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E.g., 18-02-2020
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    Gavekal Research

    Never Do On Monday What You Wish You’d Done On Friday

    The first rule of bear markets is never to do on Monday what you wish you had done on Friday. During bear markets, the constant stream of negative stories from the media leads to a build-up of anxiety among investors, anxiety that pours out first thing on Monday morning on trading floors everywhere.

    1
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    Gavekal Research

    Fear Not Brexit

    The UK political class is all in a flutter as the latest European Union referendum polls show an apparent rising tide of support for “Leave”. Having orchestrated the great and good into warning of catastrophe should a Brexit materialize, it would seem that “project fear” is not cutting through. I tend to have strong political convictions and perhaps for this reason I have a lousy record of guesstimating election outcomes. Since the UK referendum...

    8
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    Gavekal Research

    The ECB Embraces Total QE

    The European Central Bank pushed further into uncharted territory this week, when it made its first foray into the corporate bond market. Three months after announcing its new initiative, the ECB added the Corporate Sector Purchase Program, or CSPP, to its alphabet soup of monetary operations. Under the CSPP, the central bank will make purchases of investment grade non-bank corporate debt, to go with the sovereign debt, covered bonds and asset-...

    0
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    Gavekal Research

    The French Investment Pick-Up

    France may be racked by strikes and edgy about terrorist threats as a major soccer tournament it is hosting kicks off today, but the eurozone’s second biggest economy has a decent story to tell. Consumer confidence is at a post-2007 high, recent GDP readings have surprised on the upside and even jobless claims hint at an improvement in the labor market (see Is France Getting Better?). All of this perhaps explains why French investment for 1Q16...

    2
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    Gavekal Research

    The Outlook For The US$ Vs The Euro

    When coming to investment decisions in the financial markets, I always try to be as “rules-based” as I possibly can. By that, I mean that I look as closely as I can at the available evidence to determine what has worked in the past—and what has not. This is difficult enough when analyzing the US bond market or the French stock market, but when it comes to exchange rates, the task reaches a whole new level of complexity. It is necessary to look...

    5
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    Gavekal Research

    On Populism

    The ruling class, which over the last 20 years has done so much to manage our decline, has found a new enemy in the shape of political “populism.” While acknowledging that times have been tough, what so annoys this elite is the realization that “we the people” do not recognize that a complicated world is being run in our own best interests. For this reason it is no great surprise that such ingrates have been labelled populists.

    7
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    Gavekal Research

    A Backdoor Resolution For Greece, And The Eurozone

    A Greek crisis was avoided last week after European creditors agreed to a €10.3bn disbursement to Athens without the International Monetary Fund contributing funds. The idea is for the Europeans and the IMF to thrash out a compromise that grants Greece sufficient debt relief to make its program sustainable. On one level this mucky deal seemed just another case of the can being kicked down the road, yet on another there is now a “back door”...

    2
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    Gavekal Research

    The Gavekal Monthly: Risks For Equities—Populism And The Dollar

    Even as markets nudge higher, investors are unnerved by a rising tide of populist politics whose tangible expression will be tested on June 23, when UK voters must choose between Brexit or a less than perfect status quo inside the European Union. Investors are also concerned that the US dollar will strengthen further as the Federal Reserve mulls the question of whether to raise interest rates. In this monthly our writers weigh these big issues...

    0
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    Gavekal Research

    The Death Knell For The French Left

    To outside observers the latest round of strikes and demonstrations to sweep France must seem a case of déja vu all over again. For the fourth time in a little over 20 years, left wing trade unions have called mass walk-outs to protest against proposed government reforms of France’s notoriously rigid labor market. As before, the transport system has been thrown into chaos, with air traffic controllers en grève, and blockades of the country’s oil...

    2
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    Gavekal Research

    When Rules Are There To be Broken

    It has become an article of faith for Europe-watchers that the one thing holding together the single currency area is super easy monetary policy. Yet in light of Brussels deficit policing bureaucracy having recently been revealed as a toothless tiger, expansionary fiscal policy can perhaps be added to the list. It is hardly news that Europe is back-tracking from German-dictated austerity, but for the first time officials are openly admitting...

    3
  • Gavekal Research

    The Challenge For Equity Markets

    Given high valuations and a rock bottom risk-free rate, it is hard to see US equities moving higher without a pick-up in corporate earnings. Yet with the strong US dollar hurting exporters and domestic economic data coming in weak, US-based firms may struggle to deliver.

    6
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    Gavekal Research

    The German Consumer Lives

    By most measures, the eurozone remains unbalanced, with a competitive north eating the lunch of a productivity-challenged Latin periphery. Germany’s current account surplus stands at 8.6% of GDP and its banks are stuffed with excess deposits, suggesting that thrift remains the Teutonic economic passion of choice. Yet look closer at Germany and it is clear that domestic demand, not exports, is driving growth—household spending accounted for about...

    0
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    Gavekal Research

    The Calm Before The European Storm

    A deal with Turkey to ease Europe’s refugee crisis is close to collapse, Greek bailout negotiations are set to test German political resolve and Britain’s referendum on European Union membership is too close to call. Europe’s “project” has been held together since 2012 by extraordinary monetary policy which has spurred a mild economic recovery, observable in the latest data. The concern now is that growing centrifugal forces—mostly political in...

    0
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    Gavekal Research

    Trump And The Tree People

    Recently I reada bookcalled Je n’ai plus peur (I am not afraid any more)by the French writer Jean-Claude Guillebaud. I do not know Guillebaud personally, but even though he is very much on the left of the French political spectrum, I must confess that I have read all his books, and that I have always liked what he has to say.

    7
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    Gavekal Research

    Disaster Averted Is Not Success

    This week Atlante, Italy’s new private sector bail-out fund, swung into action for the first time, supporting an equity issue by the troubled Banca Popolare di Vicenza. But although Atlante’s market debut could be said to have averted a potential systemic disaster, it was hardly the success either the politicians of Rome or the financiers of Milan had been hoping for.

    1
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    Gavekal Research

    Making Sense Of The Rally In Cyclicals

    By all accounts, 2016 has so far proved to be a challenging year for “market neutral” funds, and “smart beta” strategies, along with various quant funds. Before we have even reached the seasonally-challenging part of the year—sell in May and go away, and all that—a quick glance at year-to-date returns for “low volatility” hedge funds illustrates that the pain is pretty widespread. In a sense, this is surprising; after all, spreads are tighter...

    2
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    Gavekal Research

    The Gavekal Monthly: Glass Half Full Or Glass Half Empty?

    The past month has seen the US dollar seemingly top out, the oil price settle into a trading range and China’s economic outlook stabilize. Emerging markets in particular have bolted higher despite weak global trade, an oversupplied commodity complex and worries about high levels of leverage. In this edition of The Gavekal Monthly we ask a pressing question for EM investors: is the glass now half full, or half empty?

    0
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    Gavekal Research

    Is France “Getting Better”?

    He was not quite Reaganesque in his cheery optimism, but in a recent primetime television appearance President Francois Hollande did declare to France that life was “getting better”. He could point to growth rising to 1.1% last year from a meagre 0.2% in 2014. Unfortunately, the French jobless total hit a new record of 3.6mn in February contributing to a public response of general derision, not to mention rioting at proposed labor market reforms...

    5
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    Gavekal Research

    A European Sinner Repents

    When Brussels implemented new solvency rules for European insurance companies in 2014, it committed one of the five cardinal sins of government: over-regulation. Of course, stricter rules were always likely following the financial follies of the pre-crisis era, but when they drew up the new “Solvency II” regulations, the European Union’s generals were so focused on fighting the last war, they failed to realize the danger posed by their own...

    0
  • Gavekal Research

    Time To Bet On Sterling And Against Brexit

    If Britain votes to remain a member of the European Union, the moment when the tide turned against Brexit will probably be remembered as Barack Obama’s London press conference on Friday. With a single phrase Obama demolished the Brexiteers’ most powerful economic argument when he noted, with a friendly but remorseless grin, that if Britain chose to detach itself from Europe it would wait “at the back of the queue” for any special US trade deal....

    1
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    Gavekal Research

    Time Alone Is Not Enough For The ECB

    Stung by attacks on his negative interest rate policy, Mario Draghi yesterday hit back at his critics in Berlin, and pleaded for patience. “Our policies work,” insisted the European Central Bank president. “Just give them time.” Draghi’s plea is unlikely to placate German finance minister Wolfgang Schäuble, who earlier this month blamed negative rates and the harm they have inflicted on savers’ incomes for the success of right-wing populists in...

    2
  • Gavekal Research

    NIRP: Machiavellian Design Or A Policy Mistake?

    In order to make money, Starbucks has little choice but to sell coffee. Ford must sell cars if it hopes to stay open. And Lockheed Martin better get orders for bombs, missiles and planes if it is to remain relevant. But banks do not need to make loans (their stated purpose) in order to make payrolls and pay shareholders a dividend, at least at certain points in the cycle. When the yield curve is steep, banks can borrow money cheaply at the...

    3
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    Gavekal Research

    The Sum Of All Fears

    As “China implosion” and renminbi devaluation fears have faded, risk assets around the world have enjoyed a sustained a rally led by “China sensitive” assets such as commodities, Asian equities and emerging market high-yield debt. In short, all the assets that were priced for a scenario just short of Armageddon. But following this rebound, what next? The most obvious point is that, with the pick-up in fiscal stimulus, the rebound in construction...

    0
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    Gavekal Research

    Eurozone Reform Update 2016

    Last February we published a detailed score card of the structural reform efforts undertaken by Europe’s battered peripheral economies (see Assessing ‘Thatcherite-Keynesianism’). The last year has seen small improvements, but not enough change to warrant another box-ticking exercise. Our assessment in 2016 mostly focuses on the key relationship between the labor markets and national competitiveness. Inevitably such changes are slow moving and in...

    0
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    Gavekal Research

    No Relief For European Banks

    Yesterday a consortium of Italy’s healthier banks and financial institutions agreed to put up €5.7bn to finance a private sector bailout fund for the country’s weaker banks. The deal, which was cobbled together by Italy’s Finance Ministry, is clearly intended to circumvent European Union rules limiting state aid to the banking sector. Details remain sketchy, however it is difficult to see how the agreement can restore confidence in Italy’s banks...

    0
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    Gavekal Research

    European Disunion

    The grand old men who conceived of a united states of Europe knew that a successful single currency demanded a modern federation with integrated monetary, fiscal and political institutions. Such a leap into the unknown was politically impossible in the 1990s, and their assumption (and perhaps hope) was that the less than optimal eurozone would suffer periodic crises, so creating the conditions for reform and a centralization of powers. Since the...

    3
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    Gavekal Research

    Fade The Emerging Market Rally

    In defiance of conventional wisdom the oil price has tumbled -10% in the last two weeks despite a weak US dollar. For emerging markets investors, the breakdown of this correlation raises tricky questions.

    0
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    Gavekal Research

    The Case For Sterling

    What was the weakest major currency in the world in the first quarter? It was not the Brazilian real nor the Australian dollar nor any of the other usual suspects among the emerging market and commodity currencies. That accolade went to the British pound, which managed to depreciate by -4%, from US$1.48 to US$1.42, even while the dollar itself fell another -5% on its trade-weighted index.

    2
  • Gavekal Research

    Things Fall Apart

    Over the past century periods of social breakdown have swung the pendulum of power from markets to governments and back. Each crisis ended with a transformation in economic and political thinking. Today, voter anger is a response to the 2008 breakdown of deregulated capitalism. This time, argues Anatole, politicians must reconsider the market fundamentalism that has prevailed in recent decades and design a new system of checks and balances to...

    12
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    Gavekal Research

    The Gavekal Monthly: The Dollar Weakens; Time To Buy Jewels?

    The big change over the last month is that the US dollar is now falling on a year-on-year basis. This weakness reflects a more abundant international supply of dollars as the US trade balance, ex-China and ex-oil, has swung back into the red after six years in surplus. In this edition of The Gavekal Monthly, Louis outlines why, in such a plentiful-dollar environment, investors should consider prioritizing “jewels” over “tools”.

    0
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    Gavekal Research

    Europe’s Reflation Trade

    Yesterday’s awful events in Brussels offer a stark reminder of our personal vulnerability in an unstable world and our hearts go out to the victims. They also reinforce liberal Europe’s vulnerability to hate-based ideology and highly motivated terrorists. However, we at Gavekal are economic analysts rather than geopolitical experts, and today want to focus on a more constructive view of Europe—namely, its equity market. After a knee-jerk sell-...

    0
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    Gavekal Research

    Dollar Liquidity And Its Dependents

    One of our long-standing rules of thumb has been that a deteriorating US trade balance is good news for the rest of the world, and especially for emerging markets. It is thus a positive sign that the ex-energy, ex-China trade balance shifted from surplus to a deficit in 2015, sending US$150bn to the world outside of China and the oil exporters. The overall trade balance is likely to continue worsening through late 2017, thanks to the lagged...

    5
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    Gavekal Research

    The Road To Reflation

    For the last ten years or so, ever since the Hartz reforms to the German labor market, Germany has been by far the biggest driver of overall eurozone growth. Indeed, for much of 2012, Germany was the only driver of eurozone growth. This has not been a healthy phenomenon. With German savings rates high, and domestic consumption sluggish, much of Germany’s own growth was propelled by its net exports of goods to the rest of the world beyond the...

    1
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    Gavekal Research

    Super Mario: Hero To Zero To Hero

    As markets plunged following Thursday’s European Central Bank meeting, it seemed as if Super Mario had turned into Dumb Draghi.But by Friday morning Draghi had again gone from Zero to Hero, with risk-on assets racing ahead in virtually every market around the world.

    2
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    Gavekal Research

    The End Of The Road

    The European Central Bank pulled the trigger but the bazooka misfired. European stocks peaked half an hour after yesterday’s new easing measures were announced, but investors quickly focused on the broader significance of the action.

    1
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    Gavekal Research

    Draghi’s Difficulty

    When the European Central Bank’s governing council meets tomorrow, Mario Draghi and his colleagues will find themselves facing a dilemma. With growth sluggish, and inflation elusive, the consensus expects the ECB to ease its already ultra-loose monetary policy further. Likely steps include cutting the central bank deposit rate by 10bps to -40bps, increasing bond purchases to €70bn a month from €60bn, and extending the program of purchases beyond...

    0
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    Gavekal Research

    A Diagnostic Tool For Bear Markets

    One of the most vexing moments in a money manager’s career comes when one of the team—usually the young intern—asks the question: “So, are we in a bear market or not?” Immediately, everybody on the investment committee jumps into the discussion, and without fail everyone has a strong opinion on the matter. A vigorous debate ensues, and when everything is said and done, a lot more has been said than done—and neither the intern nor anyone else on...

    7
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    Gavekal Research

    Too Quiet On The Southern Front

    Since the euro crisis kicked off six years ago, policy decisions affecting banks have had two main goals. Whether it be monetary policy, the 2014 asset quality review or moves toward both a banking and capital markets union, the objective has been to boost confidence in the system and reduce the fragmentation of credit markets. A -20% fall in eurozone bank shares YTD on concerns about the impact of negative interest rates shows that the first...

    0
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    Gavekal Research

    Sweden And The NIRP Trap

    Swedish GDP growth for 4Q15 was just reported at 4.5% YoY, the fastest pace since 2011 and the tenth straight quarterly gain. This makes Sweden by far the best performing developed economy in the post-2008 period. So given that it led the way with negative interest rates, an interesting question is whether the Swedish experience represents a vindication for NIRP.

    0
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    Gavekal Research

    The Gavekal Monthly: Nothing To Fear But Fear Itself

    February saw some stability return to markets as investors got more comfortable with China’s currency policy and became less convinced that the Federal Reserve made a fatal mistake in December by raising interest rates. In this edition of the Gavekal Monthly Anatole assesses the big worries for global investors, while other writers focus on the burning currency questions in the major economic regions.

    0
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    Gavekal Research

    Video: On Wicksellian Theory

    0
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    Gavekal Research

    New European Crisis, Same Problem

    Almost every year since 2008 has been marked by a “crisis” in Europe. Last year’s big headache centered on Grexit, 2014 saw Russia’s land-grab in Ukraine and this year the worry is Brexit and a collapse of the Schengen open border system. European stocks are down -13% YTD and 10 year bunds yield 0.15%, a decline of 48bp. But are these falls justified given that the bigger concern in global markets is centered on emerging economies and a possible...

    0
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    Gavekal Research

    No More Curve To Roll Down

    Since the Bank of Japan introduced a negative deposit rate on January 30, Japanese bank shares have collapsed, falling -21% in yen terms and -15% in US dollars. The first question to ask is this: why were Japanese bank shares derated so dramatically after the policy change? Here are a few explanations, which are not mutually exclusive:

    4
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    Gavekal Research

    Why Brexit Won't Happen

    Among the multiple existential challenges facing the European Union this year—refugees, populist politics, German-inspired austerity, government bankruptcy in Greece and perhaps Portugal—one crisis is well on its way to resolution. Britain will not vote to leave the EU.

    24
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    Gavekal Research

    Down The Negative Rate Rabbit Hole

    “Curiouser and curiouser,” as Alice remarked on falling down the rabbit hole and entering Wonderland. Released yesterday, the minutes of the European Central Bank’s January meeting strongly hinted at further monetary easing measures when the governing council next meets in March. Already committed to €60bn in asset purchases per month until March 2017 and charging a negative interest rate of -0.3%, the ECB now looks likely to push its deposit...

    0
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    Gavekal Research

    Having Your Cake, And Eating It

    Is the world really facing a 2008-style economic and market meltdown all over again? If it is, then the prescription for investors is clear: load up on long-dated US treasuries in expectation of a continued slide in yields, leaven your portfolio with exposure to gold, and prepare for the apocalypse. But what if the end of days is not imminent? In that case, investors face a trickier call.

    0
  • Gavekal Research

    Crisis? What Crisis?

    Two weeks ago I published an article dissenting from the near-universal view among my Gavekal colleagues, and also probably among our clients, that the global equity markets had entered a severe bear market (see Is Wall Street In A “Bear Market”?). Since I expressed this relatively optimistic view on January 27, the S&P 500 has fallen another -2.7%, the world MSCI-ex US by -3% and the Nikkei by a whopping -8.5% in yen terms. It may therefore...

    4
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    Gavekal Research

    Europe's Banking Rout

    Following yesterday’s rout in European banking stocks, there is one thing that we can say for certain: the proximal cause of the sell-off had nothing to do with China. With Chinese markets closed for the lunar new year holiday, beleaguered investors in Europe had been hoping for a little breathing space this week. In the event, the sell-off in European bank shares only intensified, with the Euro Stoxx banks index sliding -6.4% on Monday,...

    3
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    Gavekal Research

    QSCB: How To Adapt To A Slow-Growth Future

    Growth in the world’s two biggest economies is settling at much lower rates than investors are used to. We predictably struggle to find a neat consensus on what the current macro environment means for asset allocators, but Charles, Louis and Anatole all offer specific portfolio advice.

    0
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    Gavekal Research

    No More Shock Absorbers?

    Things have come to a pretty pass when the heads of two of the world’s three leading central banks come out with all guns blazing in an attempt to persuade markets that they will do whatever it takes and more to ease policy—and their currencies promptly strengthen by two big figures. Yet that is exactly what has happened this week. On Monday Mario Draghi dropped a heavy hint that the European Central Bank is preparing to push interest rates even...

    2
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