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E.g., 21-10-2021
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    Gavekal Dragonomics

    Huarong Comes Up For Air

    Huarong Asset Management announced in a press conference on Wednesday that it had reached a recapitalization agreement with government-backed investors. In this Quick Take, Wei and Xiaoxi explore the consequences for Huarong investors and the government’s wider battle against the implicit guarantee.

    0
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    Gavekal Research

    Housing’s Different Drivers

    High house prices may be making headlines in the US, but the homebuilding sector faces headwinds. In July, housing starts and building permit issuance for single family dwellings fell -1.7% month-on-month and -4.5%, respectively. Mortgage applications also fell, which points to weaker construction ahead (see chart below). A positive factor for US housing has been the recent decline in long-term treasury yields, yet there are good reasons to...

    0
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    Gavekal Research

    Asia’s Asset Quality Problem

    Economies with low vaccination rates across emerging Asia are tightening their restrictions on activity once again. So far, the economic and financial impact of the latest cycle of restrictions has been cushioned by exports and government support, but domestic demand remains depressed, private sector balance sheets have sustained damage and bank asset quality is deteriorating.

    0
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    Gavekal Research

    The Taper Is Coming

    In less than two weeks, Jay Powell will get up to make his speech at the annual Jackson Hole gathering of central bankers. Investors should position for a clear signal that in the coming months the US will begin to taper. It is possible, even likely, that the ever-cautious Federal Reserve chief may decide to delay a few weeks, perhaps until the conclusion of the Fed’s next policy meeting on September 22. But his signal is only a matter of time....

    3
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    Gavekal Dragonomics

    Loan Demand Becomes A Problem

    China’s restrictions on borrowing by the property sector and local governments are proving so effective that total demand for credit is weakening. It now looks like loan growth could undershoot official expectations in the remaining months of 2021, which is raising pressure on the PBOC to cut reserve requirements or policy rates.

    0
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    Gavekal Research

    Saigon, Mosul Or Suez?

    The images of US diplomats scrambling onto jets at Kabul airport, of Afghan refugees fleeing to Iran, Pakistan and Tajikistan, and of the Taliban entering Kabul with barely a shot fired are disturbing viewing. For investors, the question is which is the closest historical parallel. The flying helicopters and evacuated embassies recall Saigon in 1975. The speed of the humiliation evokes the 1956 Suez Crisis. And the images of the Taliban parading...

    7
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    Gavekal Dragonomics

    A Bumpy Slowdown

    Chinese economic data weakened across the board in July as disruptions caused by extreme weather exacerbated the country’s wider economic slowdown. In this report, the Dragonomics team explain why policymakers are expected to offer limited support in H2, support which will likely be insufficient to counteract the slowdown in exports and property.

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    Gavekal Research

    Where There Is A Risk Of A Wage-Price Spiral

    After the United Kingdom released data on Thursday showing GDP grew 4.8% quarter-on-quarter in the second quarter, markets are now pricing in a near-100% chance of a rate hike by mid-June next year. In the event, 2Q21 GDP growth was a shade below the Bank of England’s forecasts. And unlike the US, the UK’s output remains below its prepandemic baseline—by 4.4%. Nevertheless, because of a contraction in the UK’s pool of potential labor following...

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    Gavekal Research

    The Coming Decline In Earnings Growth

    After 453 of the S&P 500’s constituent companies have reported for the second quarter, aggregate earnings are up 99% year-on-year. Much of this jump is attributable to base effects; the second quarter of 2020 was when lockdowns hit hardest. But not all; even stripping out base effects, earnings growth has been strong. This growth is destined to fade over the second half, as the impact of economic reopening and government stimulus abates, and...

    0
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    Gavekal Dragonomics

    Don't Count On An Infrastructure Boost

    With China’s government sounding more worried about growth, hopes are rising that infrastructure spending will get a boost in coming months. In this piece, Wei explains why new funding for projects will be slow to arrive. More of a boost will come by early 2022, but the upside will still be modest by historical standards.

    0
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    Gavekal Research

    Understanding Asia’s New Monetary Order (Part II)

    Last month, Charles reviewed the efforts China has made to build an alternative to Asia’s US-dollar-based trading system. Today, he peers into the future, and looks at what China is doing, not just to offer an alternative to the US dollar or euro, but to build a new monetary order for Asia.

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    Gavekal Dragonomics

    The Delta Stress Test

    The rapid spread of the Delta variant across China is posing the biggest challenge yet to the government’s zero-tolerance policy toward Covid-19. In this report, Ernan explains why officials are confident in the policy and will likely keep it in place for the indefinite future—at the cost of depressed travel and consumer services.

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    Gavekal Research

    Video: India Backs Off Foreigner Tax

    India has been a tough place for multinationals to make big capital investments. Just this week the country’s highest court cleared the way for anti-trust action against Amazon and Walmart’s online retail platforms. However, a counter-trend move has been the government backing away from a retrospective tax that has been deployed against foreign investors.

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    Gavekal Research

    The Consequence Of The IPCC Report

    The quote I over-use most is probably Charlie Munger’s “show me the incentives and I will tell you the outcome.” With this in mind, it is no surprise that the IPCC report makes for a harrowing read. Whether you agree with its conclusions is neither here nor there. The key question is this: what will policymakers do, or want to be seen to do, in response?

    8
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    Gavekal Research

    The Gavekal V-Indicator And Tactical Asset Allocation

    The Gavekal velocity indicator has lately begun to send some potentially alarming signals. If in the next four weeks the daily indicator does not swing back to positive, then the three-month moving average will turn negative, raising a red flag. To explain why, it is first necessary to remind readers what our V-indicator is, and why it can be useful.

    2
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    Gavekal Research

    Building A High-Pressure Economy

    With the Biden administration’s US$550bn infrastructure bill all but clearing the Senate on Sunday, more stimulus is set to hit the US economy. Assuming the House of Representatives approves the plan, hard-hatted government contractors will soon be upgrading transport, broadband, water, and power facilities. The effect of this largely debt-funded spending will be to fuel growth in a US economy that already packs heat and faces a tightening labor...

    0
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    Gavekal Research

    The Yen As An Antifragile Asset

    Over the last 12 months, the world’s best-performing major currency has been the renminbi, returning 10.6% against the US dollar. The second best has been the British pound, up 6%. The worst has been the yen, which is down -4%. Over the last 24 months, the best-performing two currencies were again the pound and the renminbi, which both gained 15.1%. The worst, again, was the yen, down -3.4%.

    2
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    Gavekal Research

    Why Commodities Trump Politics

    On the eve of the pandemic, anger at stagnant incomes, high inequality and failing institutions spurred political protests across Latin America. Then came Covid-19. The political price of these events is coming due as left-wing leaders promise voters redistributive policies. For investors, the worry is of a lurch towards unsustainable public spending.

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    Gavekal Research

    Webinar: Global Investment Roundtable, August 2021

    The US growth outlook may be softening as the reopening boom weakens but equity markets seem relaxed as this outcome could delay the day when monetary stimulus is withdrawn. In our sign-off webinar for August, Gavekal partners asked if markets are right in their benign assessment, or whether a nasty surprise could emerge over the usually quiet summer months.

    0
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    Gavekal Research

    Video: A Healing US Labor Market

    Since the depths of the pandemic, the US labor market has recovered remarkably quickly. A key question for investors is how long strong job creation can be sustained before upward wage pressure returns. Ahead of Fridays’ payrolls report, Kai Xian outlines the key drivers of the US labor market.

    0
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    Gavekal Dragonomics

    Another Squeeze For Steelmakers

    Steel futures are on the rise again after several provinces announced plans to cut production. This might sound familiar: prices spiked in April and May following similar announcements. Rosealea writes that this time is different, as slowing construction activity in 2H21 should lower steel demand, making production easier to control.

    1
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    Gavekal Research

    The Sobering Signal In Lumber

    Back in May, an internet meme suggested that if you wanted to impress your date by taking them somewhere really expensive, you should go to a lumber yard. No longer, as the price of US two-by-four has since cratered by two-thirds. KX examines what commodity-price moves such as this can tell us about the broader economy.

    2
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    Gavekal Research

    The European Rotation

    As Europe returns towards something approaching normality, the eurozone is undergoing a rotation in economic leadership from goods to services. This rotation will go on through the second half of 2020.

    0
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    Gavekal Dragonomics

    Getting Kids Off Screens

    Digital gaming stocks tumbled yesterday after an editorial published in state media criticized the social consequences of video games. In this Quick Take, Ernan explains how regulators are tackling the perceived social ills of China’s youth, and why the dramatic market reaction underscores how sensitive investors have become to official guidance.

    0
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    Gavekal Dragonomics

    The Capital Markets Balancing Act

    The pace of financial decoupling between the US and China has quickened, with regulators in both countries tightening requirements for Chinese firms seeking to list in US markets. With the SEC likely to push ahead with the delisting of Chinese firms, Thomas writes that Chinese companies will rely on Hong Kong to access global capital.

    0
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    Gavekal Research

    Is The Reflationary Trade Back On?

    Forget the recent easing signals sent by the Chinese Politburo (and consequent drop in Chinese bond yields). Forget fears about the “Delta variant” giving Western central banks cover to keep extremely loose monetary policies even as inflation rises. Forget also the upcoming US stimulus bill, or the unleashing of European fiscal expansion. A positive signal that no one is yet talking about is the deflationary signal that could have materialized,...

    1
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    Gavekal Research

    Strategy Monthly: The Global Monetary Divergence

    As the world’s three big economies—the US, the eurozone and China—recover at different speeds from the shock of Covid, their monetary policy paths are diverging. This divergence will have major implications for bond investors and foreign exchange markets.

    0
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    Gavekal Research

    Risks To The Rally

    US equities have ground higher on strong demand, easy monetary policy, and unattractive bond yields. As long as this situation remains, investors should remain moderately overweight US equities. But they should also carefully monitor three key macro risks that could upend this fairly benign investing environment.

    0
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    Gavekal Research

    Breaking Down European Inflation

    Two weeks ago, after US consumer price data for June showed inflation had climbed to a 13-year high of 5.4%, my colleague Tan Kai Xian examined the three main drivers of this year’s rise in US inflation: base effects, supply-side constraints and demand-pull factors. He concluded that base effects have started to wear off and supply-side constraints will soon begin to ease. However, demand-pull factors are set to strengthen over the coming...

    0
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    Gavekal Research

    Webinar: Europe Caught Between Stools

    The US has taken an approach to the pandemic that involves reopening and “living with Covid”, whereas most East Asian economies are heading down the "zero-Covid" path. Europe seems to be caught between these two stools. Which way Europe turns could have a big impact on global growth, the value of the euro and key asset values.

    0
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    Gavekal Research

    When Will The Regulatory Rout End?

    Investors in China’s offshore-listed stocks have suffered multiple regulatory shocks. But with both onshore and Hong Kong equities now suffering, the crackdown is hitting domestic investors. Thomas explains why this will likely change the calculus for China’s policymakers, and why regulators are now likely to adopt a more constructive tone.

    2
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    Gavekal Research

    Video: The Semiconductor Crunch And Asian Exports

    Apple's Tim Cook warned investors that it would face microchip shortages in the second half of the year. Yet last week, Taiwan Manufacturing Semiconductor said that it saw an abatement of the great chip shortage. In this video interview, Vincent seeks to reconcile these two statements, and explain what it all means for Asian exports.

    0
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    Gavekal Research

    The Evergrande Drama Plays Out

    Investor confidence in Evergrande Group, China’s second-largest property developer, has been pummeled in recent weeks. While Evergrande has managed to put out the latest round of fires, and a collapse is unlikely, Rosealea argues in this piece that market volatility for developers will probably continue as financial regulators keep on squeezing.

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    Gavekal Research

    Strange Times And The Return Of TINA

    Fresh Covid-19 outbreaks, stunning Chinese regulatory actions and worries over global growth are causing US real bond yields to plumb new depths. So what is the humble investor to do? After all, historically tight US credit spreads means corporate credit is unattractive, while equities keep making new highs, pushing the S&P 500 index up 18% year-to-date. The answer may not be that complicated, as current growth data and market pricing...

    0
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    Gavekal Research

    Behind China’s Corporate Clampdown

    Private education is the latest sector to draw fire from the Chinese authorities. Their action has precipitated an abrupt slide in Hong Kong’s equity indexes as international investors bale out, alarmed at what they see as official caprice. It has also triggered a spate of questions about what lies behind the crackdown, and what the action means for the future of investing in China.

    9
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    Gavekal Dragonomics

    The WMP Countdown

    The clock is ticking for China’s banks to restructure the wealth-management products they have long used to evade financial regulations. Progress has been slow, but regulators have signaled they will not extend the end-2021 deadline again. However, as Xiaoxi argues in this piece, regulators will end up having to grant banks plenty of exceptions.

    5
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    Gavekal Research

    A Glass Less Full

    The eurozone’s economy has continued to pick up in July, with the flash composite PMI released on Friday beating expectations to hit a 21-year high. The manufacturing component continued to fire strongly, and notably the services index topped 60 for the first time since May 2006 as governments relaxed Covid restrictions and the summer tourist season got under way. However, after nine months in which eurozone data has consistently come in ahead...

    0
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    Gavekal Dragonomics

    Class Is Over For Tutoring Firms

    Policymakers launched a massive crackdown against Chinese education companies over the weekend that will likely mean the end of these companies as they are currently structured. In doing so, Ernan writes that China has signaled it is not afraid to simply shut down a large and profitable industry in order to achieve its social and political goals.

    14
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    Gavekal Research

    Low For Even Longer

    On Thursday, the European Central Bank’s decisionmakers sat down for their first monetary policy meeting since they ditched their longstanding inflation target of “below, but close to 2%” in favor of a new symmetrical target centered on 2%. That decision formalized the ECB’s shift away from its Bundesbank-style focus on price stability and enshrined its role as the guardian of eurozone financial stability.

    0
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    Gavekal Dragonomics

    Macro Update: Easing Into The Slowdown

    China's post-Covid boom peaked in H1 and the beginnings of a slowdown are now obvious. Although growth momentum is still quite solid, policymakers have moved pre-emptively to start a monetary easing cycle. In the latest edition of our regular chartbook, the Dragonomics team explains the outlook for the economy and markets.

    0
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    Gavekal Research

    Webinar: The State Of Global Growth

    The reflation trade has ebbed in recent weeks as investors have gotten more comfortable with the trajectory of US monetary policy and concerns have risen over the Delta variant of Covid disrupting economic opening. At the same time, China continues to crack down on its high-growth internet sector. Our team assessed the market implications of these trends.

    0
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    Gavekal Research

    Did The Equity Rotation And Bond Sell-Off End In May?

    The arrival of Covid-19 vaccines in November sparked a selloff in bonds and significant outperformance of value stocks, at least until mid-May. Having advised a bias to value stocks and keeping duration short in bond portfolios since last November Will was wrong-footed by the market moves of the past two months. Will the new trend last?

    2
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    Gavekal Research

    The Fiscal Effect Of Zero Covid

    As a resource-rich economy, Malaysia has been buoyed by strong commodity and energy prices, yet the effect of the pandemic has been to create an unstable political situation. The governing coalition fell apart on July 8 and a new one has not been formed. Ordinarily, the way out of such a parliamentary impasse would be for an election to be held, yet with the country in a fresh lockdown due to surging Covid-19 cases, that will be difficult.

    0
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    Gavekal Research

    Video: The Debt Ceiling Is Back

    After a two-year suspension, the US debt ceiling will soon be reimposed at current levels. Official estimates suggest that the Treasury can delay defaulting on its debt for three to four months. That is shorter than the five months the Treasury was able to delay during a similar standoff over the debt ceiling in 2019. Ultimately, Congress should act and default will be avoided.

    0
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    Gavekal Research

    A High-Pressure Business Cycle

    The US economy may have suffered one of its biggest ever contractions last year, but at just two months, it was one of the shortest due to aggressive policy reactions that spurred an unlikely economic boom. A worry for investors is that late-cycle stresses now emerging cause this expansion to fade as quickly as it started.

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    Gavekal Research

    China’s Afghan Quandary

    For China, the only thing worse than having the United States Army on your border is not having it there at all. When the US completes its withdrawal from Afghanistan this summer, China will have to fill the ensuing power vacuum to stave off terrorism and Islamic extremism at home, as well as protect its Belt and Road Initiative investments.

    0
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    Gavekal Dragonomics

    The PBOC’s Pre-Emptive Strike

    China’s surprising decision this month to cut banks’ reserve requirement ratios has upended the consensus on its policy trajectory and sown confusion in the market. In this piece, Wei explains the move was neither a panicked attempt to jump-start growth, nor a minor technical adjustment, but a pre-emptive start to a different kind of easing cycle.

    2
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    Gavekal Research

    The World Becomes More Fragile

    In a July 2 paper, Didier Darcet explained how after seven months of being positive, the market reading from our Paris-run quant system had turned negative. The takeaway was that equity market volatility had “more than ever” become the indicator signaling a downturn. Watch any move in the Vix above 27 as a signal that US markets are entering the "tails" of the risk curve.

    3
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    Gavekal Research

    How Monopolies Behave

    The economy is simply energy transformed. Today, we have a situation where governments in the West are attempting to kill off energy derived from fossil fuels, to which end they are subsidizing new forms of energy. The trouble is that demand for energy is growing faster than the ability of these new forms of energy to meet it.

    3
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    Gavekal Dragonomics

    A Carbon Market's Slow Start

    China launched the world’s biggest carbon market last week to great fanfare. Unfortunately, Rosealea writes that it will not do much to slow China’s CO2 emissions growth, at least not initially. While the market's impact will be small at first, its architecture can be gradually strengthened to achieve more ambitious goals.

    0
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    Gavekal Research

    Rotate Back To Taiwan

    Korea and Taiwan have lately been the twin star performers among East Asia’s equity markets. Over the 12 months to the end of June, MSCI Korea returned 70% in US dollar terms, and Taiwan 69%. Both markets were supercharged by the strongest local export growth in decades. And while shipments were flattered by base effects, there was strong underlying support from the robust demand for East Asia’s exports as developed markets reopened. In addition...

    0
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    Gavekal Research

    Webinar: What's Behind China's Internet Crackdown?

    China's authorities have aggressively tightened regulation of the formerly free-wheeling internet sector. In this webinar, Gavekal RedTech principal Michael Clendenin joined Gavekal Dragonomics's Ernan Cui and Thomas Gatley to analyze the government's motives in the ever-widening crackdown, forecast the next regulatory moves and explain how investors can navigate the risks.

    0
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    Gavekal Research

    The Economic Impact Of Delta

    This week saw Gavekal writers address risks to the global reflation trade. Louis explored three reasons for the market shift: (i) the rise of the Delta Covid variant, (ii) tighter-than-expected policy settings in the US, and (iii) China’s tightening measures. My aim is to focus on risks posed by the first of those: another Covid shock to Western economies.

    4
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    Gavekal Research

    The China Piece Of The Puzzle

    On Monday, Louis identified three possible culprits for the rally in US treasuries, the consequent abrupt shift from value to growth, and the outperformance of US equities. Of these three, Chinese overtightening seemed the best explanation for what has unfolded in financial markets over the past couple of months. Louis explores what this could mean for investors.

    4
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    Gavekal Research

    Video: The IMF Weighs In

    Large emerging markets have managed through the pandemic decently well, yet the debilitating economic effects of Covid mean stresses are appearing among lower quality national borrowers. This is one reason that the International Monetary Fund is set to expand distribution of its "Special Drawing Rights" reserve-type asset by US$650bn.

    0
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    Gavekal Dragonomics

    A Manageable Decline

    Chinese economic data for June showed cyclical sectors beginning to decline from a strong peak, while consumption growth is still struggling to regain pre-Covid levels. In this Quick Take, the Dragonomics team explains why China seems on track for a manageable decline in H2.

    0
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    Gavekal Research

    Distributional Effects Of A Pandemic

    While business activity in India has rebounded to above 90% of its pre-pandemic level, the economic suffering caused by lockdowns remains acute. Small firms are struggling to survive, millions of households have fallen into poverty, inequality has worsened and employment levels have structurally declined. Yet none of this has shown up in stock benchmarks.

    0
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    Gavekal Dragonomics

    Data Security Is National Security

    With the dramatic punishment of ride-hailing platform Didi Chuxing immediately after its IPO, China’s government has opened a new front in its regulatory crackdown on internet companies: data security. In this piece, Ernan explains why regulators are escalating and what these new concerns mean for Chinese internet platforms.

    4
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    Gavekal Research

    Breaking Down US Inflation

    So have hopes that US price pressures are merely a transitory effect faded like a mirage on an Oregon highway? The higher-than-expected jump in June’s consumer price index to a 5.4% year-on-year gain certainly dented investors’ belief that US price pressures will prove fleeting. They are probably right in that view. For while some factors driving US prices higher will abate, new pressures are waiting in the wings. Therefore, in the medium term,...

    0
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    Gavekal Research

    Understanding Asia’s New Monetary Order

    China’s program to dedollarize Asia must overcome two sets of problems: the problems inherent in trade between countries, and problems related to the financial risks posed by the passage of time. In this paper, the first of a major two-part report, Charles examines the progress Asia has made towards replacing the dollar as a reliable means of exchange for intra-regional trade.

    2
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    Gavekal Research

    The Best Of Times, The Worst Of Times

    It is the best of times, it is the worst of times. July has seen the shares of the biggest US tech companies, including Apple, Amazon, Google and Facebook, advance to new record highs. At the same time, the legal and regulatory campaign to rein in Big Tech is reaching a new pitch of intensity.

    5
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    Gavekal Research

    Behind The Bond Market Rally: Delta, The Fed Or China?

    US treasury yields made a post-Covid crisis high of 1.74% on March 31. At the time, US consumer prices were rising at 2.6% a year and oil was at US$60 a barrel. Fast forward to today and US CPI is at 5% and West Texas Intermediate at US$72/bbl. Meanwhile, bond yields have declined to 1.3%. It is hard not to conclude that one of these prices is “wrong”.

    3
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    Gavekal Dragonomics

    Making The Implicit Guarantee Explicit

    To keep access to bond markets amid rising defaults, many of China’s financially stressed local governments are offering stronger support for their companies’ debts—making the implicit guarantee more explicit. This won’t stop all local government financing vehicles from defaulting, but it means the defaults may come from less obvious places.

    0
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    Gavekal Research

    Will Manic Depression Move From Bonds To Equities?

    The retreat of US bond yields over the past quarter was no surprise for Anatole, as he has argued for much of this year that both US policymakers and investors would ultimately look through the "inflation scare". A lower cost of money could cushion the inevitable decline in growth that will occur in 2H21, and the bubble in US growth stocks can keep inflating.

    7
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    Gavekal Research

    Is The Chinese Growth Sector Still Investable?

    First China’s regulators came for the fintech companies. Next, it was antitrust investigations into successful internet companies. Then it was a crackdown on private education. Now regulators’ ire has focused on ride-hailing platform Didi Chuxing. Has the specter of harsh and unpredictable regulation made China’s internet and other high-growth companies uninvestable?

    2
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    Gavekal Research

    Bye-Bye Buba

    The European Central Bank on Thursday jettisoned its longstanding inflation target of “below, but close to 2%” in favor of a symmetrical target centered around the 2% mark. The formal adoption of a symmetrical target is significant, because it acknowledges just how far the ECB has traveled from its origins as the institutional offspring of the Deutsche Bundesbank.

    1
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    Gavekal Research

    Webinar: China's Conflicting Pressures In The Second Half

    China is entering the second half of 2021 with its strong post-Covid economic momentum still intact, despite policymakers staying consistently hawkish on debt and property. In this webinar Wei He, Rosealea Yao and Thomas Gatley outlined how these conflicting pressures will play out over the rest of the year, and discussed the potential for an easing of the policy stance.

    0
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    Gavekal Research

    Not Quite A Wage-Price Spiral

    European companies are hiring again—or at least they would be if they could get the staff. The rebound in eurozone economic activity has fueled employers’ demand for labor. Having languished at about one standard deviation below its long term average through 4Q20 and 1Q21, the European Commission’s index of eurozone businesses’ hiring intentions has risen to over one standard deviation above its long-term average, as of end-June. The number of...

    0
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    Gavekal Dragonomics

    A Surprise Easing Signal

    China’s State Council issued a statement calling for “using monetary policy tools, including cuts in the reserve requirement ratio” to reduce financing costs for enterprises. In this Quick Take, Wei explains why policymakers are trying to lower corporate borrowing costs without pushing down interbank rates.

    0
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    Gavekal Research

    Video: How Brexit Britain Shapes Up

    Six months after the UK properly left the European Union, the shape of the emerging post-Brexit economy is becoming a little clearer. Despite distorting effects from the pandemic, the impact on trade from being outside the EU’s single market can be seen, arguments about the UK’s position as a manufacturing hub can be tested and the future shape of Britain’s once super-charged financial services sector is coming into focus. Nick Andrews reviews...

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    Demographics And Prices

    Starting in the early 1980s, the world became increasingly flush with people in their prime working and saving years. That trend, however, has largely run its course and may now be going into reverse. As a result, investors should consider what economic trends have demographic drivers, making them vulnerable to a structural shift occurring.

    9
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    The Year Of Policy Divergence

    A year into its recovery from the Covid-induced collapse of 2020, the world’s largest economy is stimulating final demand to an extent rarely seen before. Meanwhile, on the other side of the Pacific, the picture in the world’s second largest economy is starkly different. As a result, for the first time, broad money growth in the US is rapidly outpacing that occurring in China.

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    The Inflation Quandary

    Markets seem to be comforting themselves that incipient inflation is, as the Federal Reserve has argued, a transitory phenomenon. Louis is skeptical that this is the case. He sees no evidence of any deflationary shocks that could squeeze price pressure, while at the same time, Western policymakers are doing all in their power to pump up demand.

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    Opec Frays

    Last year, when Opec+ talks broke up without an agreement on setting production quotas, the oil price collapsed. On Monday, when Opec+ talks broke up without an agreement on setting production quotas, the oil price surged. The majority of market watchers see no inconsistency, but they are making some large assumptions, which deserve close scrutiny.

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    Gavekal Dragonomics

    Another Go At The Property Tax

    After two years of silence, the Chinese government has signaled it is making a new effort to implement a residential property tax by expanding local trials. In this report, Rosealea explains why, against a better economic backdrop and with less organized opposition, the property tax is likely to stick this time around.

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    The Impact Of Didi’s Smackdown

    Just two days after raising US$4.4bn from US investors, China’s largest ride-hailing platform, Didi Chuxing, has been placed under investigation by Chinese authorities and told to stop registering new users due to alleged violations in the handling of users’ data. Ernan and Thomas assess what this signals for the uncoupling of US and Chinese equity capital markets.

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    Webinar: Can Things Really Keep Getting Better?

    The US economy continues to break growth records as it reopens and other big regions may be set to go the same way, while Asia continues to prosper from a strong export outlook. The question is not whether the world economy slumps back into a funk, but whether growth expectations are now set too bullish.

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    Strategy Monthly: Dialing Down Expectations For US Growth

    Growth in the US economy is set to go from great to good. The easy pickings of releasing pent-up demand and re-employing idle workers are almost used up. Growth should stay above trend, but by a smaller margin. Investors should prepare for growth to undershoot expectations that are now too high.

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    Not Quite Vassal States

    "The best defense is a good offense" seems to be the mantra adopted by some emerging market central banks that have raised interest rates since the Federal Reserve began talking about a taper to its asset purchase program. This precautionary approach is at odds with the rhetoric from other EM central banks. So how to play this apparent bifurcation in responses?

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    Video: Can Italy Recover?

    In response to the Covid economic shock, the European Union has vowed to adopt more expansive fiscal responses and limited mutualization of national debts. The country where this approach will fall, or rise is Italy. In this interview, Nick offers a view on whether it will be enough for Italy to mount a comeback.

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    A Killer Wave In The Nasdaq Bubble?

    It’s hardly surprising that stock markets are hitting new records. The inflation panic has subsided and bond yields have retreated Therefore, the immediate risk for investors is not a meltdown in bonds and equities that was predicted by perma-bears in the second quarter. The real risk may be a melt-up in equities, especially in growth stocks, as the first quarter’s growth-to-value rotation reverses.

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    Asia’s ‘Heads I Win, Tails I Don’t Lose’

    It was less of a taper tantrum, more of a taper tizzy. In response to the US Federal Reserve’s first talk of policy normalization in mid-June, the DXY US dollar index rose 1.9% and the S&P GSCI commodity index fell -2.7%. These are not huge moves, but they are big enough to prompt nervous emerging market investors to look for “heads I win, tails I don’t lose” plays.

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    Gavekal Dragonomics

    A User's Guide To The Chinese Bond Market

    The expansion and opening of China’s onshore renminbi bond market is one of the biggest changes to the structure of global financial markets in recent years, one that investors are still grappling with. In this comprehensive 30-page DeepChina report, our analysts present a guide to the nature and functioning of this important market.

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    Cryptos’ Many Damocles’ Swords

    Since peaking in mid-April at US$63,500, bitcoin has almost halved in value, making a series of lower highs and lower lows . For such a high-beta asset, this roll-over is interesting given that risk assets like equities have powered on to new highs. So has the overall environment for cryptos materially changed?

    5
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    Gavekal Dragonomics

    Disciplining Deposit Rates

    China is changing the way bank deposit rate ceilings are calculated, the first such change in five years. In this piece, Xiaoxi explains how the change, which will flatten bank deposit yield curves, has some of the same effects as a deposit rate cut: it will reduce cost pressures on banks and widen their margins, although not dramatically.

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    The G7’s Rival To The Belt And Road

    With the launch of “Build Back Better World,” the world’s rich democracies want to take on China’s Belt and Road Initiative. The G7 sees the initiative as a chance to re-energize international development finance. The plan is worthy, but the nuts and bolts of providing such projects in poor countries suggests that China does not face serious competition.

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    The First To Normalize

    The Bank of Mexico last week joined a growing number of emerging-market central banks that have hiked policy rates this year. Developed markets, in contrast, have stayed dovish as they are not overly worried about inflation and fret about chocking off their recoveries. But there is a good chance that the BoE will be the first big Western central bank to normalize policy in 2022.

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    Webinar: Can Europe Normalize?

    In yesterday's webinar, Cedric and Nick assessed the risks and opportunities associated with Europe's economic reopening, the effectiveness of the new Recovery Fund backed by mutualized debt, and the signs heading into a new political season in which Euroskeptic parties stand to do well.

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    Peak US Growth

    The US economy has been on a tear and it could be assumed that a bipartisan Congressional deal to spend US$1.2rn on roads, bridges and tunnels would spur even more growth. Yet, surprising as it may seem, we may have seen the top of the US growth cycle as activity goes from great to good in the second half of this year.

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    Video: The US Housing Sector Rolls Over

    The US housing market has been booming for the past year, with prices setting a record-high in data released this week. However, a decline in affordability, coupled with the potential for higher mortgage rates, is weighing on demand and has started to force a shift from a buyer-led market to a renter-led market.

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    Gavekal Dragonomics

    No Need For Passports

    One of the most dramatic shifts within the global consumer market since Covid-19 has been the sudden termination of Chinese overseas tourism. In this report, Ernan explains why Chinese tourists will likely decide to remain grounded even as other countries open their doors, leaving households with extra money to deploy at home.

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    The Morphing Of European Political Risk

    On both sides of the Rhine, celebrations were afoot on Wednesday night after France and Germany managed to earn spots in the knockout phase of the Euro 2020 football tournament. But once a winner is finally decided on July 11, the citizens of both countries will be forced to focus some attention on politics. After a summer of fun, the specter is being raised of European political risk.

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    Gavekal Dragonomics

    Decarbonization Is An Industrial Problem

    How achievable are China’s targets of reaching peak carbon emissions before 2030 and a fully carbon-neutral economy by 2060? Rosealea writes that the unusually large share of heavy industry in China’s CO2 emissions will make the 2030 target difficult to achieve, while carbon neutrality will require a massive reorientation of China’s economy.

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    The Peril Facing Northern Europe’s Savings Industry

    Between 1966 and 2012 investors did better in German bonds than US equities on a total return and common currency basis. That changed in 2012, and Germany’s managed savings institutions are now in peril, along with those in other parts of Northern Europe. In this piece, Charles shows how much trouble these institutions face and offers a view on how this exercise concludes.

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    The Dollar’s Temporary Fillip

    Currency markets must process information on many factors impacting an economy and then judge how it stack ups against another economy, yet from time to time the focus switches to just one thing. The Fed's hawkish statement last week sparked a monomaniacal focus on the timing of a taper to asset purchases. Yet there are already signs that this unitary focus is waning.

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    Europe’s Battery Boom

    A few years ago, European carmakers and auto parts firms raised white flags and ceded the market for electric vehicle batteries to mostly Asian competitors. Today, they are back in the fight. If European companies’ development plans come to fruition, writes Cedric, their share of the continent’s manufacturing capacity will rise from 5% in 2020 to 67% by the middle of the decade.

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    Flabbergasted

    When you write in a language that you didn’t learn from your mother, it is easy to fall in love with new words and then overuse them. In the 1970’s, I came across “flabbergasted” and, truth be told, I ended up being flabbergasted in that decade rather more than I actually was. Today, however, I am again flabbergasted, but am fairly confident that it is for good reason.

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    Reasons To Buy The Commodity Dip

    After rising nearly 60% from its March 2020 trough, the Bloomberg commodity index fell -4.2% over the past week. This has given a headache to investors who had prepared their portfolios for imagined inflationary times by buying real assets like commodities. Do they now “buy the dip” in expectation of another leg up?

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    Video: The New Normal For Antitrust

    Earlier this week, outspoken “Big Tech” critic Lina Khan was named chair of the Federal Trade Commission after a bipartisan vote. In this interview, Yanmei assesses to what degree this signals a harder line on antitrust issues by the Biden administration, and whether the US’s big tech firms have reason to be worried.

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    Webinar: The Market Impact Of US Policymakers

    In yesterday’s webinar, our team of US analysts considered what the Federal Reserve's tentative moves to normalize monetary policy means for growth and asset values. They also offered updates on US fiscal policy and anti-trust developments.

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