Gavekal Research

Tom Holland

Mar 13th 2018

One of the longest awaited adjustments in financial markets may finally be about to happen. Last year, betting that Hong Kong dollar interest rates would rise to converge with US dollar rates was reckoned to be among the surest trades in world markets. Yet the convergence never happened. Over the last 12 months, one-month Hong Kong dollar Hibor has consistently traded at a discount to one-month US dollar Libor of more than 30bp. And since the...

Gavekal Research

Tan Kai Xian

Mar 12th 2018

Since early February, global markets have had a volatile ride. The big exception has been the US dollar, which has stayed stoically range-bound. This is odd considering the Federal Reserve’s fairly hawkish outlook for monetary policy and the fact that imposing tariffs on metal imports should lessen the US trade deficit. Not to pat ourselves on the back, but the general Gavekal view on the US dollar has in recent times been fairly bearish (see...

Gavekal Research

Cedric Gemehl

Mar 12th 2018

The result of this weekend’s Russian presidential election is not in doubt. But investors in Russia face considerable uncertainty. Despite monetary policy and exchange rate liberalization, Russia has made little progress towards the structural reforms needed to boost its potential growth rate above rock-bottom levels. Nevertheless, cyclical tailwinds mean there are still some attractive pockets of opportunity for international investors.

Gavekal Research

Arthur Kroeber

Mar 09th 2018

In the aftermath of the past week’s to-ing and fro-ing over steel and aluminum tariffs, there is one thing we can be certain of this year: we are going to see a lot more protectionist theatrics coming out of the White House. What is much less certain is how worried we should be.

Gavekal Dragonomics

Rosealea Yao

Mar 08th 2018

A property tax is back on the Chinese government’s agenda: after being postponed in 2017, the long-discussed tax was brought up again at this week’s legislative session. The draft law could come in 2018, with actual taxes being levied by late 2019 at the earliest. But Rosealea expects this to be largely a non-event for the property market.

Gavekal Research

Will Denyer, Tan Kai Xian

Mar 07th 2018

The last economic cycle in the US was marked by excesses in residential investment and a dearth of business investment, which proved negative for productivity growth. As the current cycle gets a pro-cyclical boost in its mature phase from last year’s tax reforms, that imbalance will be at least partially reversed.

Gavekal Research

Charles Gave

Mar 06th 2018

At Gavekal, we have no house view, but in recent weeks something of a united front has formed among my erudite colleagues on the subject of Europe and her politics. Just to be sure that clients don’t conclude that we have all imbibed the Brussels-dispensed Kool Aid, let me offer my take on the situation and the implication for financial asset values.

Gavekal Research

Anatole Kaletsky, Cedric Gemehl

Mar 05th 2018

Is it time for investors to finally forget about “political risk” in the eurozone? Judging by the weekend’s events in Germany and Italy the answer is an emphatic “Yes”. The big event was the overwhelming vote by Germany’s Social Democratic Party to participate in a “grand coalition” with the center-right. This means that Angela Merkel will be reappointed for a fourth term as chancellor. Thus Germany will have a stable government with no serious...

Gavekal Research

Tan Kai Xian

Mar 05th 2018

US president Donald Trump’s announcement last week of tariffs on imports of steel and aluminum are just the first salvo of a trade war aimed at reducing the US$566bn annual US trade deficit. Yet even far more extensive tariffs than those announced on Thursday will do nothing to narrow the US trade gap. As KX argues in this report, more powerful economic forces are working to widen the US trade and current account deficits over the coming...

Gavekal Research

Long Chen

Mar 02nd 2018

Scarcely a week goes by without word of some new regulatory crackdown on China’s financial services industry. After years of financial liberalization, runaway growth in the shadow banking market, and rampant regulatory arbitrage, the authorities are now moving to unify a fragmented regulatory regime and contain the risks posed by excessive leverage and complexity. In this video interview, Chen Long makes sense of the about-face and explains what...

Gavekal Research

Joyce Poon

Mar 01st 2018

The best performing currency in the world so far this year is... the Japanese yen. Over the first two months of 2018, the yen has climbed 5.5% against the US dollar, remaining well bid even as the US dollar itself has found support in recent days. At the same time, the Japanese equity market has taken a beating, falling -4.3% in local currency terms over the year to date. As a result, even though Japanese stocks are still up in US dollar terms...

Gavekal Research

Louis Gave

Feb 28th 2018

The foreign exchange market, I’ve often said, is a serial monogamist. There are multitudes of potential drivers out there. But the market likes to step out with just one at a time. Its relationships can last anywhere from a few quarters to a couple of years. But sooner or later, it gets bored and switches its affections. So, in 2005-07, the main driver was the growing US current account deficit and the perception that the US was flooding the...

Gavekal Research

Louis Gave

Feb 27th 2018

Few in the markets will be sorry to see the back of February. But as a tough month draws to a close, this seems a reasonable time to take stock and draw lessons for the future. It is perturbing that lesson Number One must be that there really was nowhere to hide. Geographical diversification served little purpose, as all markets fell and then rebounded in unison. The same held with sectors, for those that performed worst in 2017 (energy and...

Gavekal Research

Yanmei Xie

Feb 26th 2018

By removing term limits from his office of president, Xi Jinping has shown there are no constraints left on his political power. As he strengthens his grasp on the top of China’s political pyramid, he is also enforcing his will more effectively at the bottom. For better or for worse, he is moving China to a more centralized and top-down system.

Gavekal Research

Cedric Gemehl

Feb 23rd 2018

European growth was always going to soften at some point; the question is whether this week’s squishy data releases reflect a fizzling out of the upswing, or merely an inevitable maturing of the cycle. The fact that the deterioration unfolded during a market dislocation that did not originate in Europe certainly gives succor to skeptics who see the single currency area as the soft underbelly of the current global synchronized upturn.

Gavekal Research

Anatole Kaletsky

Feb 22nd 2018

Last Monday, I pointed to three reasons why the recent turmoil in global equities would probably prove nothing worse than a counter-trend “buy on dips” correction, rather than the start of a serious bear market. That's not to say that worries about inflation and overheating are unfounded. But investors are still quite relaxed about both growth and inflation, as evidenced by historically modest bond yields.

Gavekal Research

Udith Sikand

Feb 21st 2018

As most emerging equity markets have clawed back a good portion of the losses they suffered in early February’s risk-off, there has been one notable exception. Far from rebounding, Indian stocks have taken another leg down following revelations of a US$1.7bn fraud at Punjab National Bank, the country’s second-largest state-owned lender. The scale of the fraud—roughly twice the amount promised to the bank by the government in the first tranche of...

Gavekal Research

Tom Holland

Feb 20th 2018

It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.

Gavekal Research

Udith Sikand

Feb 19th 2018

On Thursday, my colleague Joyce Poon argued that strong global growth and favorable financial conditions should allow emerging markets to sustain their outperformance. In the immediate run-up to the recent global sell-off, Latin American markets like Brazil and Mexico had charged hardest on the back of higher commodity prices and an incipient global shift from growth stocks toward value plays. But once the dust settles and EMs get their mojo...

Gavekal Research

Nick Andrews

Feb 16th 2018

Last week, the Bank of England upped its UK growth forecast and signaled that interest rates may be raised harder and faster than expected. This week, Theresa May’s government maintained its muddled passage towards a European Union exit, which has increasingly fretful multinationals warning that Britain’s economy could be headed for the rocks. Even, if like me, you think the UK will secure an eventual squishy-type deal with the EU that involves...

Gavekal Research

Charles Gave, Didier Darcet

Feb 15th 2018

On Monday, in CSI Wall Street Anatole morphed into Sherlock Holmes to investigate the crime scene following the market correction. He concluded that: “There’s nothing to see here. Please move along.” And the markets promptly did. Over the past week, equities have rallied around the world while volatility has gradually ratcheted down. A few more weeks like the past one, and the market moves of late January and early February will quickly be...

Gavekal Research

Yanmei Xie

Feb 14th 2018

It has been a week of confusing signals from the Korean peninsula. Even as North Korea has paraded its missiles, and the US and its allies have sworn to exert “maximum pressure” against Kim Jong-Un’s rogue regime, both sides have hinted at their readiness to return to the negotiating table. Yanmei cuts through the fog to assess the future trajectory of North Korean event risk.

Gavekal Research

Anatole Kaletsky

Feb 12th 2018

Bear market massacre or harmless buy-the-dip correction? Financial investigators have spent the weekend sifting through, dismantling and reassembling dozens of clues to determine the true nature of the shocking crime committed on Wall Street last week, as stock prices suddenly went down instead of up. But amid the righteous indignation inspired by this offence against morality and natural law, possibly the most important forensic evidence has...

Gavekal Research

Louis Gave

Feb 09th 2018

“A week is a long time in politics”, Harold Wilson was said to have once quipped to a young aide. The former British prime minister should have tried working in the US equity market. In recent days, it has sometimes felt as if time stood still. So what should we make of stocks’ inability to mount a rally after they again closed on their lows?