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E.g., 13-08-2020
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    Gavekal Research

    Europe's Covid-19 Loan Drag

    In response to the Covid-19 crisis, central banks in Europe have shoveled money to banks in a bid to have them deliver liquidity to stressed companies. A worry is that this new debt binge will weigh down corporate balance sheets for years to come, and limit growth. These concerns are probably overdone.

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    What US-China Decoupling Means For The US Dollar

    Almost all of the world’s commodity trade is done in US dollars, so any commodity-importing country must keep much of its central-bank reserves in US currency. The fact that China, the world’s largest commodity importer, pays for these imports using another nation’s currency was an anomaly even when the US and China got along. As US hostility towards Beijing increases, this raises four possible scenarios.

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    Gavekal Research

    The State Of The US Recovery

    The renewed Covid-19 outbreak in the past two months put a brake on the US recovery, but that engine is again firing. Despite many states having reversed opening measures, Friday’s payroll report came in strong, with the unemployment rate down to 10.2%; high-frequency data like mobility readings paint a similar picture.

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    Gavekal Research

    How To Pay For Sin In The Future?

    Just as success has many fathers, there are many possible explanations for the upside breakout in gold prices. Obvious explanations include a rapid rise in monetary aggregates across the OECD, the fall in the US dollar and growing US-China tensions. An overlooked explanation is the demise of physical cash as a liquid and easily transportable asset.

    1
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    Emerging Markets And The Dollar

    A weakening US dollar is usually an unalloyed positive for emerging markets, so it is no surprise that their assets have rallied since the March 23 bottom in global markets—equities are up 45%, while bonds (both US dollar and local currency-based indexes) have gained 20%. Happy days indeed, but the next stage of the EM rally is likely to be more exacting for investors.

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    Gavekal Research

    Different Decades, Different Backdrops

    In the months after the 2008 global mortgage crisis, gold prices broke out to new highs in part driven by the belief that quantitative easing would trigger higher inflation, perhaps even hyper-inflation. Against such a backdrop investors flocked to real assets. Today, similar forces seem to be at work, although maybe in more concentrated form.

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    Gavekal Research

    The Assault On Chinese Tech

    After a whirlwind of negotiations, the US government may have succeeded in forcing the sale of TikTok’s US operations to a US company. The US earlier used national-security grounds to restrict the business of Huawei. Both companies still have large domestic businesses, but US government actions over the past year may mark a peak for the global expansion by Chinese tech firms.

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    Gavekal Research

    Europe Stares Down A Second Wave

    Europe beat back the Covid-19 outbreak in March and April with decisive responses and reaped the benefit by reopening its economy in the early summer. Now, however, the price of fun in the sun has come due, with a rising case count that has led Britain’s prime minister, Boris Johnson, to label it Europe’s “second wave”. In response to rising infections in Spain, the UK has reimposed quarantine rules on returning travelers from the country, while...

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    Gavekal Research

    Not All Tech Markets Are Created Equal

    Aided by lockdown effects, Big Tech has rolled out some stellar results. Self-isolating consumers have replaced devices and devoured cloud computing services, spurring a new upgrade cycle. Such demand has boosted Asia’s tech supply chain, but surging hardware demand is about to become more specific, with some segments facing excess supply and others sustained tightness.

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    Gavekal Research

    A Conventional Fed

    The Federal Reserve did not shift its policy stance yesterday and nor is it likely to announce some big-bang reform after a “strategic policy framework review”, which Jerome Powell indicated should be wrapped up within a couple of policy-setting meetings. That may not be an exciting story, but it is one that financial markets will welcome.

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    Gavekal Research

    Don’t Fear The Fiscal Cliff

    The Republican Senate proposal for a new stimulus falls far short of the Democratic bill passed in the House in May. Reconciling these differing visions into a unified bill that can pass through both chambers and into law will likely take several weeks at least. As a result, the incomes of 17mn jobless Americans will fall off a cliff at the end of July.

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    Gavekal Research

    Not Cheap, But Not Expensive Either

    I don’t propose to wade into the debate over whether US equities are in are in a bubble or not. I'd only point out that by one key metric—relative valuation—equities do not look excessively expensive today, at least when compared with the relative valuations seen at the height of the dot-com boom at the turn of the century.

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    Gavekal Research

    The EU And The Bond Markets

    The European Union’s decision last week to issue an additional €750bn of debt in its own name has profound implications for the euro-denominated bond markets. Firstly, the decision will mark the emergence of the EU (or more specifically the European Commission) as a major—and relatively attractive—issuer, on a par with sizable European sovereigns. Secondly, EU supranational issuance will be a stabilizing force in the market, reducing the risk...

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    Gavekal Research

    Edging Toward A New Cold War

    The US decision to close China’s consulate in Houston is a big deal. The precise motivations are obscure but the story is not: the Trump Administration is turning up the heat on China before the US presidential election. In the next few months Washington is likely to make new moves pushing the US closer to a Cold War posture against China.

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    Gavekal Research

    Living With Hard Times

    Even as the Covid-19 outbreak materially worsens in the US, the pricing of financial assets remains benign. Is this equanimity justified or are we just waiting for the next shoe to drop? Myself and Will Denyer have been in the constructive camp on US equities, even if we are now squeamish about valuations, and continue to think that markets have it about right.

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    Gavekal Research

    Europe's Deal

    Most of the attention paid to the European Union’s recovery fund deal, secured in the early hours of Tuesday morning, focused on how much of the agreed €750bn would be distributed as grants and how much as loans. That’s understandable. Haggling over this balance was one of the main reasons the talks dragged on into their fifth day. But as far as investors are concerned, the relative size of grants and loans is among the least significant aspects...

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    Gavekal Research

    Toward A Renminbi-Gold Standard

    As the international trading and monetary order of the last 50 years continues to crumble, the endgame must be the US dollar losing its lofty position at the apex of the system. Louis and I have argued that this process began in and around 2005 as the US moved to “weaponize” the dollar, thereby ensuring the renminbi’s emergence as a competitor.

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    Gavekal Research

    What Will Stop The Gold Bull Market?

    The sustained outperformance of very large-cap tech stocks means that any manager who substantially underweighted the sector has likely lost clients. The exception may be those who favored gold and gold miners, which have experienced a “stealth” bull market. I say stealth because the precious metals rally has garnered limited headlines, scant investor interest and fewer reflections on either its causes, or consequences.

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    Gavekal Research

    Unpicking The Tourism Effect

    Despite a worsening Covid-19 situation in many big developing economies and concerns over central banks’ monetization responses, emerging market investors continue to climb the wall of worry, betting that a putative “second wave” does not stymie the recoveries of developed economies and China. But another challenge for EM economies is a collapse in foreign tourism.

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    Gavekal Research

    From Temporary To Permanent

    “Nothing,” Milton Friedman famously declared, “is so permanent as a temporary government program.” He was right, which is one reason Wednesday saw the euro climb to its highest against the US dollar since the first days of the international Covid outbreak in early March, while 10-year Italian government bond yields fell to their lowest. Investors are betting that the European Union’s €750bn “Next Generation EU,” proposed as a temporary facility...

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