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    Gavekal Research

    The Upside For Bund Yields

    Right now, it feels like a double blow for investors. It was no surprise that German GDP should have contracted in the fourth quarter. According to the national statistics agency, GDP could have shrunk by as much as -1% QoQ, as omicron worsened supply-side disruptions and high inflation, especially for energy, eroded real disposable incomes and squeezed demand. Meanwhile, the yield on 10-year bunds has climbed 33bp since mid-December to hit -0....

    0
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    Playing Emerging Markets In 2022

    It is a significant signal for emerging market investors that the one big market move on Wednesday’s news that US CPI inflation hit a year-on-year rate of 7% in December was a sell-off in the US dollar. There was nothing surprising about the CPI print itself, which was in line with expectations; US equity and bond markets took the release in their stride. However, the US currency sold off on the news, with the DXY falling by -0.6% and the US...

    3
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    Breakout Time... Again

    In early 2021 US bond yields charged higher, and oil and gold both looked poised to break out decisively to the upside. The underperformance of value stocks seemed to be coming to an end. Then two developments pulled the rug out from under the cyclical trade. Fast forward, and today we might be back in early 2021. Louis asks what could shock markets this time.

    1
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    Gavekal Research

    Four Reasons To Buy The Dip

    Is it time to buy the dip in global equities? One reason might be the absurdly panicky headlines that preceded Monday’s possible reversal of the global equity correction. But beyond the hysterical headlines, I can see four reasons to increase equity exposure, even though the S&P 500 is just -3% and the Nasdaq only -7% off their all-time highs.

    13
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    Gavekal Research

    The Labor Market, The Fed And Asset Prices

    The first week of January drove home the extent to which investors and the US Federal Reserve have both lost faith in the “transitory inflation” story. The US unemployment rate fell to 3.9% in December—tight by any standard. As a result, investors have concluded that the Fed cannot stay loose forever, and that tightening is likely sooner rather than later.

    5
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    Peak Inflation, Peak Rotation

    As investors reassessed the risk of central bank hawkishness, European equity markets took a hit on Thursday, with the MSCI EMU index falling -1.4% to wipe out almost all the gains made in the first three trading sessions of the year. The sell-off was not universal, however.

    0
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    Gavekal Research

    As January Goes

    We are only six days into the year, but most investors must hope that the adage “as January goes, so goes the year” does not hold true for 2022. After all, the S&P 500 is down -1.4% and the Nasdaq has shed -3.5%. And behind this pullback in the broader indexes, pain in the more speculative parts of the market is starting to add up. Since early November, the bitcoin price has fallen -36.5% and the Russell 2000 growth index is flirting with...

    3
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    Gavekal Research

    Validation For VIEs

    China’s policymakers have given foreign investors in Chinese internet firms an unexpected gift: regulatory validation for the variable-interest entity, a corporate structure which allows firms to skirt a prohibition on foreign investment. Thomas explains that while regulatory uncertainty remains for restricted sectors, a key risk has been removed.

    0
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    Gavekal Research

    Of Prices, Profits, Energy And Markets

    In various pieces over recent years, I have tried to show that most economic activity is nothing but energy transformed, and that economic value derives from "scarcity" or "efficiency". Further, US stock market returns can tell us a lot about "efficiency values" deployable in the future. These broad concepts can be tied together to assist in investment decisions.

    4
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    Gavekal Research

    US Equity Transitions

    Despite huge supply chain disruption, rising inflation and a more-hawkish-than-expected central bank, the S&P 500 index rose a whopping 27% last year and along the way suffered a maximum fall of -5%. Going into 2022, investors may conclude that US equities have hit “escape velocity” and nothing will spoil the rally.

    0
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    Gavekal Research

    Bring Out The Usual Suspects

    As we approach the end of 2021, two questions come to mind for next year: Will the US tighten in 2022, and if so, by how much? And will China ease policy in the face of its slowing economy, and if so, how? In addition to these two established founts of uncertainty, two new sources have reared their heads in recent days.

    2
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    Gavekal Research

    The European Inflation Split

    Europe is again being split along eastern and western lines. To the West, the European Central Bank is holding fast to its belief in the transitory inflation narrative, with Christine Lagarde barely acknowledging upside risks. Yet to the East, the CEE-3 countries—Hungary, the Czech Republic and Poland—are taking inflation as a serious threat. The Hungarian National Bank recently hiked interest rates for the seventh time in less than six months,...

    3
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    Gavekal Research

    Are Rock-Bottom Bond Yields ‘Irrational’?

    What has been the most surprising financial event of 2021? The 20% gain in equity prices, the 40% jump in oil prices and even the fivefold leap in US inflation may all have been bigger than expected, but they were at least directionally understandable consequences of the fastest growth in the world economy for 40 years. That explosive growth, in turn, was a predictable response to last year’s unprecedented monetary and fiscal stimuli, magnified...

    0
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    Gavekal Research

    A Tale Of Two Central Banks

    On Wednesday, the Bank of England ended its expansionary £895bn asset buying program, only to raise its key interest rate by 15bp a day later. In contrast, the European Central Bank stuck to its cautious script, saying it would buy bonds through 2022 and beyond if necessary. Of the two, the UK’s tightening approach’ looks most prone to a forced reversal.

    0
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    Never Mind The Fed Hawks

    Even as the Federal Reserve chairman went out of his way to sound hawkish on Wednesday, risk assets rallied. On the basis that truth often hides in plain sight, the most obvious explanation is that the Fed had well telegraphed an accelerated taper to its asset purchases from US$15bn a month to US$30bn. A faster wind-down to the quantitative easing program means the Fed will be unencumbered in hiking interest rates sooner, if needed. That is a...

    2
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    Gavekal Research

    The US Infrastructure Conundrum

    As the central bank pulls away the punch bowl and the fiscal authorities push for a boozy top-up to give the party fresh impetus, the US economy faces an odd moment. With inflation near a 40-year high, opposition to the Biden administration’s sprawling US$1.75trn “Build Back Better” bill is partly focused on its inflationary impact. Critics point to the White House’s infrastructure spending program, passed last month, as having already given an...

    0
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    Gavekal Research

    Missing The Forest For The Trees

    In these strange times, I have recently published a few pieces looking at money’s “reserve of value” function. Yet in preparing these papers, I came to realize that over the last decade I made the classic mistake of focusing too much on what was visible, and missing what was obscured.

    3
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    A Green Light For Onshore Chinese Equities

    Chinese officials are signaling a shift in policy to counter downward pressure on growth, a move which Thomas and Wei believe will set the stage for a rally in onshore equities through 1Q22. The main risk is that policymakers under-deliver on their new rhetoric of stability. Meanwhile, the outlook for offshore Chinese equities is more mixed.

    2
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    Gavekal Research

    Asia’s Manipulative Havens

    In early December, the US Treasury published its half-yearly report card on currency manipulation, in which it softened its criticism of offenders’ foreign exchange policies. When it comes to East Asia, the softening of US criticism is a sign that the Treasury is encouraged the targeted countries are intervening less heavily, allowing their currencies to appreciate.

    0
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    Gavekal Research

    Growth Stock Relative Performance

    In Monday’s Daily, I pondered the odd outperformance of US growth stocks at a time of upside inflationary surprises. A sharp-eyed client noted that this outperformance depended on the part of the market under review. In fact, the relative performance divergence between US large-cap growth stocks and US small-cap growth stocks is unprecedented.

    6
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    Gavekal Research

    Behind The Absence Of Asian Consumer Inflation

    At a time when headline inflation is running at 30-year highs in both the US and the eurozone, Asia stands out for its absence of abnormal consumer inflation. Now admittedly, emerging Asia is not uniform, yet it is fair to say that across the segment as a whole, consumer inflation is the dog that has failed to bark.This is not necessarily the benign picture it may appear.

    0
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    Gavekal Research

    A Cautious Easing

    China’s recent cut to its reserve-requirement ratio is another signal that policymakers are becoming more willing to ease policy to counter the sharp slowdown in growth. But will it be enough? Wei argues that, while positive for equities, the modest easing set to occur in 2022 will at best stabilize growth rather than drive a cyclical rebound.

    0
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    Gavekal Research

    What If Inflation Had Not Appeared?

    If inflation had stayed roughly at the level of the previous decade, one would have expected long-term bond yields to stay contained, large-cap US growth stocks to outperform and the US dollar to remain well bid. Yet, all this came to pass even as inflation soared to generational highs. So Louis asks: what would have happened if inflation hadn't soared?

    0
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    Gavekal Research

    Ripple Effects On The Supply Chain

    A year after a handful of auto manufacturers first began to complain about difficulties sourcing integrated circuits from component suppliers, the global semiconductor shortage has broadened to affect the sales outlook of high-end industry segments—such as premium smartphones—that until recently have remained largely immune. This is causing ripple effects far back along Asia’s hardware supply chains, which is bad news for the region’s export...

    0
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    Gavekal Research

    The Importance Of What Didn’t Occur

    Amid all the turmoil of the last week or so, the most significant market move may be one that didn’t happen. When news of omicron hit the wires markets saw sharp moves. Usually in times of uncertainty, the US dollar rises on a safe-haven bid. Last Friday that didn’t happen; the US dollar fell against most major currencies.

    0
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    Gavekal Research

    Trading Omicron

    Fear is stalking markets on concerns that the global economy could be hit by an Omicron Covid outbreak and the world’s central bank will not ride to the rescue. Comments by Jay Powell yesterday on a faster-than-planned taper to the Federal Reserve’s asset purchases added to the bad brew for risk assets. This sell-off reminds that despite recent calm conditions, highly-valued US equities are prone to sudden volatility. There are reasons to think...

    0
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    Gavekal Research

    The Phantom Menace

    Prices are rising around the world, but how do we know that all orders are real? If firms have responded to global supply congestion and long delivery times by ordering more than they need to meet demand, it is likely that some will end up not taking delivery of what is apparently due them.

    0
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    Gavekal Research

    The Economics Of Covid Divergence

    Even before omicron showed up, European governments had reacted to high Covid case loads with demand-sapping limits on travel and social activity. In the US, by contrast, most Covid restrictions continue to be focused on what can be generalized as the economy’s supply side. The betting must be that this divergence of approaches remains—and is even reinforced by omicron.

    0
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    Gavekal Research

    When Risk Appetite Returns

    Whenever a currency crisis engulfs an emerging economy, investors nervously look around for the next shoe to drop. After the meltdown this week in the Turkish lira—down -20% in November; -40% year-to-date—precedents from the Asian crisis of 1997-98 to the 2013 taper tantrum suggest contagion might be about to spread to infect the rest of the emerging currency complex. However, despite the broad strength of the US dollar and steep falls in a...

    3
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    Gavekal Research

    Houston, We Have A Problem

    Charles looks at global bond and equity markets, concluding that the combined effect of central bank policies and private sector indexation is creating a massive corner in the US dollar and US equities.The last time something similar happened was in late 1989, when Japanese equities made up more than half of MSCI World.

    11
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    Gavekal Research

    Biden’s Impotent Signaling

    Media pundits were quick to dismiss Joe Biden’s release of oil from the US Strategic Petroleum Reserve as a failure Tuesday, on the grounds that the price of crude oil promptly rose by 4%. They were harsh. Despite Tuesday’s rise, the price of WTI has actually fallen by around -7% over the last four weeks as the market priced in the prospect of an SPR draw.

    3
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    Gavekal Research

    Biden's Fed Picks

    President Joe Biden took the path of least resistance in nominating Jay Powell to serve a second term as Federal Reserve chair. It reinforces my view that macro policy will be driven more by changes in the economic data than changes in Fed leadership. At the sectoral level, these appointments should be positive for US bank stocks.

    0
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    Gavekal Research

    Tantrum, What Tantrum?

    As the Federal Reserve dials back its quantitative easing program, emerging market assets have come under selling pressure, much as they did in 2013. Yet, it would be wrong to see this as a “taper tantrum”. What cannot be disputed is that global bond markets have, in recent months, thrown a strop.

    0
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    Gavekal Research

    An Italian Renaissance?

    Visiting Gavekal clients in Italy this week for the first time in 18 months, I have been struck by the mood of sunny optimism that pervades the country’s financial community. Arriving there myself with a relatively upbeat view on Italy’s economic prospects, I was expecting at least a partial reality check from clients. But pushbacks were rare and half-hearted. Instead, stories of thriving new start-ups and returning Italian expatriates abounded...

    1
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    Gavekal Research

    Piling On The Misery

    Faced with a fourth wave of coronavirus infections, and in some places even a fifth, European Union governments are again tightening their public health restrictions. Clearly this cannot be good news for Europe’s near-term economic outlook. But how bad is it likely to be? A Covid misery index may provide a useful guide.

    0
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    Gavekal Research

    Making Sense Of Bond Market Moves

    The last month has seen a number of major shifts occur in the US treasury market which may well be leaving investors scratching their heads over how to interpret them, especially as some appear at first to be conflicting. On examination, however, the market is sending four clear messages. They are consistent with each other. But that does not mean they are all right.

    0
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    Gavekal Research

    Don’t Panic, But Do Be Wary

    On Monday, Anatole argued that Markets Are Right To Ignore The Inflation Panic. His case is that favorable base effects and more moderate demand growth now that the initial reopening boom is over mean headline inflation rates will moderate significantly next year. As a result, the current elevated inflation rates will prove largely transient, rendering an aggressive monetary policy response unnecessary. This benign scenario is possible, but I...

    1
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    Gavekal Research

    Markets Are Right To Ignore The Inflation Panic

    Considering last week’s headlines about US inflation exploding to 6.2%, a level not seen since 1990, many investors and most economists seem baffled, or even angry, about how equities keep hitting new highs while bond yields remain remarkably stable in a narrow trading range of 1.25% to 1.75%. In my view, the most surprising thing about these market conditions is that they are described as surprising. Sky-high equity prices and rock-bottom...

    3
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    Gavekal Research

    Payback Time In Asia

    Other than in China, policymakers in Asia made two big macro bets during the pandemic. Asian governments spent big and central banks have stayed easy for longer than counterparts in other emerging markets. Alas, their bets on inflation proving transitory are coming unstuck and the actions they now take will influence returns in the region for years to come.

    0
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    Gavekal Research

    Inflation’s Medium-Term Cure

    After consumer price inflation in October topped forecasts, it is clear that the US economy is running hot. And as workers embrace the “great resignation” rather than seek fresh work, the US labor market is tight. Still, my inflationary glass has tended to be half-full on the basis that improved US capital spending should ultimately help fix the economy’s supply side.

    0
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    Gavekal Research

    Transitory Inflation’s Unanswered Questions

    As a child, I was lucky enough to attend a Jesuit school. I once asked a teacher: “Father, is it true that Jesuits always answer a question with another question?”. The priest looked me up and down and answered: “Who told you that?”. In this spirit, I will try to answer today’s biggest market question—whether inflation proves transitory, or not—with more questions.

    13
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    Gavekal Research

    The Fed Chair Question And The Euro

    The resignation Monday of US Federal Reserve governor Randy Quarles has highlighted the question marks hanging over his boss, Fed chair Jay Powell. With each week that goes by, the failure of Joe Biden to renominate Powell shortens the odds that the Fed chair will not see a second term. This may help to explain the recent rallies in bonds and equities. If Powell is to be replaced, his successor is likely to be even more dovish. Given the White...

    0
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    Gavekal Research

    Hedging A Tighter US Economy

    After October’s payroll report came in strong on Friday, the S&P 500 hit a new high. On Saturday, the House Of Representatives was corralled into passing the Biden administration’s delayed infrastructure bill and there is a good chance of the “reconciliation bill” becoming law. Given such boosts to demand, US equity investors could be forgiven for expecting smooth sailing ahead. But KX warns of higher volatility.

    0
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    Gavekal Research

    Fortress Europe (Again)

    One of Europe’s enduring mysteries is why the continent’s left-of-center political parties, many of them steeped in Marxist theory, became such eager exponents of European integration. Integration, after all, promised to expose the domestic workers whose interests the left claimed to represent to cut-throat cross-border competition.

    4
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    Gavekal Research

    An Unstable Equilibrium

    In the past few weeks, the central banks of developed commodity producers including Canada, Australia and New Zealand have given up on the idea that monetary policy will stay easy forever. But the world’s major central banks do not seem to share their concern. This makes for an unstable equilibrium.

    9
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    Gavekal Research

    Chronic Congestion

    The US is facing the prospect of a gloomy Black Friday this year. Consumer demand for products is strong. But with scores of container ships backed up outside the main US ports, supply chain bottlenecks are slowing the pace at which stuff can be distributed. This isn’t just a problem affecting imported consumer goods. It is also leading to shortages of key components, which are weighing on the output of US manufacturers. Either way, the results...

    0
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    Beware The Bear Flattening

    On Tuesday, the Reserve Bank of Australia became the latest major central bank to signal a change of course, shifting away from its ultra-accommodative policy stance and towards a marginal tightening in response to higher inflation pressures. In executing its shift, the RBA confirmed what the bond market had already concluded: last month, yields at the short end of the Australian dollar curve spiked higher in anticipation of interest rate...

    0
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    Gavekal Research

    The Downside Of Rising Wages

    US wage growth is accelerating. The employment cost index rose 3.7% year-on-year in the third quarter, up from 2.8% in 2Q to the fastest rate since 2004. In quarter-on-quarter terms, compensation rose at a rate that has only been matched twice in recent decades—in 2001 and 1990, both times on the eve of recession. A number of transient constrictions in labor supply contributed to the rapidity of 3Q wage growth. But although these will abate in...

    3
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    Gavekal Research

    Lagarde Versus The Market

    If European Central Bank president Christine Lagarde really intended to throw cold water over market expectations of an ECB interest rate hike in 2022, then she failed dismally on Thursday. At Wednesday’s close, the short term interest rate market had been pricing in a hike of 23bp by December 2022. By the end of Lagarde’s press conference on Thursday, it was pricing in an increase of 32bp.

    3
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    Gavekal Research

    A Case Of Hopeless Optimism

    How can we reconcile the 6.5% growth forecast and the absence of feared tax hikes in Wednesday’s UK budget with The Coming UK Recession forecast by Nick Andrews at the beginning of October? The strict answer is that we cannot, because a recession in the conventional sense of two quarters of negative GDP growth is almost impossible in Britain next year. This is for the same reason that a recession is almost impossible in the US, or anywhere else...

    0
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    Gavekal Research

    This Time Really Is Different

    Let’s go back to a time before 2015. Imagine a country running a big trade surplus with the US. Typically, the exporters who create this surplus bear domestic costs and so need to change their US dollar revenues into the local currency. From here, one of two things can happen:

    6
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    Gavekal Research

    Asia’s Taper Resilience Wanes

    In mid-2013, emerging markets faced blanket selling after the Federal Reserve said it would buy fewer assets. In time, investors differentiated between strong and fragile markets, but the damage was still severe. Fast forward eight years and there have been good reasons to think that Asia could happily avoid a rerun of the “taper tantrum”. Vincent is now revising that view.

    2
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    Gavekal Research

    When Correlations Reverse

    For decades, portfolio managers have held US treasuries as a hedge for their equity exposure on the grounds that over periods of 12 months or so, treasuries tend to be inversely correlated with the US stock market. For the most part this strategy has worked. But few investors seem to appreciate that the relative performance of US treasuries and stocks depends heavily on the type of inflation the US economy experiences. If inflation is demand-led...

    0
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    Japan’s Poorly Defined New Dawn

    Having recorded the first rise in headline consumer prices for 18 months, Japan is once again an inflationary economy. This may be welcome news for new prime minister Fumio Kishida, who claims to have a bold new agenda to break Japan out of its funk. Alas, Kishida’s agenda looks half-baked and could spur a retreat from Japanese risk assets.

    0
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    Europe’s Wage-Price Nexus

    Data released on Wednesday showed that Germany’s producer price inflation accelerated to 14.2% year-on-year in September. That’s not only faster than consensus expectations of 12.8%, it’s the fastest since November 1974 in the immediate aftermath of the oil price shock.

    0
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    Drawing Conclusions From A Sample Size Of One

    We are all the fruits of our own experiences, which create biases to project our experiences into the future. Such personal experience can even be transformed into iron rules. Today, the narrative is that Federal Reserve tapering results in lower bond yields. Louis challenges this view, pointing out that as the Fed has started talk of tapering, yields have been rising.

    0
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    The US Production Problem

    US manufacturing production data for September released on Monday was a double disappointment. The -0.7% month-on-month decline, down from growth of 0.2% in August, not only fell short of consensus expectations for 0.1% growth. It also dampened hopes that manufacturing is set to emerge as a significant driver of US economic growth. This raises questions over the future strength of the US expansion.

    0
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    The Source Of Discoordination And Inflation

    Today, the global economy lacks its usual order. Each month brings a new shortage that is disrupting supply chains and driving up prices. In short, the right goods are not being delivered at the right time and place. Will examines the drivers of spacial and temporal "discoordination" to determine how investors should allocate assets in this challenging environment.

    3
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    Still Behind The Curve

    On Thursday, the Monetary Authority of Singapore announced it would target a modest nominal effective exchange rate appreciation of the Singapore dollar in order to contain domestic inflation. On the same day, the governor of the Central Bank of the Philippines, or BSP, said there “is no more need” for the central bank to continue financing government fiscal policy.

    0
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    Gavekal Research

    Persistent Inflation Takes Over

    Some may hope that supply bottlenecks quickly ease and the price-hike scare of 2021 soon fades, but that is not the story of the latest US inflation reading. In short, US inflation is now persistent and the Federal Reserve will soon have to address this reality head-on.

    10
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    Gavekal Research

    Four Quadrants For Emerging Markets

    Last week, Charles Gave updated his Four Quadrants view. Udith takes it a step further, combining the quadrants with another two-by-two framework by Michael Power of Ninety One to gleam insight into what the changing macroeconomic environment means for emerging markets, and who will be the winners and losers.

    5
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    Gavekal Research

    Energy And The Euro’s Exchange Rate

    It will come as news to no one that energy prices and exchange rates are intimately connected. Historically, over the last 20 years, the euro has tended to be positively correlated with the price of oil, while the broad US dollar exchange rate has tended to be inversely correlated. So, over the first half of 2008 as the price of oil surged to a record high, the euro hit its all-time high against the US dollar. And in 2014 as the oil price...

    0
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    Gavekal Research

    Labor And The Age Of Shortages

    The leader of the British Labour Party, Keir Starmer, missed a political trick at his party conference in late September when he failed to quote Labour’s late deputy leader, Aneurin Bevan, who told the party’s 1945 conference, “This island is made mainly of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish at the same time.”

    2
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    Gavekal Research

    A Temporary Respite

    Going into 4Q21, a worry for Will had been that asset prices faced the prospect of two tightening moves to US liquidity. Yet, with Congress now punting a debt-ceiling reckoning to December, this could, in turn, delay the Fed’s taper announcement to December, or even January. Thus, yesterday’s deal on Capitol Hill could allow temporary relief on the liquidity front.

    2
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    Gavekal Research

    A Shifting Economic State

    Regular readers may be familiar Charles's my longest-serving analytical tool, the Four Quadrants framework. It aims to represent the four economic states that at different times can exist in a market economy. Through this prism, he examines current market conditions to figure out where in the quadrants we are, and where we're headed.

    3
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    The Price Of Policy

    Wherever you look, energy prices are shooting up, and shortages abound. The global economy, it seems, is in the grip of a full-blown energy crisis. Drill down, and it appears this is not one crisis, but many. The effects—worsening shortages and surging prices—are much the same in differentregions. But the immediate causes of the crunch seem to differ widely.

    0
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    Gavekal Research

    A Crabwise ‘Recoupling’

    The Biden administration continues its crabwise efforts to craft a China strategy balancing national security and economic interests. The challenge is that Biden wants to maintain the basic stance established by Donald Trump—“strategic competition”—while satisfying a wider range of interest groups and setting more realistic policy targets.

    5
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    Gavekal Research

    The Least Bad Energy Policy?

    Today, policymakers in western countries and China are facing similar problems, including growing disparities in wealth between those who own assets and those who do not, and worsening energy shortages. So will policymakers in western countries, and especially in Europe, who are facing similar shortages follow China and impose energy rationing?

    2
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    The Coming UK Recession

    Thursday saw UK GDP growth for 2Q21 revised up to a perky 5.5% from a previous 4.8%. Yet all is not well in shortage-plagued Britain. While other economies facesupply chain disruption and energy shortages, the “just in time” UK economy looks to be facing a perfect inflationary storm that could deliver a recession in 2022.

    7
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    The Chinese Power Problem

    The power shortages rippling across China threaten to weigh on economic growth that was already slowing more than previously expected. Manufacturing firms in provinces from Ningxia to Henan are being told they can only have limited electricity supply, and many are having to cut production in response. This combination of supply- and demand-side problems is clearly negative for growth, but if the current sharp slowdown in heavy industry continues...

    0
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    Avoiding Sequels

    Like many other parents, Louis has seen his share of kids' movie sequels, which unfortunately fall much too short of the of the first installment. This reminds him of two “curve-balls” that investors are now having to digest. The first is the China Evergrande debt debacle. The second is the looming shortage of energy across most of the industrialized world.

    1
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    The German Interregnum

    Germany is headed for a three-party coalition for the first time since Konrad Adenauer’s governments of the 1950s. Multiple options remain on the table but a center-left figure should eventually be sworn in as chancellor. The issue is that material differences over fiscal policy mean that coalition talks could drag out well into 2022. How these divisive issues are bridged will determine the way that Germany and Europe react to growing economic...

    0
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    The Times They Are A-Changin’

    Despite widespread fears that the troubles of property giant Evergrande will cause China's "Lehman moment", the renminbi's exchange rate against the US dollar has barely blinked, while Chinese government bonds continue their strong outperformance. Louis examines the facts and outlines the likely consequences that matter for investors.

    3
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    Volatility In A Changed Economy

    It’s been a chastening, if not decisive, month for investors in US equities. The S&P 500 index has recovered ground, but still endured a -4% fall from its September 2 peak. On a historic basis, the drawdown was small but we have not seen many of them in the last 18 months. Bulls hope that having weathered worries about China and the Federal Reserve’s asset purchase taper, the ground has been set for US equities to hit new highs. My aim today...

    0
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    Liquidity And Shortages

    It is possible the US equity market was simply confused on Wednesday, when it rallied after the Federal Open Markets Committee unfurled its communiqué. Or perhaps it was just oversold. Either way, the Federal Reserve revealed itself to be as hawkish as could have been expected. Asset purchases will be tapered “soon” and likely occur at a faster pace than last time around. Interest rates could be hiked next year and the Treasury will soon become...

    0
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    Evergrande’s International Risks

    The troubles of debt-laden Chinese property developer Evergrande are no Lehman moment, but they do pose a significant risk of international contagion across emerging markets, which investors would be rash to ignore.

    0
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    No Escape From The Evergrande Effect

    Fears about the potential systemic risks posed by troubled property developer Evergrande reverberated through global financial markets on Monday. Unless China’s regulators seriously mismanage the situation, a systemic crisis in the country’s financial sector is not on the cards. Nevertheless, lenders will not be able to escape the costs.

    1
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    Out Of The Congressional Quagmire

    Eight months after Joe Biden’s inauguration, the US president’s economic agenda remains bogged down, with two flagship spending bills stuck in Congress amid infighting among Biden’s fellow Democrats. In the coming weeks, however, there is a good chance of a compromise that will see one of the two cleared through the House of Representatives.

    0
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    Squeaky Bum Time For The US Economy

    As Covid cases rise in the US, most indicators point to a slowing economy. After August’s payrolls came in weak, activity measures and nowcasting readings have softened, while conditions in leading sectors like housing and autos have worsened. With the Citi US economic surprise index having fallen to -44.6 from close to zero a month ago, forecasters have been caught off guard by the slowdown. As Sir Alex Ferguson, the former Manchester United...

    0
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    Europe’s Energy Headwinds

    The United Kingdom got a sharp lesson in the perils of energy dependence on Wednesday. A fire shut down its imports of electricity—mostly nuclear-generated—from France, pushing domestic natural gas prices up by as much as 20% in intraday trading. The fire may keep as much as a third of the UK’s capacity to import power from France closed through the winter months. Given that the UK has the capacity to import 3MW from France and on average...

    2
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    ‘Transitory’ Inflation And Government Intervention

    Tuesday’s US CPI release shed little light on the “transitory versus persistent” inflation debate. Airfares and hotel rates weakened on the delta outbreak. And surprisingly, rents remained muted, while used car prices rolled over even as new car prices surged. Still, US CPI gained 5.3% YoY, while core CPI rose 4% YoY. By the standards of recent decades, these are big numbers.

    5
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    A Mile In MbS’s Shoes

    Steve Martin once said “before you criticize a man, walk a mile in his shoes. That way, when you do criticize him, you’ll be a mile away and have his shoes”. In this piece Louis takes a stroll in Mohammed bin Salman’s shoes to see what issues Saudi Arabia has faced recently, and outlines four scenarios that affect energy prices and geopolitics.

    0
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    Internet Platforms Versus Policy Darlings

    China’s offshore internet platform stocks saw fresh falls in Asia on Monday morning after reports that the Chinese authorities will break up Ant Group’s Alipay business. In recent weeks, some investors have been advocating a rotation to “safer” segments of China’s tech sector, such as hardware companies favored by policymakers. But Thomas writes, these carry risks of their own.

    0
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    A British Fix To Housing

    For decades, urban England has had an under-supplied and over-bought housing market. UK governments of all political stripes have tried and failed to unblock building pipelines. Britain is hardly alone in having seen home prices rocket due to pandemic effects, but there was a grim inevitability to UK home prices rising 13% in the last year. Yet, at the same juncture, there is evidence that a mixture of decent policymaking and smart market...

    2
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    The Economy And Volatility

    US equities have gone almost 18 months without a double-digit drawdown. Such calm is likely to trouble devotees of Hyman Minsky, who showed that excessively long periods of market stability breeds countervailing episodes of violent instability. The question is what will cause the transition to a more volatile market, or dare I say it, what could trigger a “Minsky moment”?

    2
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    The Split In Emerging Markets

    Animals can apparently sense impending storms and so take evasive action. Low-flying birds, sneezing cats, croaking frogs, huddled sheep and sedentary cows are all said to indicate the onset of heavy rain. In global finance, emerging markets are most exposed to sudden climatic shifts and have learned the hard way that it is unwise to be exposed when a tempest strikes. The issue today is the Federal Reserve’s well-telegraphed intention to dial...

    4
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    Bottlenecks And Corporate Bond Yields

    It seems that not all parts of the US economy are created equal. As the Delta variant outbreak causes US Covid cases to soar, the service sector is taking a hit. In contrast, the less-exposed manufacturing sector saw job growth in August. The question for investors is how these somewhat conflicting forces impact different asset classes.

    0
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    Europe’s Taper Decision

    To taper, or not to taper is the question for the European Central Bank at Thursday’s policymaking meeting. The market seems to think that monthly bond purchases will soon be lowered by about €20bn to €80bn, as shown by 10-year German bund yields rising 14bp in the last two weeks. Economic output in the eurozone is back near pre-pandemic levels and consumer price inflation in August spiked to 3%. There have even been putative sightings of the...

    2
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    The Most Worrying Shortage

    The world’s most traded commodity, semiconductors, is running scarce, the price of the second-most important commodity, oil, is grinding higher, and the cost of moving things around the world is soaring. All this would be worrying enough, but ask any businessperson in North America or Europe about their biggest constraint, and the answer is likely to be staffing.

    9
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    The Problem Lurking In Malaysia

    Until a few weeks ago, Malaysia had not had a proper prime minister since the eve of the pandemic. The new incumbent emerged out of a messy negotiation and oversees a weak coalition that could easily fracture. For investors, the worry is a steady deterioration of Malaysia’s fiscal fundamentals in a trend that is being seen across non-China emerging Asia.

    0
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    The Coming Slowdown In Europe’s New Orders

    European equities have had a stunning 10 months, returning 46% since the beginning of November 2020 and outperforming even the MSCI US. This performance has been driven by expectations of strong earnings growth— supported by buoyant demand and full order books. Peering ahead, however, there are good reasons to look for the pace of new orders to slow.

    0
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    The Long Shadow Of Canada’s Election

    Canada’s federal elections rarely make headlines. This may be because whoever wins, the outcome is usually much the same. However, Canada’s September 20 election may cast a shadow that falls beyond the country’s borders. This is because, to a large extent, the election will be a referendum on Covid policies.

    7
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    Investing Through The Taper

    After all the build-up hype, investors seem to have taken Jerome Powell saying that the Federal Reserve may soon be buying less assets in their stride. They have no doubt taken solace from the Fed chair’s promise that tapering does not mean imminent interest rate hikes, or quantitative tightening. So is the great 2021 “taper whimper” done and dusted? Perhaps not, for while the Fed’s expectation management has been slick, in the months ahead...

    7
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    The Evolution Of China Risk

    It has been a busy summer for China watchers, with rapid shifts in underlying risks. With that in mind, a quick recap of recent events, and where those leave investors, might make sense. Let me start with the obvious increased risks:

    4
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    The Never-Ending Chip Shortage

    Nine months after the world’s carmakers began to complain about difficulties sourcing the silicon chips they need to make their automobiles, it is becoming clear these shortages are not just the result of short-lived disruptions. Sure, the pandemic has played havoc with global hardware supply chains. But Covid is worsening underlying shortcomings baked into the semiconductor manufacturing industry. This means there will be no early end to the...

    0
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    How Equities Cured The Summertime Blues

    Now that equity prices have resumed their habit of setting almost daily new records, and true believers in the “buy on dips” mantra have been amply rewarded yet again, it seems worth recalling the causes of the stock market’s mini-panic in mid-July. To be more precise this was a micro-panic, lasting just five days, from July 14 to 19. What happened in those five days to rattle investors?

    0
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    Germany’s Changing Political Colors

    Questioned by opinion pollsters, most Germans say the campaign ahead of the country’s September 26 federal election is dull. Yet those same opinion polls now point to the most wide-open election race in recent history. In the last few weeks, support for the center-left social democratic SPD has surged, even as the popularity of the center-right conservative CDU/CSU has slumped and the Greens have stalled.

    0
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    The End Of The Cash Dump

    The US Treasury is running low on cash. Having massively ramped up its holdings of cash between April and July 2020 at the height of the Covid crisis, the Treasury has been running them down again since February 2021. Normally the Treasury aims to hold cash equal to one week of its outgoings, but it has fallen to less than half that amount.

    6
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    Getting The Macro Right But The Market Wrong

    In December 2020, I published a report arguing that the US economy was about to enter an inflationary boom. Things went as expected through the first quarter, but after the Fed began to talk about tightening policy at some indeterminate point in the future, the portfolio I had been recommending has done very poorly. In short, I have been wrong.

    4
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    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...

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