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    Gavekal Research

    Symptoms Of Dysfunction

    If bank shares are the canary in the global economic coalmine, they are currently singing a very alarming tune. In Japan bank shares have cratered -10% since Friday’s decision by the central bank to move to negative interest rates, even though the new -0.1% rate will only apply on the margin to additional deposits at the Bank of Japan. Elsewhere, in Europe, the banking component of the Euro Stoxx index has slumped -16.8% year-to-date, while the...

    0
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    Gavekal Research

    The Gavekal Monthly: Enter Ursus Magnus?

    January was a hair raising month for investors with a deeply worrying combination of falling oil prices, plunging equities and soaring yields for sub investment grade debt. In this edition of the Gavekal Monthly we seek some answers to the “what next” question, kicking off with Charles and Anatole who take very different views on whether a bear market is upon us.

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    Gavekal Research

    The Bank Of Japan Surprises

    The Bank of Japan just got all European in its battle against deflationary forces by adopting a negative interest rate policy. By changing its main interest rate for the first time in five years the BoJ genuinely surprised the market; some form of easing was expected given the recent strength in the yen and growth worries, but only a week ago Governor Haruhiko Kuroda ruled out the negative rate option.

    18
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    Gavekal Research

    Learning To Love A Weak Ruble

    The oil price may have bounced in recent days and with it the ruble, but Russia’s financial situation looks increasingly perilous. The economy is struggling through a second year of recession and Russian corporates must roll over US$120bn of foreign currency debt by mid-2017. Moreover Russia’s central bank seems to have embraced a policy of benign neglect toward the ruble as it tries to preserve a reduced pile of foreign exchange reserves.

    0
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    Gavekal Research

    Anatomy Of The Bear

    I wish I shared Anatole’s degree of conviction. In yesterday’s Daily he set out his belief that the current sell-off in financial markets is not the start of “a structural ‘bear market’, still less a structural Ursus Magnus likely to last for many years” (see Is Wall Street In A ‘Bear Market’). I am not so sure. I suspect that what we are witnessing may indeed be the emergence of an Ursus Magnus, the sort of bear market so deep and prolonged...

    2
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    Gavekal Research

    Is Wall Street In A “Bear Market”?

    Charles has boldly defined a serious bear market as a downtrend in which investors who buy at the top do not recover their money for four years or more. By contrast, he dismissed a -15% to -20% decline lasting less than 18 months as a mere bear cub that could equally well be described as a “pause that refreshes”. In my view the present decline it looks rather more like “cub” than an Ursus Magnus.

    4
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    Gavekal Dragonomics

    Another Grim Year For Profits

    For Chinese industry, 2015 was a year of unrelieved pain—and there is little prospect of any turnaround in 2016. Although demand for consumer goods is solid, the heavy industry sector is just clinging on until the construction cycle picks up. Our base case is for a 1% decline in industrial profits this year.

    0
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    Gavekal Research

    Don’t Buy The BoJ Bluster

    Haruhiko Kuroda, the Bank of Japan Governor, has presided over a pick-up in domestic demand and seems loath to have it extinguished by a global growth scare. Last week he hinted that he was ready to do more, and subsequent press leaks point to a further expansion of his quantitative easing program. One reason to think a big bazooka may be rolled out at Thursday’s policy-setting meeting is that a month ago the BoJ mildly expanded its QE operation...

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    Gavekal Research

    Time To Choose, PBOC

    Some calm has returned to China’s exchange-rate market—but for how long? For the past two weeks, the renminbi’s value has been relatively stable against both the US dollar and its official trade-weighted basket. But questions about the future trajectory of the renminbi have not gone away. Despite the central bank’s massive recent interventions, many market participants view the current “peg to a basket” as a temporary tool that will, at some...

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  • Gavekal Research

    Who Is The Marginal Buyer?

    Notwithstanding yesterday’s equity market rally (carried over into the Asian morning), the behavior of risk assets over the past month begs the question of whether a big financial actor is seriously “sick”. The constant plunge in commodities, the relentless rise in spreads and an inability of all major equity markets to hold on to a rally suggests that someone, somewhere, is just “puking” a massive portfolio (as AIG did in 2008).

    3
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    Gavekal Research

    The Overlooked Risk In Italy

    What is the biggest threat to European stability this year? The continent’s migrant crisis? The chance that the British will vote in a referendum to leave the European Union? Or the danger of contagion from China’s slowing economy and fragile financial markets? All of these do pose risks, but it is possible that the greatest threat to Europe this year could come from a different quarter altogether: Italy’s banking sector. At first the danger...

    4
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    Gavekal Research

    Here Comes Daddy Bear

    For the last few months I have been concerned that a bear market was likely to unfold. It is my considered opinion that we are now on such a trajectory. Of course the next question has to be what kind of bear market, for history suggests that such episodes come in two distinct extremes.

    2
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    Gavekal Research

    The Debate Over Renminbi Policy

    One of the core tenets of Gavekal’s philosophy is that we embrace open debate. Rather than concealing the diversity of our analysis beneath a single suffocating “house view”, we strongly believe that conducting our —often animated—discussions about the big topics of the day out in the open adds value for our readers. And few of our recent debates have been as lively as the one over Beijing’s renminbi policy. Joyce’s view is that the Chinese...

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  • Gavekal Research

    Four Quadrants: The Growth Question

    Charles has been on a near 40 year quest to find a rules-based solution to the most basic of economic questions “what is the current situation?”. He has long used his Four Quadrants methodology which categorizes an economy as being in either an inflationary boom or bust, or alternatively a disinflationary boom or bust. In the first part of this series he proposed a framework to show whether the US was in the inflationary or disinflationary part...

    0
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    Gavekal Research

    No Need To Fear For The HK Dollar

    In times as volatile as these, a currency move of 0.8% in a week hardly sounds remarkable. But when the currency is the Hong Kong dollar, people sit up and pay attention. As sentiment towards China’s renminbi has turned deeply bearish over the last few weeks, the Hong Kong dollar has moved away from the strong side of its HKD7.75-7.85 convertibility band against the US currency. In early trading on Wednesday, the Hong Kong dollar reached HKD7....

    2
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    Gavekal Research

    Keep Calm And Rebalance Into Equities

    The investment environment has not fundamentally changed since December. Then as now, the situation neither justifies being “all in” nor “all out”. Since the economic situation is worsening, a balanced portfolio of some type makes sense—unless there's evidence of a looming US recession. In my view, that time has not yet come.

    3
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    Gavekal Dragonomics

    Two Speeds, Both Slower

    China’s “two-speed” economy coasted to a moderate slowdown in 2015, with rapid gains in services helping offset a downturn in industry. But industry will worsen further in 2016, and the recent strength in services will prove to be cyclical. We think this slowdown will be gradual, but are watching risks in the financial sector and the job market.

    0
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    Gavekal Dragonomics

    The Turning Point For Excess Capacity

    2015 saw historic declines in China’s output of coal and steel—which are far from over. Falling commodity prices have brought the excess-capacity sectors to a turning point, finally forcing them to cut output. More producers will cut in 2016, at a pace similar to or faster than in 2015; the government is talking tough but prefers a gradual process.

    2
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    Gavekal Research

    Looking For The Bright Side

    By most measures, the first two weeks of 2016 have been the worst-ever start of the year for risk assets. With the MSCI All-Countries index down nearly -20% from last May’s high, we are now in a global bear market.

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  • Gavekal Research

    The Oil Market Confusion

    Enough is enough. The oil price collapse that began in the autumn of 2014 may have hit rock-bottom, at least for the time being. Having stayed stubbornly bearish ever since the oil market’s transition from a Saudi monopoly to a normal competitive pricing regime (see Oil: Lower For Longer) it is appropriate to regularly review our assumptions. After the huge price moves of the past two weeks, this review now suggests turning neutral or even...

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