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E.g., 22-01-2022
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    Gavekal Research

    Asia’s Big Fiscal Shift

    The lesson Asian policymakers learnt from the 1997-98 financial crisis was the importance of self-reliance. In its aftermath, they deployed undervalued exchange rates to pursue export-led growth and secure big current account surpluses that gave central banks ample forex reserves. To cut their reliance on foreign capital for deficit financing, they limited both public spending and domestic demand. The effort ensured a stable macro environment...

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    Gavekal Research

    Accomplishing The Fed’s Mission

    Another week, another discourse on US inflation, this time triggered by the personal consumption expenditures index rising 3.6% year-over-year in April, the fastest gain since 2008. Some of that is base effects, but not all: since the Federal Reserve refined its 2% inflation target to an “average” 2% last August, the PCE index has risen at an annualized 3.5%. The point of the Fed’s change was to “make up” for misses and better anchor long-term...

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    Gavekal Research

    The Odds Of Oil Breaking Out On The Upside

    Since January, most commodity prices have ripped higher, with materials and energy among this year’s best performing sectors. So where do we go from here? Obviously, the price of energy marks the spot where current supply meets current demand. And when looking at oil prices today, there are both bullish and bearish arguments to be made on either side.

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    Gavekal Research

    Further Upside For Eurozone Equities

    Year-to-date, the MSCI EMU index has recorded a total return of 15% in US dollar terms. The MSCI US has managed only 12%. Go back to the beginning of November, when hopes for Covid vaccines began to boost markets, and the performance differential is even more pronounced. Eurozone equities have returned 44%, compared with 31% for US equities. The eurozone has outperformed even though it was late to start vaccinating and slow to bring vaccination...

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    Gavekal Research

    A Cooling Market For Cars and Houses

    With stimulus checks having been sent and the jobs market recovering, last month saw the biggest jump in US car sales for at least 35 years. Will Denyer and I have been bullish on autos (and for similar reasons, housing) for the last year. Yet just as the punch bowl fills up, it looks time to get more cautious.

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    Gavekal Research

    EMs And The Inflation Equation

    A defining reason to hold emerging market risk assets is their better growth prospects relative to more stable developed economies. Over the last year, this premise held true as pandemic-induced domestic economic weakness in emerging economies was offset by strong external demand. Yet as Europe and the US hurtle towards a full opening, EM economies’ relative growth prospects have dimmed, while inflation pressures threaten a possible Federal...

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    Gavekal Research

    No Reason To Reverse A Weak Dollar Call

    The US dollar is nearing the bottom of its trading range, so does it bounce back, or break lower? In 1Q21, the US’s rapid vaccination rollout and improving economic outlook spurred the dollar’s rebound. In early April KX argued that as other nations followed a similar path, the relative strength of these factors would wane. This has played out, and there are other reasons to fade the dollar.

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    Gavekal Research

    The Market Reaction If Inflation Fears Recede

    On Tuesday I wrote a Daily note arguing that the market anxiety about US inflation is overdone, which generated a strong response from clients and Gavekal colleagues, who almost unanimously disagreed with my view. We can now be fairly sure that markets are not discounting the scenario I described. With this in mind, let me suggest some investment ideas.

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    Gavekal Research

    Is This A Private Fight, Or Can Anyone Join In?

    The old rugby player in me cannot see a bar-fight without asking: “Is this a private altercation, or can anyone join in?” I feel much the same about the debate inside Gavekal about whether or not inflation is making a comeback. Here is my contribution to the brawl.

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    Gavekal Research

    Is It Gold’s Turn To Shine?

    Over the last year, the bubbles have just rolled on from one exciting asset to the next, with investors wondering which will follow. In this note, Louis explains why he thinks gold may be the next one.

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    Gavekal Research

    Not So Much Inflation, More Fiscal Dominance

    So far, the great inflation debate has centered on the United States. Europe has barely figured. That’s not surprising; although inflation and bond yields are both ticking higher in the eurozone, the levels are modest and the increases moderate compared with those in the US. Nevertheless, there is a debate in Europe concerning the European Central Bank’s policy priorities.

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    Gavekal Research

    The Data Against The Fed Stacks Up

    The US Federal Reserve prides itself on being “data dependent.” If it is truly data dependent, the Fed is going to find it increasingly difficult to justify its extremely easy monetary policy stance. The latest of the data points to stack up against it are professional forecasters’ inflation expectations, which the Fed has often lent weight to in the past. For the last two years, these have been subdued. Now—the last piece of the inflation...

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    Gavekal Research

    Heading For The Med

    “Sell in May and go away,” has long been a popular adage in Europe, a continent renowned for its predilection for long summer holidays by the Mediterranean. Last year, however, “sell in May” would have proved disastrous as an investment strategy. This year too investors should treat the old saw with circumspection.

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    Gavekal Research

    Hardly Transitory, But Not A Spiral

    After headline and core CPI readings hit multi-year highs for April, investors have inflation on their minds. The rise in US bond yields and continued fall in equities reflects fears that the Federal Reserve is behind the curve, and could be about to slam on the monetary brakes. My view is that these price pressures are far from transitory, but a spiral higher does not beckon.

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    Gavekal Research

    Where Will The Next Deflationary Shock Come From?

    The 1986 oil price crash, to an extent, fired the starting gun on 30 years of global deflation. As commodity prices collapsed, so did the Soviet Union, giving the West a deflationary peace dividend. By the early 1990s, Japan’s real estate and equity market busts threatened its banks. The rollout of the North American Free Trade Area and the 1995 “tequila crisis” helped make Mexico a competitive manufacturing hub. Soon after, the 1997-98 Asian...

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    Gavekal Research

    Playing The Inflation Rotation

    It seems wherever you look today, there are inflation signals. If the Federal Reserve is right, and the signaled burst of inflation proves transitory, then all will be well. The risk is that inflation proves stickier than policymakers expect. If so, Monday’s -2.6% sell-off in the Nasdaq is just a taste of a rotation that still has further to run.

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    Gavekal Research

    A Post-Brexit Britain

    Some long-term investors do seem to be worried that a breakup of the United Kingdom could add another element of uncertainty to what I described last year as the “triple whammy” of Brexit, Covid and the British Treasury’s surprising flirtation with tax increases and premature fiscal tightening. It now appears, however, that only one of these concerns is really justified.

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    Gavekal Research

    India Is Running Out Of Road

    After Mumbai and Delhi, Bengaluru is the latest big Indian city to face a second wave of Covid infections. India’s underfunded health system is collapsing, as we feared it could a year ago. Yet markets are shrugging off the crisis: equities are flat, the rupee resilient. Tom and Udith investigate whether this disconnect is likely to persist.

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    Gavekal Research

    The Changing State Of US Liquidity

    When it comes to creating and distributing US money, there are three main players: the Federal Reserve, the US Treasury and commercial banks. Recent events call for a status update on the prospects for money flows from each, and what it all means for the bond market.

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    Gavekal Research

    Fighting The Fed Over Wages

    Recent rollbacks of Covid restrictions in the US should spur consumer demand, adding to an inflationary brew. Most policymakers continue to claim such pricing pressure is “transitory”. Perhaps, but the employment cost index shows US wages having accelerated for the last two quarters and the balance of evidence points to this uptrend continuing.

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