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    Gavekal Research

    The Diminishing Market Impact Of Tariffs

    After the US imposed its first major round of tariffs on Chinese goods last September, the S&P 500 sold off by -20%. After the second round went into force, it fell -6.8%. And since President Trump announced a third round, it has sold off by -6.1%. It seems each successive escalation in the trade war is having a smaller impact on the US stock market.

    2
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    Gavekal Research

    The Long Term Impact Of Trump’s Latest Tariffs

    Aftershocks from Donald Trump’s August 1 tweets promising new tariffs on US imports from China continued to reverberate through Asian markets on Monday morning. Most notably, China’s yuan fell by some -1.3%, with the USD-CNY exchange rate breezing unimpeded by the Chinese authorities through the CNY7.00 to the US dollar mark for the first time since early 2008. Equity markets in the region were also hard hit, with Japan down -2% and Hong Kong...

    0
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    Gavekal Research

    Strategy Monthly: Focus On The Fed, Not On US Tariff Threats

    Trade war fears are once again front and center of investors' minds. But the reduced magnitude of pledged US tariffs indicates that Trump is anxious to avoid damaging the US economy and financial markets. This leaves the focus on the Fed, and how much it is likely to cut interest rates.

    0
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    Gavekal Research

    What The Early End Of QT Means

    As expected, the Federal Reserve cut short term interest rates by 25bp on Wednesday. Less expected the Fed also halted its program of quantitative tightening, effective immediately. The decision to end the program early cancels an expected additional US$70bn contraction in the supply of money. This represents a significant easing.

    4
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    Gavekal Research

    The Downward Revision In US Profits

    Alongside last Friday’s second quarter US GDP release, the BEA issued revisions which wiped out almost all the increase in pre-tax corporate profits since the end of 2016, and much of the post-tax increase. The revisions can be attributed almost entirely to weak top-line growth and rising wage costs. The good news is that the revisions do not sound a recession warning.

    10
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    Gavekal Research

    Unpicking US 2Q GDP

    Second quarter US GDP growth came in at 2.1%, slightly better than expectations. In itself, this headline figure is not especially illuminating. But dig deeper into the various components of 2Q growth, and there are reasons for moderate optimism about the trajectory of the US economy through the second half of 2019.

    4
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    Gavekal Research

    The Future Of Big Tech

    Big Tech is in the US government’s cross-hairs. Google, Facebook, Amazon and Apple face probes into their behavior, and legislation is in the works to clip their wings. The question for investors is: How serious will the stand-off with the government get and will a prolonged downturn in tech spark a broader decline in the US equity market?

    0
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    Gavekal Research

    Fiscal Crisis Averted, At A Cost To Liquidity

    On Monday, the White House and Congressional leaders reached a tentative agreement to raise US government spending caps and suspend the debt ceiling for two years. Assuming the deal is passed by Congress in the next few days, a fiscal crisis will be averted this year. But before investors breathe a sigh of relief and bet on a rally, it should be noted that one near term effect of the agreement could be an acute liquidity drain as the Treasury...

    8
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    Gavekal Research

    Housing Points To Solid US Growth

    US mortgage applications fell in the week ended July 12, compared with the week before. But do not be misled by the latest week-on-week decline in this high frequency data series. In year-on-year terms, mortgage applications for home purchases have been rising consistently since the beginning of 2019, pointing to a rise in housing construction over the coming months.

    0
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    Gavekal Research

    Why This Time Is Different

    The evolution of the yield curve over the last four months—an inversion after a series of Federal Reserve interest rate hikes, followed by a rapid steepening—has been characteristic of the early stages of the last four US recessions. However, investors worried that the US economy may already be in recession can relax.

    4
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    Gavekal Research

    Look For Just One-And-Done

    In Congressional testimony on Wednesday, Jay Powell cooed just like the dove investors want him to be. The Fed chairman dispelled any lingering doubts that either the end-June trade truce between the US and China or June’s strong US payrolls number will dissuade the Fed from cutting interest rates at the end of July.

    0
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    Gavekal Research

    The Direction Of The Dollar

    The US dollar’s strength over the last year or so has been attributed in large part to expectations that the US administration would impose additional tariffs on imports from China. So, with those expectations on hold following last week’s agreement to resume trade negotiations, you might think the US dollar should be falling.

    0
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    Gavekal Research

    The Focus Turns To The Fed

    After the de-escalation of the US-China economic cold war at the weekend’s G20 summit in Osaka, all eyes are now on the US Federal Reserve, following policymakers’ recent indications that they are ready to cut interest rates. It could be argued that the trade war ceasefire reduces economic risk, and therefore will leave the Fed less inclined to loosen policy. But the Fed’s primary focus is on inflation expectations, and the degree to which they...

    2
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    Gavekal Research

    The Story Behind Low US Volatility

    When Donald Trump declared his trade war against China in the spring of 2018, investors could have been forgiven for expecting the resulting uncertainty and additional economic friction to add both to US equity market and GDP growth volatility. In fact, equity market volatility has generally been low, and US economic growth has remained stable.

    0
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    Gavekal Research

    Libra's Monetary Challenge

    Facebook has 2.7bn users and 90mn companies operating on its various platforms. Perhaps more than any other non-state player, it has the resources, reach and data trove to launch a global currency. Will is not convinced and tackles the issue by asking what benchmarks the new Libra currency will need to hit if it is to become a widely-used medium of exchange.

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    Gavekal Research

    How To Play The Fed Tease

    After the Federal Reserve’s two-day policy meeting, chairman Jay Powell told the market what it wanted to hear. Policymakers see rising risks and stand ready to cut interest rates, but there is no reason to panic—just yet. Real growth is solid, which is good for earnings, but inflation pressures are muted, allowing the Fed to be more accommodative.

    6
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    Gavekal Research

    Don't Worry About The US Consumer

    There is a schizophrenic quality to commentary on the health of the US consumer. On the bright side, sentiment readings are cheery and the labor market is generally solid. Yet on the other hand, Cassandras point to rising credit card delinquency rates, and weakness in sales of autos and homes as early signals of a recession. So what gives?

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    Gavekal Research

    Recession Risk Mispriced

    US treasury yields are up from their 21-month low touched earlier this week, but the market is still priced for recession. Sure, the trade war uncertainty is negative for risk assets. But there are good reasons to believe that the US economy will continue to grow, albeit at a modest rate. As a result, piling into treasuries at current yields is a dangerous move.

    4
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    Gavekal Research

    Trump's War And Our Problem

    In the seven decades after World War II, the most powerful nation in the world could be relied on to defend and promote free trade among nations. Then came President Donald. J Trump. Now it’s conceivable that Trump’s goal is to shake up the old rules-based system.

    3
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    Gavekal Research

    An Ugly Trade War And An Inverted Yield Curve

    Will a trade war boost US growth and inflation, or instead cause a deflationary recession? The bond market is basically saying that a trade war will dent US growth and force the Federal Reserve into easing. Bear with my two-handed explanation, but there are also good reasons why it could also boost nominal growth.

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