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    Gavekal Research

    Trading The British Election

    Anyone who claims to be confident about the outcome of tomorrow’s UK election is really just guessing, which is why we have advised against taking big positions in sterling assets—either long or short—before the exit polls are released. But from 10.01pm onwards, the currency markets could start to see major moves that are very tradeable in one direction or another. So for clients who got hooked on overnight currency trading after profitable (or...

    3
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    Figuring Out Where The Ball Will Be

    Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...

    2
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    What Is The Signal In The Renminbi’s Surprising Strength?

    Over the past week and a half, the renminbi has appreciated 1.1% against the US dollar in the onshore market, and 1.5% offshore, where the PBOC has also engineered a spike in short-term interest rates. It seems China wants to send a signal about the renminbi, but markets are having trouble decoding what it is. Andrew outlines three possible strategies the central bank may be following.

    0
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    Getting By Without Friends

    After a week spent in Europe antagonizing fellow democratic leaders, conspicuously failing to reaffirm the US’s commitment to defend its NATO allies, and driving Angela Merkel into an uncharacteristically histrionic speech about Europe’s need to go it alone on security policy, Trump came home and announced he is pulling the US out of the Paris Agreement on climate change.

    0
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    Gavekal Research

    My Whole Career In One Chart

    My career in financial markets started in January 1971, half a year before Richard Nixon changed the basis of the post-WWII financial order by ending gold convertibility for US dollars. Hence, I thought that readers may be interested in a chart below that tells a simple story of those years, while also offering an asset allocation tool that for me has proven invaluable. In short, it is the story of running a balanced portfolio.

    1
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    Gavekal Research

    The UK’s Pre-Election Wobble

    In mid-April, when UK prime minister Theresa May took the decision to call a general election for June 8, she did so because she was confident her Conservative party would be returned to government with a massively increased parliamentary majority. Six weeks later, and with just one week of campaigning still to go, that confidence is a distant memory.

    0
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    Gavekal Research

    Stimulus Gets More Direct In Japan

    Fresh reflation ideas are back on the agenda in Japan as inflation shows no sign of rising despite record stimulus and a tight labor market. Prime Minister Shinzo Abe is focused on hard-pressed 30-somethings who continue to save furiously in part as they must fund their children's higher education. His idea is to ease the burden and hopefully spur a step change in consumption spending.

    0
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    Gavekal Research

    Still No Real Recovery In US Profits

    After a very strong corporate earnings season, Friday delivered the first estimate of profits as tallied by the US national income and product accounts, or NIPA. Unfortunately, the NIPA data pours cold water over the notion that the US is seeing a real, widespread recovery in profitability. The nonfinancial corporate sector of the US economy (not exactly a niche segment) is experiencing nothing of the sort. Instead, real profitability continues...

    4
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    Decoding The HK Dollar’s Signals

    When Moody’s downgraded China’s credit rating this week, it also downgraded Hong Kong. Although Hong Kong is fiscally autonomous, and has seen no rapid build-up in leverage comparable to the mainland, Moody’s still downgraded the territory from Aa1 to Aa2. In explanation, the agency cited Hong Kong’s “tightening economic, financial and political linkages with the mainland,” which it warned “risk introducing more direct contagion channels”...

    0
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    Gavekal Research

    What The Fed Really, Really Means

    The Federal Open Market Committee has fired the starting gun on its plan to start shrinking the US central bank’s balance sheet before the year is out. The language was coy, but indicated a consensus that outright contraction will start so long as the trajectory of growth and the key policy interest rate matches the committee’s expectations.

    2
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    Gavekal Research

    German Ordo-liberalism vs French Keynesianism

    So I hear that happy days have returned to Europe’s single currency area as shown by improved purchasing manager readings. With German firms especially upbeat and a reassuring new fellow occupying the Élysée Palace, I understand that Berlin will soon roll over and allow a juicy fiscal expansion in return for France making its job market less rigid. I tend to be skeptical about such road-to-Damascus conversions.

    1
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    Gavekal Research

    Don’t Buy The Smartphone Hype

    As Apple prepares to launch its anniversary iPhone and Samsung unveils models that don’t blow up, technology equities in the US and Asia have soared on hopes for a new smartphone cycle. After 2016 saw high-end smartphone sales fall, investors are betting that consumers respond to gee-whizz gadgetry by replacing their devices more often. We are not so sure.

    0
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    Gavekal Research

    Brazil: Better Than Last Time Around

    A year after Dilma Rousseff’s ouster, Brazil again faces political tumult. Impeachment calls have come thick and fast following the release last week of an incriminating taped conversation between President Michel Temer and a businessman. The worry is that a fragile coalition of interests that has been inching Brazil toward meaningful economic reform falls apart, sparking renewed market panic. Such fears are overstated as this time, both left...

    0
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    Gavekal Research

    A Less Flexible Britain

    Yesterday saw the release of robust UK retail sales data for April that reversed a weakening trend and pointed to still strong consumers. So it was notable that on a day that confirmed British economic resilience despite attendant uncertainties, Prime Minister Theresa May effectively renounced free market policies that long have been core tenants of the Conservative Party credo.

    1
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    Gavekal Research

    Don’t Sweat An Impeachment

    After weeks of ignoring ever wackier White House shenanigans, investors yesterday focused on US political risk. The revelation of memos that seem to offer prima facie evidence of the president obstructing justice means the chance of an impeachment has jumped from improbable to possible. As the government’s investigative machinery cranked up a notch yesterday, US equities experienced their worst day since last September and treasury yields fell...

    2
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    What Germany Wants

    What does Germany want? That was a question we asked in January as sabre rattling by the new US president unnerved Europe’s instinctive mercantilist. Our answer was that Germany was at a cross-roads in its modern history and could either double down on a narrow pursuit of surpluses, or instead embrace its European Union members with a fresh push to federalism. Monday’s meeting between Emmanuel Macron and Angela Merkel confirmed that the latter...

    0
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    Gavekal Research

    Back To The Future

    Back in 1947, war was over but a ruined European economy needed full-scale reconstruction: the Marshall Plan. As I look at the way China is wooing its neighbors through its Belt and Road strategy and other economic and financial linkages, the approach looks like a remarkably effective “copy-and-paste” operation.

    2
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    Why A Brexit Deal May Not Be So Hard

    European Union membership entails four core freedoms—goods, services, capital and people. To keep the first three, but not the last one as the UK wants has been dubbed “having one’s cake and eating it”. The UK also wants to be exempt from the European Court of Justice’s control and to exit the EU customs union, opening the way for free trade agreements to be made elsewhere. The assumption is that these demands will ensure the UK ends up with a “...

    2
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    Gavekal Research

    Video: How Brexit May Work

    The consensus is for a tortuous few years of negotiations between the UK and the European Union over the terms of Brexit and any subsequent free trade agreement. Following up on today’s Daily, Nick argues in this video interview that a deal may be easier than most people think. Moreover, the template for an FTA may already be in place.

    0
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    Gavekal Research

    What Trump Will And Won’t Do

    After President Trump’s shock firing of his top law enforcement official, this week has seen the White House scramble to keep some semblance of control over the news agenda. This means that an administration that was already dialing back the radical parts of its reform agenda will have even less room to drive change.

    1
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    Gavekal Research

    The Headwinds To US Housebuilding

    US home prices are on the up, having climbed 6% over the 12 months to February. Yet housebuilding has failed to keep pace with the rise in prices. Although construction has made a positive contribution to GDP growth over the last couple of quarters, activity has built from a very low base. Housing starts in March were an annualized 1.215mn, with a consensus forecast for April of 1.25mn. Both figures are well below the long term pre-crisis US...

    2
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    Gavekal Research

    A Clearer Picture In Seoul

    South Koreans went to the polls yesterday and elected a special forces soldier turned human rights lawyer as president. Moon Jae-in will need both skillsets in dealing with a belligerent North Korea, distrustful China and saber-rattling US. Yet an even tougher ask may prove delivering on his promises to shake up collusive ties between big business and the government, and so unleash animal spirits. I would argue, however, that for once the...

    4
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    Gavekal Research

    Calling Time On Indian Outperformance

    Indian equities have been on a tear this year with their 22% currency-adjusted gain only bested among emerging markets by Poland. This is not surprising given that India has strong fundamentals and a reform-minded government that still enjoys popular support. Yet, while long term positive drivers for the Indian market remain intact, equities have run ahead of themselves by pricing in a swift return to robust earnings growth.

    0
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    Macron And A New Europe

    With the populist, anti-EU tide now clearly reversing, first in Holland, then last night in France and finally in September’s German elections, investors can put to rest their worries about a breakup of the euro or the European Union and focus instead on the continent’s economic and financial fundamentals. These fundamentals have been steadily improving since the European Central Bank began its enormous bond purchase program in March 2015.

    5
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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

    A Positive Cycle For Eurozone Earnings

    For many investors, last night’s televised debate will have removed any lingering fears about French political risk, freeing them to focus on the eurozone earnings picture—which is increasingly rosy. The majority of pundits awarded the debate on points to centrist candidate Emmanuel Macron. Their verdict was that the performance of far-right Euroskeptic Marine Le Pen was insufficiently “presidential” to sway undecided voters. As a result,...

    0
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    Gavekal Research

    The Flip Side Of A Hard Brexit

    The pound has rallied strongly since Theresa May announced an early UK general election on April 18 and may soon break through US$1.30, opening the way for a rise back to levels not seen since last summer. This move has mostly been driven by politics in France, rather than Britain, but this may be about to change.

    1
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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

    Don’t Bet On Another Bond Bubble

    Recent days have not been good for US treasury bears betting on higher yields. First, Donald Trump’s much hyped tax reform plan proved thin on detail and lacking in credibility. Then Friday’s weak US GDP release for 1Q17 showed an economy facing a notable softening in consumption demand. The one factor offering succor to treasury shorts has been reduced political risk in Europe after a centrist made it through to the second round of France’s...

    0
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    Gavekal Research

    The End Of Yen Outperformance

    Year-to-date, the yen is the best-performing of the G10 currencies. Over the last four months it has appreciated 5.2% against the US dollar, lifted by abating enthusiasm for the Trump trade and safe haven flows into Japan. Given the tight inverse correlation between the yen and Japanese equities, it is therefore no surprise that the Japanese stock market has underperformed its developed market peers so far this year.

    0
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    Gavekal Research

    Taxing Times In The US

    The big news this week is the lack of news. Tectonic changes—that inspired both hope and fear—now look less likely to materialize. The first round result in France’s presidential election suggests that the centrist, pro-euro Emmanuel Macron will be the next head of state, rather than the disruptive Marine Le Pen—no révolution in Europe. Then yesterday Donald Trump revealed his much anticipated tax plan. It only served to show how little progress...

    0
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    Gavekal Research

    Europe’s Road To Reflation

    With fears of a political upset laid to rest, the European reflation trade is in full swing. The flash eurozone composite PMI hit a six-year high last week, French manufacturing confidence is at its highest since June 2011, and the European Central Bank’s bank lending survey published yesterday showed that banks are continuing to relax credit standards as demand for borrowing grows. With employment growth lifting domestic demand and external...

    0
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    Gavekal Research

    Stop Worrying And Buy Europe

    The market reaction made good sense, assuming that the opinion polls—which turned out to be uncannily accurate in the first round of the French election—prove right again and Emmanuel Macron wins by a landslide on May 7. The polls may, of course, be completely wrong and Marine Le Pen may become the next President of France, but for this to happen the polling error would have to be many times larger than it was in the case of Brexit or Trump.

    0
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    Takeaways From France’s First Round

    For once the opinion pollsters got things right. Although the candidates of France’s traditionally dominant left and right wing parties were both eliminated in yesterday’s first round presidential election, the political center held. Independent Europhile centrist Emmanuel Macron emerged with the largest share—23.9%—of the vote, for a second round face-off against nationalist Euroskeptic Marine Le Pen, who captured 21.4%.

    0
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    Gavekal Research

    Final Thoughts On The French First Round

    Going into Sunday’s first round vote in France’s presidential election, it is widely assumed that yesterday’s tragic events on the Champs Élysées will boost nationalist-populist candidate Marine Le Pen. What is clear is that the race has tightened: centrist outsider Emmanuel Macron is polling at 24%, Le Pen at 22.5%, Republican François Fillon at 19% and firebrand socialist Jean-Luc Mélenchon at 18.5%. Here are some final thoughts for navigating...

    5
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    China’s Kim Problem

    Last weekend's extreme tension on the Korean peninsula is just the latest episode to severely test Beijing’s patience with North Korea. Yet even as elements of the Chinese leadership tire of Kim Jong Un’s grandstanding, China remains unlikely to make a bold move that threatens the regime. Despite acute US pressure, China will seek to preserve the status quo.

    0
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    Pound’s Rally Based On Flawed Assumptions

    The spring sun was shining on UK prime minister Theresa May yesterday when she stood in Downing Street to announce a cut-and-run general election for June 8. The sun was shining too on sterling, which rallied 2% against the US dollar and 1.3% against the euro on the news. The market clearly expects that a greatly increased parliamentary majority for May’s Conservative government following the vote will boost the chances of a softer Brexit deal...

    2
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    Beyond The Election Risk: Upturn Still Favors Eurozone Stocks

    For the next three weeks at least, the upcoming two-round French presidential election will continue to dictate short term sentiment among investors in the eurozone. Following a late surge in the opinion polls from far left candidate Jean-Luc Mélenchon, two of the four leading contenders are now professed Euroskeptics. That knowledge has colored investor attitudes, keeping the spreads between French and German sovereigns elevated—the 10-year...

    0
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    Who The French Will Not Vote For

    All the media commentary on the opinion polls ahead of the French presidential election concentrates on which candidates the electorate intends to vote for. This is the wrong way to analyze the current political situation in France. With just 10 days to go before the April 23 first round, readers should pay no attention whatsoever to the opinion polls. They are almost entirely meaningless: 40% of respondents say that they do not know who they...

    10
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    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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    Downfall Of A Regulator

    The chief of China’s insurance regulator has become the latest “crocodile” to be snared by the Communist Party’s anti-corruption agency—the first leading financial regulator to face such scrutiny. Chen Long outlines two important implications for the insurance sector and for China’s financial markets.

    0
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    Beyond The March Payrolls ‘Soft Patch’

    With the world busy going mad, have financial markets unexpectedly come to their senses? Friday delivered an enormous “miss” on US payrolls, with the March number printing at only 98,000, compared with expectations of 180,000. Yet the markets failed to react. The S&P 500 closed almost unchanged, while US treasury yields actually ticked up marginally. This absence of any selling in equities or buying in bonds was a crucial clue, like the dog...

    0
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    Gavekal Research

    E Pur Si Muove

    Back in early 2011, I argued that the adoption of abnormally low short-term interest rates (in real terms) always leads to a collapse in productivity, followed by a decline in the economy’s structural growth rate. Since late 2010 marked the transition from the acute phase of the financial crisis to something approaching normality, at least in the United States, it is worth examining the US experience in the ensuing period.

    5
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    Threats To The US Bull Market

    I have spent the last few weeks traveling around Europe telling clients to reduce risk exposure—at least to US equities, if not globally. I see four potential threats to the US bull market, and while none is certain, the odds are high that at least one of them spoils the party. Let’s review:

    4
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    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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    India Gets Serious About Its Banks

    Indian equities delivered the best returns of any emerging market in 1Q17, as the economy rebounded from November’s demonetization debacle. With manufacturing expanding for three straight months, consumer demand returning to normal levels, and the BJP’s decisive victory in state elections boosting sentiment, MSCI India surged by 17%. Growth in the fiscal year to March 31 likely topped 7%, enabling India to retain its crown as the world’s fastest...

    0
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    Gavekal Research

    The Dollar In The Coming Quarter

    The first quarter of the year demonstrated once again that there is little more uncertain than a sure thing in the foreign exchange market. Rewind to mid-December, just before markets eased back for the holiday season, and the consensus firmly favored a stronger US dollar in 2017 . Of course, when sentiment is so strongly aligned, it means there are few marginal buyers left to enter the market. As a result, the consensus was confounded, as the...

    0
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    Regulating Complex Systems

    Everyone will surely agree that today’s financial system is sufficiently complicated and interconnected to qualify as a complex system.And regulating a complex system is by definition almost impossible, because it is in complex systems that Frédéric Bastiat’s observation that there is “what is seen and what is not seen” really comes into its own.

    3
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    Handicapping The French Election

    Things are on the up across Europe: better PMIs, growing employment, increasing trade, stronger consumer confidence and of course rising currency and equity markets. The combination of re-accelerating growth across emerging markets—key export markets for most eurozone countries—low energy prices, very easy monetary policy, low interest rates and a deeply undervalued exchange rate is working its magic. In fact, at this juncture, the only factor...

    1
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    Gavekal Research

    Hong Kong: Meet The New Boss

    Meet the new boss. Same as the old boss? Last Sunday saw the “election” of Carrie Lam, CY Leung’s former Number 2, to the post of Hong Kong chief executive. The hope now has to be that, just as Robert Wagner in Austin Powers proved altogether more competent than Dr Evil, Hong Kong’s Number 2 will show herself to be more competent than her former boss in handling the territory’s affairs.

    3
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    Yes To Brexit, No To Rate Hikes

    Tomorrow should see the UK initiate its departure from the European Union by triggering Article 50 and starting the clock on a two year exit negotiation. Yet far from anxiously counting down the days, investors have spent the last week bidding sterling higher, largely on the belief that a robust UK economy may soon spur tighter monetary policy. That is probably a bullish interpretation too far, and the pound’s next significant move will probably...

    0
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    After The Health Care Reform Failure

    The Republican drive to repeal and replace Obamacare failed ignominiously on Friday. Together, President Donald Trump and House Speaker Paul Ryan were unable to muster enough support to pass the new health care bill through the House of Representatives. Bowing to reality, they pulled the vote. If there is a positive element to this failure, it is that both the administration and Congress will now shift their focus to tax reform. However, the...

    2
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    A-Shares Come In From The Cold

    Last year, MSCI raised three objections which prohibited the inclusion of China’s onshore A-share markets in its benchmark indexes. In a document published yesterday MSCI suggested two of those obstacles can now be overcome. Chances are high that the third objection can also be dealt with, allowing the inclusion of A-shares as early as this year.

    0
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    Europe’s Surest Bet

    As investors fret about the trajectory of US growth and the sustainability of the Trump reflation trade, Europe is getting drawn in. Sovereign yields fell pretty much across the board yesterday on worries that the eurozone’s gathering cyclical upturn could be disrupted. In this case, the thinking is that monetary stimulus by the European Central Bank gets extended. To our mind, such worries are overdone as—absent an external shock—Europe’s pick-...

    0
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    Will Washington Disappoint?

    Equity markets have pretty much straight lined higher since the US election on hopes for market-friendly tax cuts, health care reform, and broad deregulation. Worries about high import tariffs and other potential growth-sapping measures have been set to one side. In short, investors have been counting on “Trump without the bad stuff”. With the S&P 500 yesterday sliding -1.2%—the first fall of more than -1% since November’s election—they now...

    2
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    The Profit Illusion

    Inflation has a way of making things look better than they really are. This is especially true of corporate profits. After a dismal first half last year, S&P 500 companies reported an earnings recovery in 2H16. In the final quarter, they posted profit growth of 6% YoY (with or without financials). Alas, this recovery appears to be a mirage, caused by accelerating inflation. Using official flow of funds data for the domestic non-financial...

    7
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    Where The French Center May Fail

    Just five weeks after the deciding second round of France’s presidential election, French voters go to the polls yet again. In another two-round ballot, to be held on successive Sundays in June, the French electorate will vote in a new lower house of parliament. The overwhelming consensus is that voters will choose a centrist in the presidential election. But if they do, their choice may well not allay France’s heightened political risk.

    2
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    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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    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

    0
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    The Importance Of The Dutch Election

    Today’s Dutch election may not seem very important in itself, since it is almost inconceivable that the anti-immigration Freedom Party of Geert Wilders will win enough votes to enter the next Dutch government. Nevertheless, the result—which is likely to be clear by around 0400 GMT Thursday—will have a big market impact. That’s because the Freedom Party’s performance will rightly be seen as a leading indicator of political events during the...

    3
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    The BoJ’s Tantrumless Taper

    When the Bank of Japan’s board meets on Wednesday and Thursday this week, at least one member will be calling for a retreat from the central bank’s policy of negative interest rates coupled with quantitative easing “with yield curve control”. In a speech last month Takahide Kiuchi called on the BoJ to taper its purchases of Japanese government bonds from ¥80trn annually to ¥45trn. The chance that the central bank will announce any such change in...

    0
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    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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    When A Less Dovish Dove Is A Hawk

    As changes of tone go, Mario Draghi’s was a muted shift. At yesterday’s meeting, the European Central Bank president said that the sense of urgency driving additional easing had diminished, and dropped his pledge to use all the weapons in the ECB’s arsenal to effect monetary accommodation. Interest rates will still remain negative for an extended period, and quantitative easing will continue at least until the end of the year. But while the...

    0
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    The North Korean Wedge Between The US And China

    This week’s missile launches by North Korea, the latest in a recent series of provocations, are forcing the US into a position where it must take steps to limit the threat to itself and its Asian allies. But such moves are certain to antagonize China, and shatter the fiction that the US and China have common interests in dealing with North Korea.

    7
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    The Prime Minister Has No Clothes

    Britain’s House of Lords passed a crucial amendment yesterday to Theresa May’s Brexit bill. This amendment would give Parliament a “meaningful vote” at the end of the Brexit negotiations and could offer the possibility of stopping Brexit or seeking to extend the negotiations beyond the 2019 deadline, if the deal Mrs May brings home next year is deemed to be not good enough. Anatole argues this is a game changer for opponents of Brexit.

    7
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    Time To Exit US Equities

    Over the last few months Charles has argued that the US stock market rally was running on fumes. In the intervening period, US equities have, of course, powered to new highs. He now says that for the first time since 2007 his valuation model definitively points to US equities being overvalued.

    2
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    On Borrowed Time In Hong Kong

    Last month, home prices in Hong Kong’s secondary market climbed to a record high, up more than 150% from the depths of the financial crisis. At the same time, Hong Kong’s stock market has been among the world’s strongest major markets so far this year, comfortably outperforming the S&P 500. The buoyancy of Hong Kong assets owes more than a little to investor enthusiasm for the global reflation trade, and to inflows of Chinese money. But more...

    2
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    The Upside Of Eurozone Inflation

    As even formerly dovish policymakers on the Federal Open Market Committee have hardened their rhetoric in recent days, the US dollar has strengthened, with the bilateral EUR/USD rate falling back to dip briefly below the US$1.05 mark late Tuesday. Whether the US dollar’s run-up can be sustained is questionable, however. With the market expecting three US rate hikes this year, the US dollar appears priced for a “Trumpflation” outcome that both...

    0
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    Video: The Self-Sustaining Eurozone Recovery

    A broadening and deepening of the eurozone’s economic recovery suggests that the expansion has finally become self-sustaining. The worry is that a political shock from upcoming national elections tips the single currency area back into crisis. Nick Andrews does not think such a bearish outcome is likely, and in this video explains his preferred investment strategy.

    0
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    Because Of Trump, Or Despite Him?

    The enthusiastic market reaction to US President Donald Trump’s big speech on Tuesday night can be interpreted in two ways, both bullish for equities and bearish for bonds, but only one of them positive for the dollar.

    0
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    A Structural Turn In Japan

    For more than a quarter of a century Japan has been a reliable source of disappointment for investors. After a nice little run-up late last year, a familiar pattern has emerged in 2017 as equities edge nervously sideways. Despite some evidence of Asia’s trading economy spluttering into life, Japan yesterday released surprisingly soft industrial production data for January. To top things off, the Wall Street Journal on the same day ran a...

    2
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    Where Next For The Reflation Trade?

    What was the biggest surprise of 2016? Ask the question in the US and invariably the answer is Donald Trump’s election victory. Ask in Europe and the answer is either the same or, if not, it is the result of the Brexit vote. But are these the events that genuinely moved markets the most? Look at it this way: over the past 12 months, commodity producers have typically been the best performers in almost every market, followed by financials. The...

    0
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    Calling Time On Bank Outperformance

    Tomorrow Donald Trump is scheduled to address a joint session of the US Congress. Although expected to be long on characteristic bombast, the president’s speech is likely to be short on hard details about his core policies. That shouldn’t be too surprising. Drawing up tax reform and infrastructure spending plans and squaring them away with the Republican majority in Congress will take many months. However, without concrete information to sustain...

    0
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    Are Border Adjustments Protectionist?

    The introduction of border adjustments into the US tax code is by far the most controversial part of the House Republicans’ “blueprint” for tax reform—with good reason. This reform alone would be a game-changer, with many winners and losers. This is why, like all major tax reforms, it faces an uphill battle to become law, and why it may never happen. But the same was said of a Donald Trump presidency, and of Brexit. So, investors still need to...

    5
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    The Eurozone’s Ongoing Rebalancing

    Yesterday the European Commission criticized Germany for its “persistently high current account surplus”. Berlin should take more steps to boost domestic demand in Germany, Brussels suggested, in order to trim its external surplus and to help the rest of the euro-area rebalance. It is hardly new advice, but the EC does not seem optimistic it will be heeded anytime soon. In the same release, it forecast that Germany’s current account surplus will...

    0
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    A Qualified Positive For Chinese Banks

    The Hong Kong-listed H-shares of mainland Chinese financials are the best performing segment of one of the world’s strongest markets year-to-date. So far this year, the H-share index is up 12% in US dollar terms, driven largely by gains in the stocks of China’s big banks and insurers. So it is natural for investors to sit up and take notice on reports that China’s big four financial regulators have drafted a joint proposal to tighten their...

    0
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    A Methodology For Playing The Eurozone Bond Markets

    In yesterday’s Daily, I argued that a long position in the French CAC 40 stock index, locally funded, versus a short position in Germany’s Dax offers investors a neat “heads I win, tails I don’t lose” hedge against a possible break-up of the euro driven by French politics (see It’s Time To Buy French Equities).

    1
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    It’s Time To Buy French Equities

    As regular Gavekal readers may remember, I have always maintained that over the long run the returns delivered by two different stock markets— adjusted for exchange rate fluctuations and differences in pay-outs—must be the same. This is just another way of saying that in an open economy the returns on invested capital generated by well diversified stock markets have to be the same.

    6
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    The EM Reflation Trade Is Past Its Best

    The emerging market reflation trade has been on fire. This week Dr. Copper broke out of his six-year downward trend, adding fuel to the reflationary flames. As a result, while the relative performance of cyclical stocks has moderated in developed markets during February, EM cyclicals have continued their bullish run. Their strong performance has helped to lift the MSCI EM index by 10% year-to-date in US dollar terms to reach a 19-month high. But...

    2
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    Decomposing Sterling

    In recent months, few discussions at Gavekal have been as polarized as the debate over sterling. Charles and Louis both note the pound’s undervaluation. History suggests it will revert to the mean. Anatole argues that the British economy will undergo a painful restructuring over the coming years facing hard Brexit. I will examine the structure of the UK’s current account and the forces that are at work to propel sterling.

    4
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    The Eurozone’s Silver Lining

    Just as it has been hard to work up much excitement over the last couple of years about the eurozone’s grinding emergence from economic despond, so investors should not be too downhearted at the latest lackluster growth data. Yesterday Eurostat revised down its flash estimate for 4Q2016 eurozone GDP growth to 0.4% QoQ, compared with its advance estimate of 0.5% released two weeks ago. The downward revision was due mainly to weaker than expected...

    3
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    In Dutch With The Electorate

    There is a tendency to divide Europe into the “serious” beer drinkers of the north and the not so serious wine tipplers of the south. Using such a dichotomy reinforces a common assumption that trouble in modern day Europe always arrives from the Mediterranean regions. It explains why there is a cottage industry of politicos watching developments in Italy, Spain, France and Portugal, while precious little energy is expended on political goings on...

    1
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    US Inflation: The End Of The Affair

    If there is one consensus view about US markets it is that inflation is ticking up, a tightening cycle is underway and the dollar will again rise. As markets are made at the margin, any hit to these beliefs could push investors into a sharp repositioning. Within Gavekal there is disagreement on this score, with Anatole arguing that US inflation and bond yields are on an upward trend, Charles taking the opposite view and Louis stating that US...

    0
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    Choosing Between Disadvantages

    It was a record that Germany would rather not have announced, at least not this week. Yesterday official data showed that Europe’s über exporter racked up a current account surplus in 2016 of US$281bn versus a mere US$210bn for China. With the US running by far the largest offsetting deficit, such data means that the temperature between Washington and Berlin is likely to get hotter.

    4
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    China’s Asian Dream

    China’s “Asian Dream” is to restore its position as the undisputed regional power. Trump’s decision to bin the Trans-Pacific Partnership, which would have anchored the US presence in Asia, brings China a step closer. While Trump’s sidekicks huff about wielding a bigger stick in the South China Sea, China is transforming the facts on the ground.

    1
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    Germany And The Greek Question

    Last month Cedric Gemehl and I argued that the new geopolitical back-drop offered by Donald Trump had changed the basic strategic equation for Germany. Berlin could respond by doubling down on its mercantilist impulses, or alternatively embrace its eurozone partners. An interesting test case of our hypothesis has just arisen: yes, the Greek problem is back on the agenda.

    0
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    A Win-Win Deal For Abe And Trump?

    This Friday Japanese prime minister Shinzo Abe will touch down in Washington for his second meeting with Donald Trump since the November 8 US election. The auspices hardly appear propitious. In the run-up to the meeting, the new US president has pulled out of the Trans-Pacific Partnership, a multilateral trade deal built largely around the US-Japan economic axis. He has railed against Japan for deliberately undervaluing the yen. He has bemoaned...

    3
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    The End Of The European Dream

    Back in 2002 I wrote a book, Lions Led By Donkeys, whose main point was that the euro’s adoption would kill the competitive and heterogeneous Europe that I so loved. It was prefaced by Milton Friedman who predicted that Europe was set to enter a period of rigor mortis. Fifteen years on and it is clear that Europe as a unitary concept is indeed dying.

    4
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    Golden Rule Says Extend Duration

    Great economists are seldom top flight mathematicians. One exception was Maurice Allais, who won the Nobel Prize in 1988 for his “rigorous mathematical formulations of market equilibrium and the efficiency properties of markets”. Among his findings was his so-called “golden rule”, which states that over the long run, long term government bond yields always converge with the structural growth rate of the economy.

    2
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    India’s Budget: A Fine Balance

    After the fiasco that followed India’s move in November to scrap large denomination banknotes, yesterday’s budget was carefully calibrated to reassure jumpy markets. With the IMF estimating that the monetary bloodletting will drain 1pp off growth this fiscal year, doubts have resurfaced over India’s ability to realize its economic potential. The good news for nervous investors is that India remains wedded to fiscal responsibility. The bad news...

    0
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    The Eurozone Upturn Continues

    The data flow out of the eurozone—both forward and backward-looking—continues to paint a picture of accelerating activity, subdued core inflation, ongoing monetary accommodation, and—most notably for investors—improving corporate earnings.

    0
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    The Real Political Risk In France

    There are many areas where Anatole and I agree to disagree. But one in which the two of us see eye to eye is the heightened influence political risk may have on markets this year. Consider France, where the political situation threatens to get complicated. The problem is not so much the presidential election, due to be held in two rounds in April and May, but the legislative elections set to be held a month later.

    2
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    The “Experts” May Yet Be Right

    Last week Louis set out a comprehensive roadmap for 2017. I have just five points to add: two points of strong agreement (on Europe and the oil price); two of dissent (on US bonds and Britain); and one that echoes Louis’s uncertainty and anxiety, but for slightly different reasons (about the pressures on the US dollar and what they could mean for emerging markets). I will explore these specific issues of agreement and dissent in a lengthier...

    3
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    Border Tax Adjustments In Context

    US president Donald Trump moved a step closer to realizing his “America first” trade policy yesterday, promising a 20% tax on imports from Mexico. However, rather than an outright tariff on imports, it is looking increasingly likely that the new levy will come in the form of a border tax adjustment, as envisaged by the House Republican majority as part of a wider US tax reform program. In theory, border tax adjustments should be trade-neutral,...

    2
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    The Dow 20,000 Conundrum

    The Trump trade continues. Yesterday the Dow Jones Industrial Average passed the magical 20,000 mark for the first time, with the S&P 500 closing at a record high just a whisker short of 2,300. I hate to be the one to douse the market’s high spirits with a bucket of cold water (well, I don’t really hate it), but sober analysis suggests that the current Trump-propelled rally is a fad that may soon fade.

    0
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    The Return Of German Inflation

    Inflation is re-emerging in Germany, and a tightening labor market implies inflationary pressures will continue to mount in what could promise to become the great German reflation that many have long looked for to rebalance the eurozone economy. Yet rising inflation threatens to erode one of the central tenets of the German economic model.

    0
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    Trump May Yet Learn To Like Border Adjustments

    Last week, Donald Trump dismissed border tax adjustments as “too complicated”. He may yet reconsider. If the newly-installed president has one dominant policy objective, it is to make the US more attractive as a destination for investment and as a location for manufacturing. Alongside deregulation and cutting the US corporate tax rate, imposing border tax adjustments along the lines proposed by the House Republicans is one of the simplest and...

    2
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    Is China Ready For A Trade Shock From Trump?

    China reported an acceleration in its economic growth on Friday, just hours before Donald Trump was sworn in as US president. But growth could take a hit if Trump makes radical changes to tax and trade policy. And while China has plenty of weapons to fight a trade war, those measures are unlikely to completely offset a sudden shock to its exports.

    3
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    Germany’s Date With Destiny

    Germany, more than any other European economy, has relied on the US-dictated, rules-based international system to define its post-World War II identity. Germany’s highly specialized export-orientated economy has thrived within the World Trade Organization and its security has been ensured by the American nuclear umbrella. It is not clear whether Donald Trump’s recent broadside against Berlin reflects a permanent rupture in that order, but...

    0
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    Trump’s Declarations On The Dollar

    Even more than getting it right on US interest rates, performance in 2017 will most likely be driven by getting the US dollar call right. And forming a view on the US dollar with any high degree of certainty is a challenge.

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