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    Gavekal Research

    The UK’s Sweet Spot

    Is the UK economy running out of steam? Growth slowed to just 0.3% quarter-on-quarter in the first three months of this year. That was the slowest for more than two years, and a reminder that while businesses have employed more workers, headline productivity growth has all but stalled. The fear now is that with the tightening labor market pushing up wages, poor productivity will lead to slower real growth, making it harder for the UK to attract...

    0
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    Gavekal Dragonomics

    Macro Update: After Easing, A Limited Recovery

    In the latest quarterly chartbook, Chen Long summarizes the outlook for China’s growth and economic policies in a concise presentation. After a very weak start to 2015, the authorities stepped up their supportive policies. Housing sales are now growing again as a result, but the industrial sector is still weak, and the recovery has been marginal. But the fixes to some of the first half’s fiscal problems should offer more support to growth in the...

    3
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    Gavekal Research

    Buy India On Bank Reform

    In recent months India has offered investors incrementally bad news due to bad monsoon rains, the government suffering a series of political missteps and a tougher external financing environment as higher US interest rates are contemplated. Moreover, the gradual rise in the oil price has diminished the growth-boosting dividend that India won in the second half of last year. So it was pleasing to get some “good India” news yesterday with the...

    2
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    Gavekal Research

    A Bear Market, Or A Rotation?

    Last week’s violent sell off in Chinese A-shares inflicted punishing losses on mainland retail investors and prompted any number of skeptical international commentators to declare that mainland China’s stock markets were a bubble that had now burst. The Shanghai Composite Index fell 13% over the week, losing an eye-watering 6.4% on Friday alone to round off the worst week for Chinese equities since the financial crisis of 2008. With the index...

    0
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    Gavekal Research

    Hedging The Unknown

    As Athens and its creditors inch painfully towards a deal that should see the release of fresh bailout funds, the probability that Greece will be unceremoniously ejected from the eurozone is diminishing. Grexit has never been Gavekal’s core scenario, however I have long held the view that while the chances of a Greek exit may have been relatively small, the damage it would have inflicted on financial markets would have been disproportionately...

    5
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    Gavekal Research

    Why Athens Has No Choice

    The main actors in the Greek crisis seem happy to choreograph an ending with this week’s “last ditch” negotiations to be followed on Monday by a “final” summit of European Union leaders. Adding to the theatre, Greek Prime Minister Alexis Tsipras will today meet Vladimir Putin in St Petersburg, where talks will presumably focus on the basis for co-operation and financial support between the two nations in the event of Grexit. Our view remains...

    0
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    Gavekal Research

    Still A Lonely Power

    China, the political scientist David Shambaugh declared last year, is a “lonely power”—lacking close friends and possessing no allies. That is something that Xi Jinping’s “proactive” foreign policy aims to change. His New Silk Road vision—now officially termed the “Belt and Road Initiative”—is to forge a “community of shared destiny,” in which Asia’s prosperity is tied to China’s rise. Rather than building formal alliances, Beijing’s goal is to...

    0
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    Gavekal Research

    The Fed And Dollar Depreciation

    So no surprises. A slightly more dovish Federal Open Market Committee stuck to the script of future monetary policy moves being data dependent. Since the US central bank yesterday scaled back its 2015 GDP growth forecast to 1.8%-2%, the implication is that rate increases, even if they start in September, will be a gradual affair. Investors liked what they heard as this suggests that Goldilocks lives, and a “not-too-hot, not-too-cold” scenario...

    0
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    Gavekal Research

    Greek Default Would Trigger Regime Change, Not Grexit

    As Greece moves inexorably towards default, the big news from the markets is not contagion but the opposite—the remarkable lack of response in the euro exchange rate ($1.125 today compared to $1.123 the day before January’s Greek election) and sovereign bond spreads in the Club Med (BTP-bund spread today is 150bp, against 120bp on January 23). Is this just a case of investor complacency and wishful thinking, like the period prior to Lehman? Or...

    16
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    Gavekal Dragonomics

    China Update: Local Government Bond Issuance Takes Off

    From a standing start just one month ago, China’s local government bond market has leapt into life with remarkable vigor. Since mid-May, when Jiangsu became the first province to issue bonds under Beijing’s local government debt restructuring program, a further 16 provinces have also tapped the market, raising a total of RMB600bn.

    0
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    Gavekal Research

    Five Corners (June 17): Bond Market Shakeout

    Overview: Charles Gave argues that the lack of market-making capacity in the financial sector means that the next big market move could be highly disorderly. United States: 10-year Treasuries look overvalued on a fundamental basis, but don’t expect an immediate correction says Tan Kai Xian. Europe: German bond yields have had a roller coaster ride of late so François Chauchat checks in to reassess their valuation anchors. China: From a standing...

    0
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    Gavekal Research

    Yen In The Hands Of Foreigners

    Having traded in a tight range since late last year, the Japanese yen made a technical breakout last week, weakening beyond ¥125 to the dollar for the first time since 2002. While Bank of Japan governor Haruhiko Kuroda came out to jaw-bone against more falls, higher volatility is a worry for investors who have grown used to making Japanese equity gains in US dollar terms. We would stick with Japanese stocks which continue to benefit from strong...

    2
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    Gavekal Dragonomics

    Turning Cautious On Land Reform

    The Chinese leadership’s recent enthusiasm for “modern agriculture” featuring large, mechanized farms has waned in recent months, as abuses mount and efficiency gains fail to appear. The evolution of land reform policy is thus an excellent lesson in how reformist ambitions do not always survive an encounter with China’s messy reality.

    0
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    Gavekal Research

    Switch In Favor Of US Multinationals

    In recent weeks the US dollar has grown increasingly sensitive to changes in expectations for US interest rate hikes, with the currency’s DXY index fluctuating daily in response to every shift in sentiment about the precise timing of the US Federal Reserve’s first upward move. But while the exact date of the lift-off is crucial to the short term trajectory of the foreign exchange market, over the longer run the US dollar’s upside looks limited.

    4
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    Gavekal Research

    5C Overview: Efficiency, Capital And Bond Market Spreads

    In the “good old days” much of the capital deployed in financial markets was devoted to making markets work better. Until the mid-1980s investment banks were often partnerships whose capital was directly owned by the partners. On occasions when a disorderly market emerged that capital was “put to work”, sometimes for just a few minutes—profitability was very high. Such capital was often “owned” by a family such as the Rothschilds, Barings or...

    0
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    Gavekal Research

    5C United States: Treasury Yield Normalization

    The trigger for the recent jump in 10-year treasury yields from 1.9% to 2.4% was leveraged investors unwinding long positions on European government bonds. This is not surprising as a “deflating” eurozone was a key reason for last year’s decline in global bond yields. Today, the outlook has improved as the single currency area looks to be enjoying a modest recovery. Absent a Greek-inspired contagion, Europe is likely to be less of a factor...

    0
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    Gavekal Research

    5C Europe: A Quick Tour Of Bund Valuation Anchors

    With 10-year Bund yields collapsing to almost 0% and then surging to 1% in a few months, the German bond market seems to have lost its valuation anchor. The launch of a massive quantitative easing operation by the European Central Bank, and then the violent unwinding of positions by investors who had front-run this program explains most of these erratic moves. But, after the storm, are German bonds cheap or expensive? We make a quick tour of the...

    0
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    Gavekal Research

    5C China: Local Government Bond Issuance Takes Off

    From a standing start just one month ago, China’s local government bond market has leapt into life with remarkable vigor. Since mid-May, when Jiangsu became the first province to issue bonds under Beijing’s local government debt restructuring program, a further 16 provinces have also tapped the market, raising a total of RMB600bn. The rapid pace at which local governments are issuing bonds to pay down their short term debts means that Beijing’s...

    0
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    Gavekal Research

    5C Asia: Not The Taper Tantrum II

    The sell-off in developed market sovereign bonds over the last couple of months is uncomfortably reminiscent of the “taper tantrum” of two years ago. The triggers may have been different; in 2013 the sell-off was led by US treasuries, this time it was German bunds. Nevertheless, both occasions saw a 50bp rise in Global Bond Index yields in 40 or so trading days.

    0
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    Gavekal Research

    From Farce To Irrelevance

    The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe. The bad news is that Tsipras does not seem to understand this. To judge by Tsipras’ belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe. This is the...

    3
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