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    Gavekal Research

    Is The Whale Breaking Surface?

    Charles has often said that the impact of a market shock shows up with the same sort of delay as the effects of dynamite fishing. First the small fry float to the top, then the mid-size fish. Only later does the dead whale break surface. With that analogy in mind, Louis has long maintained that investors will not be able to call the end of the oil price slump with any confidence until they have seen major bankruptcies and/or consolidation among...

    4
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    Gavekal Research

    Energy Stocks, If Only As A Hedge

    A quick glance at our Gavekal TrackMacro application illustrates how the global equity environment remains benign: modest but accelerating growth, low inflation, solid corporate profits and low interest rates. In such an environment, why not load up on equities? Investors have clearly done just that in recent quarters. As one seasoned client put it in a recent meeting: “If central banks are not going to raise rates with German consumer...

    1
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    Gavekal Research

    Fade The Latest Commodity Rally

    China’s property market is once again running hotter than expected, pushing prices of iron, steel and coal up by 15%-40% over recent weeks. But the gradual downward trend in property has not changed. And with high prices and government intervention both stimulating more commodity supply, the potential for further price gains is limited.

    3
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    Gavekal Research

    Saudi, The Oil Price & Capital Markets

    It says a lot about the dynamics currently at work in the oil market that the king of Saudi Arabia yesterday promoted his firebrand young son to crown prince, yet the price of oil still fell -2.7%. The question now is whether Saudi will double down on its current policies in a fresh attempt to goose up the oil price, whether Riyadh will be forced by its rapidly eroding finances to change direction entirely and devalue the riyal, much as Russia...

    0
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    Gavekal Research

    Keeping It Simple

    Three prices have a disproportionate impact on global financial prices: the oil price, the price of the US dollar, and US interest rates. Often the rest is just noise. In the long term, it is shifts in these three prices that drive economic cycles and determine the performance of almost any investment strategy. Take this year as an example. The investment environment has been dominated by:

    1
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    Gavekal Dragonomics

    The Iron Ore Slump Nears Its End

    China’s iron ore price is now down by about a third from its peak in February. In this piece, Rosealea reassesses the market in light of this correction, and argues that the price is unlikely to stay substantially below US$60 per ton for long. That’s because domestic miners responding to low prices by cutting output, helping rebalance the market.

    1
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    Gavekal Dragonomics

    The Return Of Regulated Coal Prices

    Coal was the most volatile commodity price in China last year, but it has been remarkably stable in 2017. In this piece, Rosealea explains how the government has revived a contract system of regulating coal prices, in the place of campaigns to cut or raise coal output. Coal prices are thus likely to stay at their relatively high levels for longer.

    0
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    Gavekal Dragonomics

    The Great Corn Crash

    China’s “supply-side reform” measures have helped drive a recovery in prices of industrial commodities. In agricultural commodities, the name is the same, but the results are very different: the price of corn fell 44% from its peak after the government removed price supports. Now that prices have adjusted, quantities will follow: imports will fall.

    0
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    Gavekal Research

    The Upside Of The Commodity Downside

    Once again, commodity prices are taking a beating. Since Wednesday the price of Brent blend crude oil has slumped by 7%. Over the last two months copper has slipped 8%, and iron ore futures traded in China are down a precipitous 30%. Coming on top of data that showed the US economy grew by a meager annualized 0.7% in the first quarter, and the recent tightening in China’s credit conditions, the latest slide in commodity prices has been...

    2
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    Gavekal Research

    The Underperformance Of Energy Stocks

    Charles likes to say that good money management often involves taking a few key decisions and sitting on them for a decade. In 1982, for example, the avoidance of energy and material stocks ensured almost 10 years of outperformance. In 1990, avoiding Japan paid off for two decades. In 2000, sidestepping TMT and underweighting the US dollar worked for almost a decade. In 2006, avoiding financials also paid off for a decade, as did underweighting...

    0
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    Gavekal Research

    The Consequences Of Trump’s Syrian Strike

    In his 1992 book Give War a Chance, P.J. O’Rourke remarked that “wherever there’s injustice, oppression and suffering, America will show up six months late and bomb the country next to where it’s happening”. Now, in fairness to Donald Trump, the bombing of assorted Middle Eastern countries by the US armed forces did not just start this past weekend. Nonetheless, by launching his cruise missiles at a Syrian airbase, Trump has now waded into the...

    2
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    Gavekal Research

    The Future Of The US SPR

    While North Korea is sure to be a major topic at Donald Trump and Xi Jinping's meeting this weekend, bubbling under the surface will be America’s US$347bn bilateral trade deficit with China. Few observers believe the summit will lead to a meeting of minds over the deficit, but a couple of recent developments in the energy sector suggest one way the deficit could be reduced to the satisfaction of both Washington and Beijing.

    0
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    Gavekal Dragonomics

    A Shaky Foundation For Iron Ore

    Iron ore prices are still high, but for how much longer? Returning from a field trip, Rosealea is now more convinced prices will fall. A government campaign to close low-end steel producers is aggravating cyclical swings rather than changing the structure of the industry. As supply is now rising to meet demand, prices will come under pressure.

    2
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    Gavekal Research

    Hedges In A Bull Market

    It is hard to find an equity market anywhere that is not in bull market territory. This much is clear from a quick look at the Gavekal TrackMacro grid. Simply put, not a single country is now flashing red. You have to go back to the Spring of 2014 for such a benign global macro backdrop.

    0
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    Gavekal Research

    The Best Macro Trade Of 2017

    What has been the world’s most crowded macro trade of the year to date? Not buying dollars, shorting US bonds or selling French OATs or sterling. The most over-extended speculative position in the world by historic standards has been the bullish exposure to crude oil. This began to reverse last week, and the -7% correction in Brent could soon turn into an avalanche.

    0
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    Gavekal Dragonomics

    Picking Apart The Iron Ore Conundrum

    Is China’s continued rally in iron ore prices the result of benign structural change in the steel sector, or frenzied financial speculation? Rosealea and Arthur review the competing explanations, and find both have some merit. So while a lot has to go right to avoid an ore price crash, this correction could still take a while to materialize.

    2
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    Gavekal Dragonomics

    Brace For US-China Trade Conflict

    Is Donald Trump backing down from his threat to get tough on China trade? It might seem so: after three weeks of rapid policy moves, his promised anti-China trade action is still missing. But it will not stay missing for long. Some US move against China trade looks inevitable in coming months, though the costs will be high and the benefits unclear.

    0
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    Gavekal Research

    Points Of Agreement And Dissent

    Last week Louis laid out his roadmap for navigating financial markets in 2017. In this follow-up, Anatole picks up on five debating points, and details where and why he agrees or disagrees with Louis.

    2
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    Gavekal Research

    Drawing Meaning From 2016, And A Roadmap For 2017

    Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

    0
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    Gavekal Dragonomics

    After Reflation, Profits Still Decent

    The stimulus-driven rebound in housing sales and commodity prices lifted the profits of China’s industrial firms in 2016. With the cycle turning, profit growth is certain to weaken in 2017. But for most manufacturers—outside the volatile commodity complex—the end of reflation should see only a gradual slowdown and still decent profit growth.

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