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Gavekal Research
Anatole Kaletsky
Aug 26th 2019
Europe’s Victimhood Culture
The biggest threat to world economic growth today is not the US-China trade war, but German exceptionalism. Even as Germany has suffered the greatest growth downgrades of any major economy, its politicians have obstinately rejected any Keynesian fiscal expansion. Now calls are mounting for a policy U-turn, but Anatole isn’t holding his breath.
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Gavekal Research
Louis Gave
Aug 23rd 2019
Making Biarritz Great Again
Some readers may know that my family is the majority shareholder in Biarritz Olympique Pays Basque, one of France’s oldest rugby clubs. Through this connection, I have had a front-row seat to the organization of the upcoming G7 meeting to be held in Biarritz over the next three days. When the city was chosen, I naively thought this was good news.
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Gavekal Research
Louis Gave
Aug 23rd 2019
Video: The Anatomy Of The August Panic
As more and more government bonds around the world slide into negative yield, investors can draw one of two conclusions: either the world faces an economic meltdown, or there is a buying panic in safe assets. But although there is indeed a synchronous global slowdown in growth, Louis favors the latter explanation.
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Gavekal Research
Nick Andrews
Aug 22nd 2019
Germany’s Fiscal Firepower
Uniquely among the world’s big economies, Germany runs a budget surplus, in accordance with the “debt brake” written into its constitution following the 2008-09 financial crisis. This means Berlin could, in theory, deploy considerable fiscal firepower even within the current rules, and a great deal more if it chose to bend or rewrite them.
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Gavekal Research
Udith Sikand, Tom Miller
Aug 22nd 2019
India Macro Update: Hardly A Growth Agenda
India’s economy is weak across the board, weighed down by lackluster investment, anemic consumption and soft external demand. Deep reforms are needed to unlock the country’s economic potential. In this quarterly report, Udith and Tom offer a check-in on India’s growth outlook, explain why equities may be de-rated further and worry about the bond rally fizzling out.
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Gavekal Research
Charles Gave
Aug 21st 2019
German Banks And The Dollar
I am certainly no technical analyst, but I do have a good memory. The story of major financial crises can be told with reference to the US dollar’s movements against the euro (and its antecedents). It now looks to have reached a significant juncture, especially with Italy moving toward another period of political instability.
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Gavekal Dragonomics
Ernan Cui
Aug 21st 2019
Consumer Spending Growth Grinds Lower
With exports and domestic investment both weakening, China’s government hopes that consumer spending will support growth. The bad news is that all indicators of consumer spending are still softening. With a deteriorating job market weighing on household income Chinese consumer spending is set to weaken further over the coming quarters.
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Gavekal Research
Louis Gave
Aug 20th 2019
The End Of The Panic
In almost three weeks since the beginning of August, gold is up 5.9% while investors in 10-year US treasuries have gained 4.2%. This is unusual. As Charles has highlighted, the two “anti-fragile” assets of choice seldom skyrocket simultaneously, so markets have been in full-blown panic mode. But what were markets panicking about, and what could boost confidence once again?
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Gavekal Dragonomics
Thomas Gatley
Aug 20th 2019
Starvation Rations For Private-Sector Borrowers
After a brief respite earlier in the year, China’s private sector is once again facing a credit squeeze. The PBOC’s announcement over the weekend of a change in the calculation methodology for the loan prime rate is likely to lower the cost of corporate loans, but it does not make it any easier for private firms to get finance.
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Gavekal Research
Tan Kai Xian
Aug 19th 2019
The Diminishing Market Impact Of Tariffs
After the US imposed its first major round of tariffs on Chinese goods last September, the S&P 500 sold off by -20%. After the second round went into force, it fell -6.8%. And since President Trump announced a third round, it has sold off by -6.1%. It seems each successive escalation in the trade war is having a smaller impact on the US stock market.
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Gavekal Research
Anatole Kaletsky
Aug 19th 2019
When The World Goes To Hell
Anatole has previously argued that the correlation between inverted yield curves and recessions has very little predictive significance. In this piece he updates that view to argue that inverted yield curves have no predictive significance whatsoever. For this reason, he thinks that equity investors have gotten their reaction to recent developments about right, while bond investors are all in a muddle.
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Gavekal Research
Simon Pritchard
Aug 16th 2019
Troops On The Border
Extreme nervousness in global markets can be attributed to a synchronous weakening of growth that has been reinforced by soft data out of Germany and China. This is also a juncture when commentators seem to have concluded that pent up stresses in the global trading and security system have reached a tipping point. On top of these secular worries is the terror that China is about to have a “Tiananmen moment” by violently crushing the two month...
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Gavekal Research
Charles Gave
Aug 15th 2019
Panic Stations
I always try to be a rules-driven investor. And when the US stock market is down -3% in a day, taking it to -6% from its peak in three weeks, when 10-year US treasury yields have halved in nine months to just 1.55%, and when gold is up 20% in three months, it is a good time to review those rules to see what they can tell me. The answer is: quite a lot.
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Gavekal Research
Louis Gave
Aug 14th 2019
Lessons From The Argentine Shock
In US dollar terms, Argentina's equity benchmark on Monday fell -48% in a one-day move. The -24% drop in long-dated US dollar-denominated Argentine bonds, a -17% drop in the currency, or the -38% fall in the local equity index will cause pain for certain macro players and dedicated emerging market funds. It should also cause us to ponder a number of questions.
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Gavekal Dragonomics
Thomas Gatley
Aug 14th 2019
The Slowdown Continues
After a end-of-quarter bounce in June, China’s economy resumed its gradual downward course in July, with industrial production, fixed investment, housing starts, retail sales and credit growth all slowing. The bright spots were a surprising pick up in exports, and housing sales, which reversed three months of declines with a modest gain.
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Gavekal Research
Louis Gave
Aug 14th 2019
The Surge In Anti-Fragile Assets
The latest round of data releases appears to confirm fears that the world is facing another synchronous global downturn. If so, it will be different from other slowdowns, in that it will not have been caused by rising interest rates or higher energy prices. What’s more, it will be setting in when there is little prospect of a globally coordinated response, when monetary policy appears to have lost traction, and when asset prices are looking...
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Gavekal Research
Charles Gave
Aug 13th 2019
Joining The US Recession Camp
To listen to current commentary, you would think that US capitalism faced a Marxist end-of-times reckoning. Hence, it is noteworthy that the share of sales going to profits is now falling, while that going to labor is rising. Yet the latest US GDP report is still alarming for what it tells us about the state of the economy.
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Gavekal Research
Louis Gave
Aug 13th 2019
Hong Kong Q&A (Part II)
The success of Hong Kong’s protesters in shutting down the city’s airport on Monday, talk from Beijing of “terrorism”, and the apparent massing of mainland paramilitary forces across the border from Hong Kong have led to a deluge of questions from clients about what is likely to happen next, and the potential investment implications. In this paper, Louis attempts answers some of the most frequent questions.
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Gavekal Dragonomics
Dan Wang
Aug 13th 2019
The Rising Risks For Chinese Firms
The outcome of US-China trade talks is uncertain, but one thing is clear. Chinese companies, their customers and suppliers, faced increased risks of US American sanctions. Hardliners in the US national security establishment are pressing ahead with an “all-of-government” strategy to constrain China’s technological and financial clout. This will continue regardless of the outcome of trade talks.
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Gavekal Research
Vincent Tsui
Aug 12th 2019
Asian Currencies Remain A Shock Absorber
It has often been said that when the US sneezes the rest of the world catches a cold. In Asia, a similar link exists between the behemoth China and other regional economies. Hence when Beijing unexpectedly let the renminbi weaken through CNY7.00 to the US dollar last Monday regional currencies fell by 1.6% in the following five days. They could fall more, however there is unlikely to be a broader contagion to regional asset markets. Asia’s solid...
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Gavekal Research
Arthur Kroeber
Aug 09th 2019
A Trade Equilibrium Of Sorts
After a week of trade war scares, things have settled down into an equilibrium that is uneasy, but likely to last several weeks. The central question now is whether the new tariff on US$300bn of Chinese exports to the US will go into effect on September 1, or if Trump’s team will find some graceful way to back down from that threat.
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Gavekal Research
Nick Andrews
Aug 08th 2019
What Germany Means For Europe
Even before the US-China trade war escalated last week, Europe stood on shaky ground. We learnt yesterday that German industrial production for June fell -1.5%. Europe’s largest economy faces cyclical and structural challenges, and the question is whether it takes its neighbors down with it.
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Gavekal Research
Charles Gave
Aug 07th 2019
The Death Spiral Of Eurozone Banks
For months Charles has told anyone who will listen that the real threat to global markets is the slow-motion implosion of the eurozone’s banking system. Each time the region's equity has hit a critical threshold an intervention has caused it to bounce off and delay the reckoning. The size of these rebounds has waned and this time there may be no respite.
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Gavekal Research
Arthur Kroeber
Aug 06th 2019
The Renminbi, Manipulation And The Trade War
Monday’s actions on the Chinese currency—Beijing’s decision to let the renminbi’s exchange rate weaken past CNY7.00 to the US dollar, and Washington’s decision to label China a currency manipulator—signal that the US and China are close to throwing in the towel on a trade deal. Trade war escalation should now be the base case.
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Gavekal Research
Tan Kai Xian
Aug 05th 2019
The Long Term Impact Of Trump’s Latest Tariffs
Aftershocks from Donald Trump’s August 1 tweets promising new tariffs on US imports from China continued to reverberate through Asian markets on Monday morning. Most notably, China’s yuan fell by some -1.3%, with the USD-CNY exchange rate breezing unimpeded by the Chinese authorities through the CNY7.00 to the US dollar mark for the first time since early 2008. Equity markets in the region were also hard hit, with Japan down -2% and Hong Kong...
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Gavekal Dragonomics
Rosealea Yao
Aug 05th 2019
The Risks To Steel Prices
China’s government is once again going after pollution from the steel industry, raising the risk of more policy-induced spikes in steel prices. While forced shutdowns to ensure blue skies are on the way, Rosealea argues that the bigger risk to steel prices is on the downside, due to weakening construction activity and cautious housing policy.
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Gavekal Research
Louis Gave
Aug 05th 2019
The Renminbi Devaluation’s Fork In The Road
Following the surprise renminbi devaluation of August 2015 policymakers in the world’s major financial powers acted to calm markets in what came to be known as the “Shanghai Agreement” of February 2016. Since then, currency markets have broadly been one big yawn, with little volatility and few opportunities for macro traders to make meaningful money. Is that situation now changing?
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Gavekal Research
Charles Gave
Aug 02nd 2019
What Sterling’s Move Tells Us
The sterling exchange rate is going down and the usual suspects say this is bad news. But the exchange rate is merely a price that helps allocate capital between the economy’s internal and external sectors, and so set the purchasing power of rentiers and entrepreneurs. Entrepreneurs do best when the currency is undervalued, while rentiers and consumers win out when it is overvalued.
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Gavekal Research
Tan Kai Xian, Will Denyer
Aug 02nd 2019
Strategy Monthly: Focus On The Fed, Not On US Tariff Threats
Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.
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Gavekal Research
Will Denyer
Aug 01st 2019
What The Early End Of QT Means
As expected, the Federal Reserve cut short term interest rates by 25bp on Wednesday. Less expected the Fed also halted its program of quantitative tightening, effective immediately. The decision to end the program early cancels an expected additional US$70bn contraction in the supply of money. This represents a significant easing.
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Gavekal Research
Nick Andrews
Aug 01st 2019
Video: Enter Boris
In the last week or so, the pound has fallen sharply to a two-and-a-half-year low against the US dollar. That’s all down to the new British government, headed by Boris Johnson, and his "do or die" Brexit campaign. But when a deal is finally struck, Britain’s strong economic fundamentals mean it is well placed for a boost in growth, along with the pound.
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Gavekal Research
Nick Andrews
Jul 31st 2019
Sterling’s Information Void
Since Boris Johnson became prime minister, the UK government’s promise of a “do or die” Brexit has caused sterling to slump -2.9% against the US dollar to about US$1.21. While the chances of Britain actually leaving the EU without a deal remain small, this outcome will remain unclear for some time. That presents risks, but great opportunities for those dealing in sterling.
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Gavekal Dragonomics
Andrew Batson
Jul 31st 2019
Read My Lips: No Housing Stimulus
The world’s major economies are seemingly united on the need for a fresh round of stimulus—except for China. And hopes for a more aggressive approach were dashed by the latest Politburo meeting, which declared that China would not boost the housing market to revive growth. In this piece, Andrew explains what’s behind China’s policy stance.
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Gavekal Research
Charles Gave
Jul 31st 2019
Darwin Or Keynes?
Keynes advised that at the outset of a recession, policymakers should drive down market interest rates in order to borrow from future demand. Today’s central bankers have adopted this approach as permanent policy. Unfortunately, permanent Keynesianism fatally interferes with the economic Darwinism of creative destruction that propels growth in a capitalist system—with dire consequences.
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Gavekal Research
Arthur Kroeber
Jul 30th 2019
Shanghai Talks Now A Sideshow
Trade talks between the US and China resume today after a three-month hiatus. This meeting may or may not pave the way for a deal in the next several months, but it no longer matters much. The global macro risk from the trade conflict has ebbed dramatically. What's important now is the dimensions of the decoupling between the world’s two biggest economies.
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Gavekal Research
Simon Pritchard
Jul 30th 2019
China’s Hong Kong Gambit
Following more violent protests in Hong Kong, Beijing reiterated its support for the city’s embattled chief executive in a first-ever press briefing on Hong Kong’s affairs. While the conflict shows no signs of resolution, the example set by Paris shows that Hong Kong can be both a dependable financial center and a hotbed of political dissent.
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Gavekal Research
Will Denyer
Jul 30th 2019
The Downward Revision In US Profits
Alongside last Friday’s second quarter US GDP release, the BEA issued revisions which wiped out almost all the increase in pre-tax corporate profits since the end of 2016, and much of the post-tax increase. The revisions can be attributed almost entirely to weak top-line growth and rising wage costs. The good news is that the revisions do not sound a recession warning.
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Gavekal Research
Will Denyer, Tan Kai Xian
Jul 29th 2019
Unpicking US 2Q GDP
Second quarter US GDP growth came in at 2.1%, slightly better than expectations. In itself, this headline figure is not especially illuminating. But dig deeper into the various components of 2Q growth, and there are reasons for moderate optimism about the trajectory of the US economy through the second half of 2019.
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Gavekal Dragonomics
Arthur Kroeber
Jul 29th 2019
From Trade War To Decoupling
Trade talks between the US and China will resume this week after a three-month hiatus, but how much do they really matter? In this piece, Arthur argues that the macro risk from the US-China trade conflict has ebbed to almost zero. What’s important now is to understand the dimensions of the decoupling between the world’s two biggest economies.
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Gavekal Research
Cedric Gemehl
Jul 26th 2019
The Most That ECB Easing Can Do
Mario Draghi fired no new bazooka on Thursday. But the European Central Bank president did signal the deployment of a whole arsenal of monetary weaponry in September. Such a package will cement the transition of the ECB under Draghi into a more active and more actively political institution, with a much more counter-cyclical policy stance.
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Gavekal Research
Vincent Tsui
Jul 25th 2019
The Effectiveness Of EM Rate Cuts
An easier Fed stance suggests that the US dollar is unlikely to trend significantly higher from its present levels. The prospect of limited US dollar upside frees Asian central banks from the necessity of defending their exchange rates, and gives them leeway to support growth by cutting interest rates. However, the impact of rate cuts on both growth and asset prices will vary among Asian EMs.
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Gavekal Dragonomics
Thomas Gatley
Jul 25th 2019
The Size Of State Subsidies
The US government alleges that “China provides massive, market-distorting subsidies,” particularly to state firms. But just how big are China’s subsidies to state-owned enterprises, and what kind of economic distortions do they create? This in-depth report quantifies three major types of direct and indirect subsidies, and explores their effects.
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Gavekal Research
Louis Gave
Jul 25th 2019
The Choice Confronting Investors
With US$13.5trn of bonds on negative yields, Germany’s sovereign curve in negative territory out to 20 years, and G7 yields lower than in the 2008 crisis, the euro crisis, or 2016, when the world expected China to collapse, there are two possibilities. Either the world is facing low growth and inflation forever, or the bond market is in the final phase of an almighty bubble.
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Gavekal Research
Nick Andrews
Jul 24th 2019
Healthchecking Boris Johnson’s Britain
On Wednesday, “colorful” former journalist, television comedian and London mayor Boris Johnson will achieve a long-held ambition when he moves into Number 10 Downing Street to replace the hapless Theresa May as the United Kingdom’s new prime minister. Judging from the headlines, Johnson is taking over an economy on the brink of a painful slowdown, if not already actually in recession.
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Gavekal Research
Tan Kai Xian
Jul 23rd 2019
The Future Of Big Tech
Big Tech is in the US government’s cross-hairs. Google, Facebook, Amazon and Apple face probes into their behavior, and legislation is in the works to clip their wings. The question for investors is: How serious will the stand-off with the government get and will a prolonged downturn in tech spark a broader decline in the US equity market?
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Gavekal Research
Will Denyer
Jul 23rd 2019
Fiscal Crisis Averted, At A Cost To Liquidity
On Monday, the White House and Congressional leaders reached a tentative agreement to raise US government spending caps and suspend the debt ceiling for two years. Assuming the deal is passed by Congress in the next few days, a fiscal crisis will be averted this year. But before investors breathe a sigh of relief and bet on a rally, it should be noted that one near term effect of the agreement could be an acute liquidity drain as the Treasury...
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Gavekal Research
Thomas Gatley
Jul 22nd 2019
STAR Is Born
Trading on the world's newest stock market board got off to a predictably volatile start on Monday, when Shanghai's STAR market opened for business. But while that was entirely foreseeable, the reaction of regulators will be less predictable, and will send important signals on the long-term liberalization of China’s stock markets.
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Gavekal Research
Louis Gave
Jul 19th 2019
La Garde Meurt Mais Ne Se Rend Pas
Surrounded at Waterloo and asked to lay down his arms, General Cambronne of Napoleon’s Imperial Guard replied: “La garde meurt mais ne se rend pas”. This translates as “The guard may die, but it does not surrender”. A saying that could apply to the new ECB head is: “The president’s term may end, but the institution does not yield to conventional monetary policies”.
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Gavekal Research
Vincent Tsui
Jul 19th 2019
Video: Korea's Coping Strategy
No other G20 economy is as exposed to global trade tensions as Korea. With its heavy dependence on semiconductor manufacturing, Korea has proved vulnerable both to the US-China economic cold war, and to long-running disputes between Seoul and Tokyo. As a result, exports have cratered and economists have slashed their Korean growth forecasts.
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Gavekal Research
Tan Kai Xian
Jul 18th 2019
Housing Points To Solid US Growth
US mortgage applications fell in the week ended July 12, compared with the week before. But do not be misled by the latest week-on-week decline in this high frequency data series. In year-on-year terms, mortgage applications for home purchases have been rising consistently since the beginning of 2019, pointing to a rise in housing construction over the coming months.
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