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E.g., 20-05-2019
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    Gavekal Research

    Is Perfidious Albion Undermining The 'Shanghai Agreement'?

    Back in the early 1980s, foreign exchange volatility wreaked havoc on business spending plans and countries’ ability to repay foreign currency debt. To remedy this situation, the world’s key financial policymakers got together to agree on a plan for coordinating monetary policies; the idea was to reduce currency volatility and so limit the scope for financial shocks.

    2
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    What Does The Italian Elite Want?

    Should we care about the Italian referendum? Without wanting to sound smug toward what remains Europe’s second prettiest country, I can’t remember ever witnessing an Italian election with consequences beyond its own borders. But the December 4th referendum could be such a first: an Italian election that matters.

    3
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    Gavekal Research

    Tan Kai Xian & Leonor du Jeu: The US Trade Deficit Conundrum

    0
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    Audio & Transcript — Gavekal Research October Call

    Will Denyer presented a newly minted dynamic asset allocation tool which was developed from an ROIC-based framework that has helped us to better map and predict US economic cycles. He then answered listener questions on these themes.

    0
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    Gavekal Research

    The British Pound: A Two Year View

    The British pound has been on a roller coaster ride to the point that on a purchasing power parity basis it is undervalued by about 10% against the euro and 17.5% versus the US dollar. As a result, sterling has been left 2% below its lower bound against the euro (in average standard deviation terms) and 9% versus the dollar on the same measure. Put another way, the pound is undervalued by more than one standard deviation against the euro and by...

    13
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    Gavekal Research

    As Goes The Pound, So Go Eurozone Exports

    In European capitals this week schadenfreude will no doubt have been expressed at the diminished status of the UK economy and its currency. This morning’s “flash crash” in the pound most likely had technical causes, but the fact the exchange rate could fall so hard without generating automatic buying responses says much about confidence in the unit. Sterling has been under pressure since Prime Minister Theresa May earlier this week said she will...

    3
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    Pierre Gave: Can Sweden Escape The Negative Rate Trap?

    On the surface, Sweden’s two-year experiment with zero, and then negative, interest rates appears to have worked well. Growth is strong by developed world standards, and the economy has escaped deflation. But this success has come at the price of an asset price bubble that looks increasingly dangerous. Pierre Gave assesses the risk, and examines possible exit routes for the Riksbank.

    0
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    Gavekal Research

    Angela Merkel’s Catch 22

    Back in April, we pondered whether, with their negative interest rate policies, central bankers were showing themselves to be particularly incompetent by condemning commercial banks to years of unprofitability, or whether their greater design was to drive weaker banks to the wall to advance a consolidation of banking industries around the world under the umbrella of nationalization (see NIRP: Machiavellian Design Or Policy Mistake?). In other...

    5
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    Gavekal Research

    The Pain Behind The Agony

    The agony at Deutsche Bank is overshadowing the pain elsewhere in the European banking system—but pain there is. Last week Commerzbank, Germany’s second largest bank and biggest Mittelstand lender, announced 9,600 job cuts and sold its Frankfurt headquarters to Samsung of Korea. Yesterday ING said it would lay off some 20% of its Dutch and Belgian headcount and trim its branch network, while in recent days banks elsewhere in the eurozone have...

    0
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    A Hardening Brexit And Softening Sterling

    The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...

    3
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    Gavekal Research

    The Eurozone Construction Revival

    The eurozone’s construction sector is on the turn as super low interest rates feed through to improved housing demand and as infrastructure building starts to pick-up. The implication is that a reliable new driver of growth should help sustain a moderate eurozone recovery. Investors are advised to take note as the sector has a decently investable universe, which is generating not too shabby earnings growth.

    0
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    Gavekal Research

    The German Banking Problem

    These are not happy times for Europe’s commercial bankers. The adoption of negative interest rates may have averted the slide into a deflationary abyss, but the policy has hit lending margins, and with them profits. Exhibit A is Deutsche Bank, the dominant financial institution in Europe’s largest and most dynamic economy. Deutsche, whose market value has shrunk to just US$14bn, has problems of its own making in the US, yet its plight has been...

    1
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    Gavekal Research

    Why The ECB Will Not Turn Japanese

    European bank stocks have enjoyed a near 5% bounce in the last two trading sessions on hopes that the European Central Bank will follow its Japanese counterpart by explicitly adopting policies that help steepen the yield curve and so lessen the squeeze on bank lending margins. There are reasons to be more cheery about the outlook for European financials, but a Japanese-style rescue mission may not be one of them.

    0
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    Neil Newman: BoJ Policy Meeting In A Nutshell

    After the Bank of Japan’s announcement earlier today of quantitative easing “with yield curve control”, Neil delivers a quick-fire video assessment of the new policy slant, and what it will mean for markets and the broader Japanese economy.

    0
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    Gavekal Research

    The EU’s Post-Brexit Paralysis

    It was billed as a show of post-Brexit unity of purpose. Without the fractious Brits to obstruct progress, leaders of the remaining 27 members of the European Union would come together to affirm their unshaken commitment to the goal of “ever-closer union”. Unsurprisingly, the reality of the weekend’s Bratislava gathering failed to live up to its billing. Without the presence of the habitually adversarial British to unite them in antagonism, the...

    0
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    Gavekal Research

    Will & KX: Soft Growth And Volatile Markets

    Will and KX present the quick view on the US economy and financial markets

    0
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    Gavekal Research

    The End Of A Bubble?

    Ask three economists for the definition of a financial bubble, and you will be lucky to get fewer than four different answers. Even in our little shop, we like to make distinctions between bubbles in productive assets (US railroads, the internet, fiber optic cables, shale gas wells...) and bubbles in unproductive assets (gold, tulips, Japanese land, Florida condos…). We also like to make distinctions on how bubbles are financed: equity (good) or...

    2
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    Gavekal Research

    Real Yields In The Driving Seat

    Notwithstanding yesterday’s bounce, the stock market is a nervous place just now. After riding a post-Brexit rebound that saw both the S&P 500 and the Nasdaq Composite scale record highs on minimal volatility, investors are increasingly wondering about the extent of the potential near term downside, not just in the US but around the world

    2
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    Gavekal Research

    Prepare For Hurricanes

    After months of contented lethargy, Friday’s big sell-off seemed to confirm the main points that Louis and I made in our conference call two days earlier. Firstly, the faith in “lower forever” bond yields is not a reason for reassurance, but a cause for concern. Secondly, political risks have not been eliminated by the summer’s market rally, merely ignored. Thirdly, what I call the “financial hurricane season” usually starts in early autumn—and...

    8
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    Gavekal Research

    The ECB And BoJ: Brothers Disarmed

    The combination of negative interest rates and quantitative easing is not working as central banks had hoped. Yesterday European Central Bank president Mario Draghi conceded that more than two years after introducing negative rates and 18 months after commencing asset purchases, the ECB is no closer to hitting its 2% inflation target than when it first adopted its unconventional policies. Although headline inflation is set to tick up over the...

    0
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    Gavekal Research

    The New Ineptocracy

    In times past, capitalist systems were organized on a simple premise. At the centre sat “money” as the medium to express all values. The primary operating dynamic of this system was that surplus money (savings) got channelled into economic activity, with a secondary effect that “unused”, or “left over”, money ended up in financial assets, usually equities, such that at times of great optimism a bull market resulted. After running for a year or...

    7
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    Gavekal Research

    Gavekal Research Monthly Conference Call — September 2016

    In the inaugural Gavekal Research monthly conference call, Louis, Anatole and Arthur addressed the global growth environment and offered asset allocation suggestions.

    0
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    Gavekal Research

    How Deep Is That Rabbit Hole?

    It is only three months since the European Central Bank crossed its latest “unconventional” threshold with corporate bond purchases, yet when policymakers meet tomorrow, more monetary expansion is in the cards. Eurozone economic growth is not collapsing, but it remains weak as shown by the latest flash PMI reading which slumped to a 19-month low, and consumer inflation running at just 0.2%. With the ECB’s quantitative easing program set to...

    0
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    Gavekal Research

    A Better G-20 Communiqué

    Another year, another G-20, another yawn. Though the group of the world’s 20 biggest economies was useful in the aftermath of the 2008 financial crisis, it has since degenerated into another global drawing room where leaders explain to one other how the world would be a better place if only it were a better place. This was a missed opportunity.

    1
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    Gavekal Research

    When New Policy Easing Becomes Contractionary

    For the European Central Bank, achieving its target of inflation “below, but close to, 2%” is proving harder than anticipated. Eurozone consumer prices rose just 0.2% year-on-year in August, unchanged from July despite more than two years of negative interest rates and nearly 18 months of quantitative easing. With core inflation actually slipping in August, the ECB is facing calls to ease policy even further. However, the central bank now finds...

    2
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    Gavekal Research

    The Gavekal Monthly: How Long Can The Rally Last?

    Investors enjoyed a surprisingly upbeat summer with the World MSCI close to an all-time high and emerging markets continuing to benefit disproportionately. Yet with the Federal Reserve sounding increasingly hawkish, earnings looking soft and political uncertainty remaining the order of the day, this Gavekal Monthly focuses on threats to the current benign market mood.

    0
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    Gavekal Research

    The Falling Natural Rate Is No Mystery

    As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...

    6
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    Gavekal Research

    Battered But Still Standing

    Battered by terrorist attacks and crippling strikes, France has hardly been having a good time of it. These problems were amply reflected in second quarter growth data which stalled after a mildly encouraging 0.7% QoQ rise in the first quarter. Yet a decent flash PMI for August—which rose to a 10-month high of 51.6—suggests an underlying resilience, which may render the 2Q16 soft patch a blip on a modest, but concerted, economic upturn of the...

    0
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    Gavekal Research

    Renzi’s Great Gamble

    Italian Prime Minister Matteo Renzi has bet his premiership on a referendum over constitutional reform. It is a high stakes gamble. Renzi’s promise to step down if there is a “No” vote has turned the referendum into a vote of confidence in the government, its Europhile policies, and Italy’s membership of the eurozone itself.

    10
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    Gavekal Research

    A Brexit-Induced Recantation

    Exactly two months have now passed since the Brexit referendum. It is now an appropriate time to review what has happened, and what hasn’t, since June 23. As a quintessential member of the elite that was angrily repudiated by a majority of British voters, this referendum was a profound emotional trauma. Therefore, my initial reaction turned out to be completely wrong.

    10
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    Gavekal Research

    Video: Italy's Constitutional Referendum

    Nick presents what's at stake in Italy's upcoming constitutional referendum, and what it could mean for the European Union

    0
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    Gavekal Research

    Video: The Politics Of Italy's Referendum

    Stefano Capacci On The Politics Of Italy's Referendum

    0
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    Gavekal Research

    The Euro And Mean Reversion

    Among my long-standing decision rules is one that generally proved reliable in the past. If two developed and open market economies trade freely with each other, then over the long run the return on invested capital in each economy will tend to be the same. In turn, this implies that over the long run, the ratio of total returns from each stock market will exhibit no trend in common currency terms. This makes intuitive sense—if one market...

    7
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    Gavekal Research

    Ripples In The Eurodollar Market

    The Eurodollar market is making waves. While most benchmark interest rates around the world have been stable or softening, US dollar Libor has bucked the trend. Over the last seven weeks three-month Libor has climbed by almost 20bp to a shade over 0.8%. Meanwhile the TED spread, which effectively measures interbank credit risk by tracking the spread between Eurodollar rates and three-month US Treasury bill yields, has shot to its widest since...

    2
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    Gavekal Research

    Eurozone Equities Ride Again

    Eurozone equities have been sucked higher in the post-Brexit global rally, but with earnings showing a mild pick-up and fears of a populist political contagion fading, the hope is that a 15 month downtrend has been broken. On a technical level the MSCI EMU’s 200-day moving average has flattened out nicely, and with the DAX on Tuesday hitting a high for the year, German stocks look as if they could break out. As to whether the broader market can...

    0
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    Gavekal Research

    Behind The BoE’s Positive Thinking

    Yesterday the Bank of England rolled out the artillery it plans to deploy against the UK’s fast-materializing post-referendum slowdown. Yet for all the effect they are likely to have, the Bank’s big guns might as well be peashooters. Although the Bank’s new forecasts suggest the UK is heading for a period of stagnation, rather than outright economic contraction, all the latest forward-looking indicators point to a severe recession starting in...

    5
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    Gavekal Research

    The Cracks Begin To Appear

    Backward-looking data has held up surprisingly well in the UK since June’s Brexit vote. It is not that second quarter GDP growth came in ahead of expectations at 0.6% QoQ; only one week of 2Q fell after the referendum. However, despite dire warnings of the damage June’s “Leave” vote would inflict on the UK’s all-important property market, home prices proved remarkably resilient in July. The Nationwide house price index rose 0.5% MoM, an...

    1
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    Gavekal Research

    The EM Equity Question

    Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.

    2
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    Gavekal Research

    One Certainty In An Uncertain World

    In an uncertain world, in which Brexit, the US presidential elections, the future of the eurozone, are all strewn with wild cards whose potential impact is impossible to quantify, investors are left grasping for certainties. One is that whatever happens in the near term, the European Central Bank will continue to buy financial assets, including corporate debt.

    0
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    The Way Ahead For Italian Banks

    On Friday, the European Banking Authority will publish the results of its 2016 stress tests. Although 51 banks from across the European Union have been tested, attention will focus most closely on the results of the five Italian banks covered. With Italy’s banking system widely identified as the most likely locus of a new eurozone crisis, bankers, politicians and investors are all hoping for the “best” likely result. This would see all the banks...

    2
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    Gavekal Research

    The Constraints Of ECB Stimulus

    Already fragile, eurozone confidence has taken a further beating in the last four weeks. In one of the first data releases since last month’s Brexit vote, the ZEW index of German economic sentiment plunged to -6.8 yesterday from 19.2 in June, its steepest fall since 2012. With growth in the eurozone’s principal economic driver likely to soften as confidence deteriorates, expectations are mounting that the European Central Bank will respond by...

    0
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    Gavekal Research

    Why Brexit Still May Not Happen

    With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.

    8
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    Gavekal Research

    The Post-Brexit Rally: Head Fake Or Game-Changer?

    Let’s face it, few expected the rally in global risk assets of the past ten days. Even investors who, like Charles, believed that Brexit was a fundamentally positive development did not expect positivity to erupt quite so suddenly. Yet, here we are, with the Nikkei up 10% since its post-Brexit low, the S&P 500 breaking out to new highs and the Shanghai benchmark above 3,000. Will it last?

    3
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    Gavekal Research

    A Fundamental Assault On Freedom

    Of all basic freedoms, one of the most fundamental of all is the freedom of the individual to organize his or her relationship with time. The way we order our affairs with respect to the all too brief time allocated to us on this earth is a profound right that we all should be allowed to exercise unhindered. In short, everyone should be free to choose whether to be an ant or a grasshopper.

    10
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    Gavekal Research

    Sterling’s Automatic Stabilizer

    As international investors question the ability of a post-Brexit UK to attract the capital inflows needed to finance its hefty current account deficit, the pound is tumbling. Yesterday cable briefly dipped below US$1.28, its lowest since the summer of 1985 just ahead of the Plaza Accord to weaken the super-strong US dollar. And many analysts believe the pound’s fall has further to run, with several houses targeting exchange rates of US$1.20, US$...

    1
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    Gavekal Research

    Can The Russian Bear Turn Into A Bull?

    This month Russia’s Sukhoi Civil Aircraft Company delivered two 100-seater passenger airplanes to the regional Irish carrier CityJet, and has orders for 13 more over the next year. The news caught our eye as it is the first time the Russian plane maker has broken into the European aviation market. As economists rather than aviation experts, it got us wondering whether Russia is finally curing itself of a decade-long bout of “Dutch disease” as...

    1
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    Gavekal Research

    The Options For Italy

    In the wake of the Brexit vote, investors fearful of contagion have woken to the slow-burn banking crisis in Italy. It should have been news to no one that Italy’s banks are sitting on non-performing loans. Yet with the sector index down -30%, banks are suddenly front and center in investors’ minds as the next source of European uncertainty.

    4
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    Gavekal Research

    The Italian Problem

    The British were recently asked if they wanted to leave the European Union and to the establishment’s horror, they chose to do just that. Italy will host Europe’s next big referendum in November with Prime Minister Matteo Renzi threatening to resign if his package of constitutional reforms isnot passed. Such a dénouement in Europe’s most indebted big economy would trigger a political crisis and require fresh elections. The issue with referendums...

    3
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    Gavekal Research

    Positioning For Uncertain Times

    Regular readers will know that Gavekal is a broad church. And while the church choir only occasionally sings in perfect unison, the different singers can often hit harmonies that are all the more powerful for being unexpected. This may be one of those occasions. Yesterday, Anatole, Charles and Louis took part in a conference call in which they laid out their different views of Brexit and what it will mean for the economy and markets of the UK,...

    1
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    Gavekal Research

    Towards A Fiscal Union By Stealth

    Unlike most fish, sharks possess no swim bladder, which means they rely on dynamic lift to maintain their buoyancy. If they stop moving forwards, they sink. In that much, at least, Europe resembles a shark. Following the UK’s Brexit vote, if the EU does not press forward with closer union, it risks sinking under the weight of the forces dragging it into the abyss.

    2
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