it a challenging...

    0
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    Gavekal Research

    5C Europe: The Bullish Consequences Of Inflation Targeting

    Europe’s response to low inflation has been a decisive move toward more aggressive and expansionary policy settings. In early June the Bundesbank signed off on the European Central Bank’s bolder strategy to fight the deflationary threat (see €-Day). Then last week the Swedish central bank unexpectedly cut its repo rate by 50bp, with a majority of members outvoting the chairman—an unusual display of bolshiness in consensus-oriented Sweden.

    2
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    Gavekal Research

    The Emerging German-Russian Axis

    This weekend has seen the European Union do a stitch-up deal so that arch-federalist Jean-Claude Juncker became Commission president. To be honest, who gets to play eurocrat in chief is of no great interest to me, but the manner of the appointment tells us lots about the changing nature of power in Europe. Governments from Stockholm to Rome reportedly opposed Juncker, but ultimately none would defy Berlin. Also this weekend, it is worth noting...

    10
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    The Juncker Quid Pro Quo

    Who will be the hero of the hour, basking in universal gratitude when the EU summit culminates this evening with the appointment of Jean-Claude Juncker as President of the European Commission? Believe it or not, the man all the other leaders will be secretly thanking is David Cameron—and investors in Europe should do the same. Cameron is certain to suffer severe embarrassment this evening if he insists on forcing a vote that he is bound to lose...

    1
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    Five Corners (25 June)

    In the latest bi-weekly review of global economics and investment:

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    Turkish Resilience

    Turkey has a fragile economy and resides in a troubled neighborhood. More than one million refugees have arrived from Syria over the last two years and now Iraq is splintering. On the face of it, such developments pose an existential threat to an economy that is heavily dependent on imported oil and runs a structural current account deficit. Yet even as Brent crude hits $114 per barrel, Turkey is muddling through. Yesterday, the central bank...

    0
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    Rising Velocity Is Driving Markets

    As we approach the half-year mark for 2014, it is remarkable how well asset markets have performed this year. Pretty much every major asset class has registered decent gains. US bonds? The long end of the US government bond market is up by 10%, even after the recent mild sell-off. Commodities? The CRB index is up by 8.6%. Global equities? The world MSCI is up by 6%.

    2
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    5C Europe: Eastern Europe’s Zero Inflation

    Central and Eastern European economies have rebounded convincingly since the spring of 2013. Yet while real gross domestic product growth is likely to average almost 3% this year, CEE inflation has fallen below even the eurozone’s. Average consumer inflation in the region has collapsed from 4.3% in September 2012 to 0.3% in May 2014—compared with 0.5% in the euro-area.

    0
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    Being Polish

    Having spent 50 years under the yoke of murderous fascists and then control-obsessed communists, Poland re-emerged in 1989 and embraced free market capitalism. It accepted the need for radical reform which had painful short term effects as inflation soared to almost 600% in 1990 while the economy shrank 14%. The payoff has been growth that since 1993 has averaged 4.3%, compared to 2.7% for a neighborhood group that includes Slovakia, Hungary,...

    4
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    New York Seminar June 2014 - Louis, Anatole & Andrew

    We held our summer seminar in New York on June 10, with Anatole, Louis and Andrew offering their take on the state of the world economy and financial markets. We were also joined by Henrik Christensen who is director of Robotics at Georgia Tech. Audio recordings of their discussions are available below:

    0
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    BNP, Big Brother And The US Dollar

    France’s biggest bank, BNP Paribas, and the US government have gotten into a fight—a fight which threatens to cost BNP US$10bn in fines and possibly even its US banking license. As usual, the official causes of the fight have very little to do with the real ones. The official narrative goes like this: the US government placed embargos on a number of countries, including Sudan, Cuba and Iran. Between 2002 and 2009, BNP’s subsidiary in Geneva,...

    6
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    Can The ECB's TLTROs Do The Job?

    With its latest round of easing measures unveiled last Thursday, the European Central Bank signalled its determination to intervene aggressively in order to stave off deflation and boost economic growth in the eurozone. The centrepiece of its strategy is its new Targeted Longer Term Refinancing Operations. By extending cheap fixed-rate funds to banks making loans to small and medium size businesses, the hope is that the new initiative will...

    0
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    5C Overview: Volatility RIP

    Having weathered fears of depression, a systemic euroland failure and most recently the specter of deflation, investors can be excused for their insouciant attitude to risk. We may not be in sunlit uplands, but for the first time since 2008 the global growth trajectory looks fairly secure and the big central banks have their monetary policy settings in sync. Hence, it is not surprising that volatility across most asset classes is making new lows...

    0
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    5C Europe: €-Day Also Resonated In Eastern Europe

    The D-Day invasion of Normandy in 1944 created the conditions for decades of freedom and prosperity in Western Europe. The action was less decisive for Eastern Europe which ultimately got stuck on the wrong side of Europe’s great divide during the cold war. We suspect the benefits of last week’s slightly less dramatic €-Day will be spread more evenly.

    0
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    5C Asia: Hop Aboard The Momentum Train

    Far from worrying about policy risks or soft patches in growth, investors suddenly seem to see nothing ahead but clear blue skies—the perfect environment for momentum investing.

    0
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    €-Day

    As world leaders gather in France to commemorate the 70th anniversary of D-Day’s decisive battle against tyranny, it is tempting to see yesterday’s European Central Bank meeting as another decisive action on the European battlefield. Unopposed deflation helped tip the continent into chaos 75 years ago. Now it can be argued that the ECB has made history by launching a substantial new assault against eurozone deflation risks: cutting interest...

    6
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    The ECB's Real Deal

    The European Central Bank has broken with tradition and over-delivered. We had our doubts, but a complete package has arrived, that in the near term should be positive for risk assets and negative for the euro. Leading up to yesterday’s meeting; we said that the ECB needed to come up with a package that lowered short rates. It did. It also needed to provide liquidity operations that were sufficiently attractive for banks to actually use them....

    3
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    Overcoming The Macro Breakdown

    The financial crisis of 2008-2009 heralded a golden age for macro investors. As the wholesale market crash rendered the relative value judgments of stock pickers irrelevant, macro investors enjoyed a boom time—especially ones who had had the foresight to short US housing, global financials, or eurozone peripheral debt. Now, as the crisis recedes further into the rear view mirror, macro investors are struggling to adapt to a world in which...

    0
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    Growth & Markets Monthly (June 2014)

    Having watched our growth indicators soften over recent months, we are now witnessing a momentum shift since our economic activity indicators have perked up markedly. Moreover, the velocity of money has risen rapidly, while our price indicators continue to show lessening deflationary pressure. Hence, it was not surprising to see that bonds are getting more expensive. Unfortunately, equities are not cheap, and this makes it a challenging...

    0
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    As Eurozone Risks Fall, US Risk Rises

    There is now a broad consensus about what the European Central Bank will do tomorrow. The market expects a 10bp to 15bp cut in the interest rate corridor—which would push the deposit rate into negative territory—along with measures aimed at injecting liquidity into eurozone money markets. Many also expect ECB president Mario Draghi to unveil additional tools that he could this summer, including asset purchases. But even as the consensus has...

    1
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    Tomorrow Is Not A Game Changer

    Tomorrow we expect to see the latest Band-Aid solution being applied to the eurozone. Having teased the market for months, it seems likely that the European Central Bank will trim its main refinancing rate, possibly announce a negative deposit rate and even promise a few asset purchases. Forgive me if I don’t roll out the barrel. This is fiddling which does little to correct the fundamental dysfunction at the heart of the system. Let’s be clear...

    1
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    Drumroll To The ECB Meeting

    Yesterday the yield on 10-year US treasury bonds broke downward through 2.5%, its floor ever since last summer’s ‘taper tantrum’. There were two main catalysts for the move. First, there was renewed weakness in the renminbi, as the offshore CNH set a new low for the year with US$-CNH rising to 6.27. Second, there was poor data from Germany and, especially, France, where the ranks of the unemployed continued to expand. Looking at the evolution of...

    0
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    Five Corners (28 May 2014)

    In the latest bi-weekly review of global economics and investment:

    0
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    The Earnings Expectations Paradox

    When it comes to global equity investment, all markets are not equal. Over the last couple of years, investors have evolved distinctly different attitudes about how to discount trends in profit growth in each of the four major equity market regions.

    0
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    An Exceptionally Good Disguise

    When Winston Churchill was facing defeat in the 1945 general election, his wife attempted to cheer him up by remarking that the Labour party’s victory might turn out to be “a blessing in disguise”. “Well then,” the great man retorted, “it’s a bloody good disguise”. To be fair, politicians tend to live in a black and white world. Losses mean bad news, and victories are good. The same cannot be said of investors, for whom good news may well be...

    3
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    A Grand Bargain

    In the run up to this week’s meeting between Russian President Vladimir Putin and Chinese President Xi Jinping, expectations had run high that 20 years of discussions could be concluded with an agreement for Russia to pipe natural gas to China. Russia’s deputy energy minister even stated last week that a contract was “98% ready.” The long history of inconclusive China-Russia negotiations on the issue suggested that his was an overly optimistic...

    0
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    5C Europe: Money Matters

    The slowdown in eurozone GDP growth in the first quarter to 0.2% QoQ has strengthened the chorus of skeptics who question the recovery. Economic indicators come in many forms, with PMI surveys favored by our own European economist Francois pointing to continued growth. However, a closer look at monetary growth trends arguably offers a far less constructive signal as to future economic activity.

    0
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    5C Overview: Keeping China In Check

    How much should we worry about China’s increasing assertiveness beyond its borders? Provocations continue to pile up in maritime Asia, most recently a spat over a Chinese oil rig in what Vietnam considers to be its waters. And last week’s Xi Jinping-Vladimir Putin summit in Shanghai, capped by the signing of a long-delayed US$400 bn gas pipeline deal, conjured the specter of a Sino-Russian concert enabling both countries to defy the United...

    0
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    A Grandmaster At Work

    “Check-mate”. As Vladimir Putin signed Russia’s historic US$400bn gas-supply agreement with China, he must have felt the satisfaction of a chess grandmaster revealing the inexorable outcome of a complicated endgame. In theory, the next phase of the chess game between Russia and the West in Ukraine will only begin with the Ukrainian presidential election on Sunday, but Putin’s positioning of the pieces means the outcome is preordained, whoever...

    1
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    Playing The Bond Markets In A Fixed Exchange Rate System

    Contrary to what some people may believe, I do not wake up in the morning with an irresistible urge to short the French bond market, or to go long US treasuries, or whatever it happens to be. I devise decision rules and I follow them. To build these rules, I always follow the same steps.

    0
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    Europe’s Protest Vote Aids Reflation

    Citizens of the 28 member states in the European Union this week get to elect the 751 members of their supranational parliament. All polls suggest that the protest vote—including the anti-EU vote—will be substantial. This statement of discontent will not, however, be big enough to challenge the majority held by the establishment parties. And barring major surprises, these elections are unlikely to produce big policy changes. However, the scale...

    0
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    Buy Eastern European Bonds

    Here is a paradox that fixed income investors may want to think about. Since mid-2013 sovereign bond yields in Central and Eastern Europe (CEE) have been broadly flat, contrasting with a strong rally in the euro-area periphery. Although the rally in Southern Europe is warranted, this divergence with Eastern Europe is not justified by economic fundamentals. Backed by very competitive currencies, a strong production rebound and spectacular...

    3
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    Time To Sell Treasuries

    The benchmark 10-year treasury yield has traded sideways in a range from 2.5% to 3% since the taper tantrum of last summer. Now it is threatening to break out on the downside. If you expect a collapse in yields, you should load up on bonds and sell everything else. We don’t.

    4
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    The Healthy Man Of Europe

    In today’s Daily Louis argued that the eurozone investment environment may be undergoing a significant reversal as investors face up to the reality that southern economies are still mired in debt traps. Such a viewpoint would militate against a continued overweight position in European equities. Our European strategist and economist Francois will take issue with this proposition, but one European economic fact that cannot be disputed is the...

    0
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    As Spreads Widen, Europe Clouds Over

    You have to go back almost to the darkest days of the euro crisis to see the sort of behavior displayed by Europe’s bond markets yesterday. As GDP growth disappointed across the continent (except for in Germany), yields dropped in the US, Germany, France and the UK, but soared in Italy, Spain, Greece etc... The 20bp or so jump in the yields of Spanish, Italian and Portuguese long bonds in the face of weak economic data begs a question: are we...

    2
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    How To Lose The Eastern Front

    Russia, it appears, has emerged victorious in Ukraine. After the unofficial referendums organized by pro-Russian groups in Ukraine’s eastern regions, Kiev knows it must negotiate with the separatists to avoid national disintegration. A deal on autonomy for parts of Donetsk and Luhansk will have to be made on terms acceptable to Vladimir Putin.

    0
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    Five Corners (14 May 2014)

    In the latest bi-weekly review of global economics and investment:

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    No Magic For ECB In Negative Rates

    At last, the European Central Bank seems ready to do something—judging by last week’s comments from Mario Draghi, reinforced by the Wall Street Journal story that triggered a sell-off in the euro yesterday. The market reaction has been pretty much along the lines described by Francois last week: bond yields in Italy and Spain have fallen to record lows, European stock markets are up 1% to 2%, and the euro has weakened from almost €1.40 to €1.37...

    3
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    EM Carry Trade Looks Vulnerable

    Over the last two months, emerging markets have delivered a handsome rally, with the MSCI emerging markets index recording a 7% return in US dollar terms, compared with just 1% for the developed markets. The trouble is that this rally has been driven primarily by investors’ growing enthusiasm for carry trades in an environment of declining global volatility. Experience teaches this is an engine which can all too suddenly be thrown into reverse

    5
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    The Problem With Piketty

    Thomas Sowell coined a marvelous phrase to describe the well-intentioned social engineers who always know what needs to be done to improve the wellbeing of the downtrodden. He called them “the anointed” and explained how their reasoning always evolves in the same three stages:

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