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    Gavekal Research

    Georgia On My Mind

    In the four weeks since the US election, the S&P 500 has climbed 7.5%. The bulk of that run-up can be attributed to hopes for an early vaccine roll-out, but at least some is due to the perceived decline in US political risk, Yet although US electoral risk may have diminished, it has not disappeared, and may yet return to affect investor positioning in markets over the coming weeks.

    0
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    Gavekal Research

    A Boost From US Restocking

    As the latest wave of US coronavirus infections continues to worsen, the probability of a modest contraction in fourth quarter GDP is rising. However, there are solid arguments for believing that the worst case scenario for 4Q remains no worse than a mild contraction in output.

    2
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    Gavekal Research

    The Brake On US Growth

    Hopes for effective coronavirus vaccination programs in 2021 propelled both the S&P 500 and the Russell 2000 small cap index to record high, but on the ground in the US, accelerating infections and rising hospitalization rates prompted more state and local governments to order additional restrictions in a bid to slow the spread of the virus.

    0
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    Gavekal Research

    Either Steeper, Or Much Steeper

    Hopes of an early vaccine rollout mean that investors are now looking beyond rising coronavirus infection rates in the US towards an end to the pandemic in 2021. The resulting improved business and consumer confidence will favor stronger activity next year, and therefore a steepening of the US yield curve driven by higher long term bond yields. On top of this, there is an appreciable probability that the Democrats could yet capture the Senate in...

    9
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    Gavekal Research

    Webinar: Facing Down US Risks

    The world is focused on the US election, with concerns over a disputed result. Our US team of analysts are less worried about process than the substantive impact of big changes in domestic economic policy settings. Will, Yanmei and KX assessed the likely fallout from November 3 and assess the latest US economic data with a focus on threats to the US recovery should the pandemic worsen and near-term fiscal responses remain uncertain.

    0
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    Gavekal Research

    A Multi-Faceted US Sell-off

    As Covid-19 cases soar and investors fret about the economic recovery being snuffed out, US equities are getting sucked into a gathering sell off. The worry is that the US follows the kind of nationally-mandated lockdowns now being adopted in Europe. We would make the point that in the US, other factors are also at work.

    0
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    Gavekal Research

    The Dynamics Of US Curve Steepening

    October has seen the US treasury curve steepen, with the spread between three-month and 10-year yields widening by almost 20bp. In historical terms, however, the US curve remains anomalously flat. This suggests there is a greater probability of further steepening in the short to medium term than of flattening. With the short end of the curve pinned at zero by the Federal Reserve, possibly for the next two or three years, any changes in the yield...

    2
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    Gavekal Research

    The State Of The US Consumer

    Data released on Friday showed that US retail sales rose a welcome 1.9% month-on-month in September. However, fears are growing that the stars are now aligning against the US consumer. First, new Covid infections are climbing rapidly to rival the numbers seen at the height of July’s second wave. With government infectious diseases boss Anthony Fauci warning that things are set to get worse heading into winter, this new wave of infections raises...

    9
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    Gavekal Research

    A US Dollar Check-Up

    Over the last month, the US dollar has caught a bid. Admittedly, the rally is small. Since the end of August, the DXY US dollar index has edged up by 1.7%, with the rise in broader dollar indexes scarcely much greater. Nevertheless, the recent uptick is causing some to question whether the dollar’s decline has run its course.

    0
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    Gavekal Research

    Strategy Monthly: The Real US Election Risks

    Some investors worry that a contested US election may spark social and political unrest that is serious enough to threaten US risk assets. They are likely focused on the wrong risk. The US’s democracy faces heavy strains but is nowhere near a breaking point, but the differing outcomes that can occur on (or after) November 3 pose threats to portfolios.

    0
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    Gavekal Research

    When Higher Inflation Is Good News

    Equity markets often seem to have a split personality, but seldom more so than over inflation. A sizable portion of investors is worried that the Federal Reserve is struggling to overcome deflationary pressures, while many of the rest fear the explosion in monetary aggregates must inevitably lead to runaway inflation.

    0
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    Gavekal Research

    Positioning For A Yield Curve Steepening

    Little about the Covid-19 recession has been “normal”, including shifts in the US yield curve. Contrary to expectations at the end of a cycle, the spread between 10-year and three-month treasury yields "steepened" by just 109bp from the bottom. At the same time, the Fed’s hugely expanded quantitative easing program has boosted demand for long-dated treasuries, which continues to compress yields. So what gives?

    3
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    Gavekal Research

    Video: Assessing The Midwest Outbreak

    While the pandemic continues to ravage the US, the last month has seen rates of infection decline across most of the country. That situation has recently reversed in some low-population Midwestern states, but on balance the US has learnt to live with Covid, and therefore a resurgence in the fall will not result in the kind of disruption seen in March and April.

    0
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    Gavekal Research

    Growth Scare? Or Rotation?

    After a three-day rout that has seen the US Nasdaq 100 index sell off by almost -11%, fear is in the ascendant. At this point a reality check may be a valuable exercise. Whatever the proximate trigger for the slump, the deep sell-off has been confined mainly to large-cap tech stocks, and is not generalized across the market. Moreover, there are reasons to believe the picture for the US economy and earnings is set to improve.

    0
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    Gavekal Research

    The Implications Of A Disputed Election

    The pundits bill every US presidential election as the most important and dramatic for years, if not decades. This time they may have a point. However, an examination of the laws governing elections and of past ructions suggests any turbulence for investors will be limited and short-lived.

    0
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    Gavekal Research

    Rich, But Keeping It Real

    The US consumer's willingness to spend remains reliable, even during the pandemic, as shown by consumer discretionary stocks sharply outperforming the rest of the market. Since this stock grouping includes pandemic winners like Amazon and Home Depot there is little reason to bet on a trend-change, as the macro winds should remain favorable.

    0
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    Gavekal Research

    Solid US Earnings Do Not Mean Another Boom Beckons

    With more than 90% of firms in the S&P 500 having reported for the second quarter, the hit to earnings came in nowhere near as bad as expected. This picture is likely to be sustained in the coming year, or so and should lay the ground for solid US equity market performance. Yet, those hoping for a sustained economic recovery to generate the kind of epic returns seen in 2Q20, or in 2009 after the financial crisis, will likely be disappointed.

    2
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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.

    2
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    Gavekal Research

    Strategy Monthly: From Bullish To Neutral On The US

    The upsurge in second-round Covid-19 infections has put the US economic recovery on hold for now. But government, businesses and consumers have got better at coping with Covid, and in contrast to the first round, the economy is not going backwards.

    0
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    Gavekal Research

    Webinar: Global Investment Roundtable, July 2020

    In our monthly Global Investment Roundtable, US analyst Tan Kai Xian analyzed the latest US data and assessed the risk that the present economic stall-out turns into a double-dip recession. Arthur Kroeber explained why the Trump Administration has amped up its Cold War rhetoric on China. Anatole Kaletsky tied it all together and tried to explain the recent movements in global markets.

    0
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    Gavekal Research

    Playing Volatility Convergence

    When the initial Covid-19 panic gripped US financial markets in March, the near term volatility priced in by both equity and bond markets leapt steeply. But the volatility priced in by the equity market rose far more in relative terms, and has been much slower to recede. As a result equity market vol remains abnormally elevated relative to bond market vol, offering investors an opportunity.

    2
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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.

    0
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    Gavekal Research

    Beyond Second Quarter Earnings

    The US 2Q20 reporting season gets into its stride this week, and for all but a fortunate few the earnings numbers will be abysmal. But abysmal numbers will come as no surprise to investors, and will have little impact on the market. A reasonable prospect of upside earnings surprises in 2H and upward revisions in earnings estimates will help support equities.

    0
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    Gavekal Research

    Learning To Transact Through Covid

    The Covid-19 flare-up in the southern and western United States threatens to slow the country’s recovery, but it is unlikely to be a rerun of the severe economic contraction seen in March and April. Since Americans are learning to maintain economic activity during Covid-19, a Nike swoosh or “stairstep” recovery seems more likely than the feared W-shaped outcome.

    2
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    Gavekal Research

    From Bullish To Neutral

    There has been a lot of talk about how the rally in US markets has been driven entirely by irrational sentiment. We disagree, and have since late March argued that the rebound in risk assets was rational. Our assessment rested on four financial and economic pillars. Today a reexamination of these pillars suggests a moderation of our bullish stance.

    0
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    Gavekal Research

    The US Consumer Has Legs

    Another day, another upside surprise from the US data. For investors, the key question is whether this recovery will continue, or whether May’s bounce-back in consumption will prove a one-off flash in the pan, extinguished by a second wave of infections and long term unemployment. Happily, there are good reasons to expect the consumption recovery to have legs.

    1
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    Gavekal Research

    Rotating Into US Small Caps

    Despite some states seeing a worrying rise in Covid-19 cases, a US economic recovery is gaining strength as lockdowns are lifted. Barring unforeseen setbacks, there are reasons to think that the US recovery sustains itself and the equity rally continues. There is, however, a solid macro argument for rotating to a different class of US stocks.

    4
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    Gavekal Research

    What US Payrolls Do And Do Not Mean

    May’s US payrolls report clearly came as a shock to many. Non-farm jobs climbed 2.51mn month-on-month, and the unemployment rate fell to 13.3%. Wrong-footed by the stronger-than-expected figures, investors rushed to bid up US equities. But while the payrolls are good news at the margin, it should not be taken as a reason to rush into equities.

    0
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    Gavekal Research

    To Rotate, Or Not To Rotate?

    This week readers have heard a variety of views from Gavekal partners on the outlook for equity markets. What is not in doubt is that since hitting a peak on February 20, US growth stocks have outperformed value plays by a whopping 17%. Wherever one stands on the macro situation, there certainly seems to be an argument for rotating.

    4
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    Gavekal Research

    The Return Of TINA

    All bull markets start as unloved beasts, but the one that began in US equities on March 23 has been especially despised. The news in the intervening two months has been dreadful, and it is still not really clear who is doing the buying, and why. So in seeking to understand if a market that is up 33% from its bottom can go further, KX considers four possible drivers.

    8
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    Gavekal Research

    Webinar: US Outlook (May 2020)

    In yesterday's webinar, Will Denyer, Tan Kai Xian and Yanmei Xie joined Simon to discuss the outlook for the US and answer viewer questions as the country tries to return to normal after Covid-19 lockdowns.

    0
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    Gavekal Research

    The Upside For Autos And Housing

    As the US begins to reopen for business, some segments of the economy will bounce back faster than others. Among the more vigorous will be the auto and housing sectors, where activity will be lifted by a favorable combination of tailwinds. Investors should consider positioning for a strong recovery in both the automobile and residential construction sectors.

    0
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    Gavekal Research

    Video: In Defense Of US Equities

    With most big US firms having reported their first quarter earnings, the picture is not pretty and worse may follow in 2Q20. Yet the stock market rally of the last six weeks suggests that investors have a fairly cheery view about US firms’ prospects. So what gives? Near-term expectations are, in fact, appropriately set and the fundamentals of the US market are better than they appear.

    0
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    Gavekal Research

    Breasting The Trough

    The apparent divergence between the stock market and economic reality continues to widen. Equity investors are focusing on the expected effects of the Federal Reserve’s massive liquidity injections once states emerge from lockdown. The risk to this rosy view is that the easing of restrictions could cause an infection increase so severe that new lockdowns are imposed.

    0
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    Gavekal Research

    US Labor And The New Economy

    US states are moving to end stay-at-home orders and slowly resume activity. With some 30mn workers having been laid off, they will do so in an economy that has been profoundly changed by Covid-19. At a macro level, a fairly swift recovery is likely. Yet it will be a painful exercise as structural changes wrought by the pandemic upend the US labor market.

    0
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    Gavekal Research

    When Dead Cats Bounce

    The S&P 500 has now rallied 24% in a little over three weeks, making back almost half of its losses over the previous four weeks. The vigor of this rebound even as corporate earnings are collapsing naturally raises the question whether the market has really formed a bottom, or whether we are seeing a classic bear market rally, as Anatole has argued.

    10
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    Gavekal Research

    Video: The US Can Do A V-Shaped Recovery

    The US economy can be assumed to already be in recession, yet KX is relatively confident in its ability to generate a V-shaped recovery once lockdowns are materially eased.

    0
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    Gavekal Research

    Is US$2trn In Fiscal Support Enough?

    Will the US$2trn fiscal packiage prove big enough? The initial market reaction might have suggested that it won’t. However, if extreme lockdowns last no longer than a month or two, the fiscal package may well succeed in its twin objectives of averting mass business failures and preventing a big rise in long term unemployment.

    2
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    Gavekal Research

    High Frequency Data For Tracking Covid-19

    As national lockdowns upend normal economic activity, conventional economic indicators are being rendered useless to investors. High frequency indicators may be helpful in spotting future turning points and gauging the strength of any eventual recovery. In this short chartbook, KX suggests a range of indicators for monitoring the US economy.

    0
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    Gavekal Research

    What US$35 Oil Means For The US

    Much of the commentary on the -30% downward breakout in the price of oil over the last couple of weeks has focused on the negative fallout for the US economy. The demand destruction caused by Covid-19 which initiated the oil price fall is a clear economic negative. Yet cheaper energy also promises positive effects. KX weighs the forces at work.

    3
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    Gavekal Research

    Buy The Dip, Or Sell The Rally?

    When the market falls -10% in a week, and then rallies 5% in a day, investors face a question: Do I buy the dip, or sell the rally? An investor selling the rally would in essence be making a bet that the negative impact of the coronavirus will outweigh the central bank support and G7 finance ministry action that has been promised.

    0
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    Gavekal Research

    Still Dollar Bears (Humbly)

    The Covid-19 outbreak has sparked a flight to safety, reversing an incipient weakening of the US dollar. This is hardly unfounded, as the US so far has been spared a major outbreak and its economy is decently insulated. Yet most of the factors weighing on the US dollar late last year remain valid. Thus Will and KX advise a negative dollar bias.

    0
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    Gavekal Research

    Video: Still The Safest Port In A Macro Storm

    It took a while, but fear of contagion is gripping Wall Street. In the last week, the S&P 500 has fallen -8%, while 10-year US treasury bills have hit a new all-time low. Yet the risk-off move in US asset markets triggered by worries the coronavirus epidemic is turning into a global pandemic is at odds with underlying US fundamentals.

    0
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    Gavekal Research

    The Problem In US Equities

    As US equities power to new highs, investors have brushed off geopolitical ructions and fears of a global pandemic. It is less clear that weak earnings are incidental to the US bull market. With 420 firms in the S&P 500 having reported for 4Q19, earnings are only up 1.6% on the previous year.

    4
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    Gavekal Research

    A Surfeit Of Money

    The fruits of the US Federal Reserve’s swing to monetary easing are ripening. In the last couple of months the about-turn in monetary direction has triggered a dramatic rebound in aggregate US money supply growth, which is outpacing GDP growth. This suggests excess cash may be piling up. If so, the excess is likely to further bid up US asset prices.

    4
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    Gavekal Research

    The Dial Moves Against US Growth Stocks

    The outperformance of growth over value continues, yet an increasing number of serious US managers are making the case for value. On the macro front the worry is of a strong economy that continues to have an inflationary vibe. Over the last five years, I have taken an equity growth bias. Now I’m shifting towards the value camp.

    0
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    Gavekal Research

    A Sweet Spot For US Jobs

    US non-farm payrolls came in stronger than expected in January. Examining more forward-looking data, such as job openings, many observers suspect the US jobs market may be heading for slower job creation and weaker wage growth in the coming quarters. These worries are likely misplaced.

    2
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    Gavekal Research

    The Threat To US Equities

    On Friday the US equity market succumbed to coronavirus jitters, with the S&P 500 sliding -1.77% to wipe out its year-to-date gains for January. The sell-off was accompanied by a surge in the VIX volatility index, which could continue to rise. Happily, however, there are five good reasons to think any such elevated volatility will prove short-lived.

    4
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    Gavekal Research

    Video: US Autos Ride Again

    A range of cyclical and structural factors have conspired to hit US auto sales in recent years. But with the US labor market remaining in rude health and US monetary policy being loosened, that may be about to change. The impact could be positive for US growth and for risk assets, argues KX in this interview.

    0
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    Gavekal Research

    Credit Spreads: Not Worth The Risk

    US corporate bonds had a great run in 2019, and have started 2020 on a strong note. Both investment grade and high yield indexes rose by around 14% last year, with credit spreads contracting substantially in the fourth quarter to approach their narrowest for this cycle. However, as US corporate leverage has risen, considerable latent risks have accumulated in the system.

    0
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    Gavekal Research

    Echoes Of 2017

    Global markets began 2020 on a bullish note, with the US S&P 500 climbing to a fresh record close, up a chunky 4.3% over the last month. Indeed, the US monetary backdrop at the start of 2020 is reminiscent of that in early 2017, a year which saw the S&P 500 climb 19.4%. History may not repeat this year, but there are good reasons to believe it may yet rhyme.

    2
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    Gavekal Research

    A Safety Rope On The Wall Of Worry

    Markets are heading into the end of 2019 on a broadly constructive note. Yet there are daunting risks hanging over 2020. And although a number of these risks may be of modest probability, the impact on portfolios should they arise will be great. This means investors are to an extent climbing a wall of worry. Fortuitously, there is a safety rope to hand.

    0
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    Gavekal Research

    The Earningless Equity Rally

    In the third quarter, US macro-level domestic earnings fell -1.9% year-on-year. Behind this squeeze lies a weak sales picture tied to trading uncertainty and a rise in wages. In the near term, both factors could intensify. Yet there is nothing especially new in weak US profits and a ripping equity market. There are, in fact, three reasons to think this situation can be sustained.

    2
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    Gavekal Research

    The US Manufacturing Slump Abates

    US manufacturing output fell -1.5% year-on-year in October to mark its weakest month since December 2015. The worry is that a US manufacturing recession causes such a drag that even well-performing sectors like housing get sucked down as well. The good news is that these production numbers look like a nadir.

    1
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    Gavekal Research

    Looking Through To US Inflation

    In Congressional testimony yesterday, Jay Powell expressed optimism that US inflation will gradually rise toward the Federal Reserve’s target of 2%. If this is the case then it is reasonable to think that the US central bank could be done with rate cuts in this cycle but some way away from any rate hikes—this points to a Goldilocks of sorts.

    0
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    Gavekal Research

    Time To Embrace The US Consumer

    Whether moving into a fixer-upper or a freshly finished McMansion, most homeowners will splurge on big ticket items to embellish their new abode. With the US housing market looking strong, investors should bet on consumer discretionary—it has the advantage of offering protection if long-dated bond yields move materially higher.

    0
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    Gavekal Research

    Strategy Monthly: Towards A Dollar Decline

    The last five years have been an era of US dollar strength. That era may now be coming to an end. After the US Federal Reserve halted its balance sheet contraction and last month resumed buying T-bills at a rate of US$60bn a month, the Fed is now printing money faster than the other central banks. As a result, relative liquidity growth now favors US dollar weakness.

    0
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    Gavekal Research

    Video: Playing The Un-inversion

    Having inverted over the summer, the US yield curve has steepened sharply. In the past such a move has often presaged recession—but not always. Twice since the 1960s an inversion and steepening was not followed by recession. Then, as now, the return on invested corporate capital was higher than the cost of that capital.

    0
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    Gavekal Research

    Culling The Pessimists

    A series of head-spinning flip-flops in the on-again-off-again trade war over the summer has caused US businesses to delay fresh investment. As a result, business surveys have been giving readings consistent with a US recession. Yet it seems likely that any damage wrought by the trade war remains ephemeral—at least hard data suggests this.

    0
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    Gavekal Research

    The Fed Goes On The Offensive

    Grocery shoppers get perturbed when they buy produce labeled as “organic” but get something from the agro-industrial complex. Investors, on the other hand, should welcome the Federal Reserve’s balance sheet boost, that was described on Friday as nothing more than “organic” growth. As it turns out, this is a heavily engineered offering by the custodians of money.

    0
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    Gavekal Research

    Watching For Signs Of A US Spillover

    Is the rot spreading? In the eurozone, there are signs that this year’s slump in manufacturing may be beginning to spill over to weigh on activity in the broader economy. Plenty of observers believe the US economy is destined to follow a similar path. Their fears may yet be realized, but so far there is no evidence the US economy is heading that way.

    0
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    Gavekal Research

    Quantifying Trade War Risk

    Investors seem to have grown somewhat blasé about the US-China trade war lately. Over 12 months after the outbreak of hostilities, the S&P 500 is up 2.2% year-on-year. Part of the reason for this nonchalance appears to be a belief that US growth and domestic profits are invulnerable to any escalation of the conflict. This belief may be mistaken.

    2
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    Gavekal Research

    What If The Fed Has Finished Cutting

    What happens to the US equity market if the Federal Reserve has already finished cutting interest rates? Last Friday, Will made the case for a rebound in US growth, but withheld judgement whether it would be driven by real growth or inflation. The prospect raises the very real possibility that the Fed may decide rates have been cut enough.

    9
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    Gavekal Research

    US Banks To Shine Again

    Ahead of next week’s Federal Reserve meeting, US bank stocks look set to break out of their 21-month underperformance trend. Investors are betting on a 25bp rate cut, with at least one more to come before December. They are also cheering the rise in long rates globally over the last week or so, which has acted to steepen yield curves. Given that US consumers will benefit from even cheaper money and should brush off whatever the trade war throws...

    0
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    Gavekal Research

    Tariffs Won't Trouble US Consumers

    As US growth has slowed this year, consumer spending has been the economy’s bright spot. Personal consumption expenditure was the principal contributor to growth in the second quarter and July. However, fears are growing that the US consumer will come under increasing pressure in the coming months as the latest round of tariffs go into effect.

    4
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    Gavekal Research

    Weathering Trump’s Trade War

    It may be the dog days of summer, but investors got a truckload of news this weekend that points to a bad situation getting worse. Given President Donald Trump’s escalation of tariffs and threat to bar US firms from operating in China, the worry is that his hardline stance spurs a US recession. KX and Will think this is unlikely.

    3
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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

    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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    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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    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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    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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    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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    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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    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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    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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    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?

    4
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    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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    The Message In Market Dispersion

    Economic events create winners and losers. It is too early to say with confidence how the current US trade and technology confrontation with China will play out, or whether US tariffs on imported autos and the threatened retaliation will go into force. But it is possible to tell how great investors believe the potential disruption is likely to be.

    0
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    A Better Time For A Trade War

    For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well. Chinese negotiator Liu He is set to arrive in Washington on Thursday for the latest round of trade talks which are going down to the wire.

    5
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    How Long Can Productivity Contain US Inflation Pressure?

    April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?

    0
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    Managing Today’s Biggest Risk

    The US first quarter GDP data released on Friday proved consistent with the picture of slower—but still positive—growth through 2019, and a continuation of the Goldilocks tailwind for asset markets. But after a strong run-up in equities this year, it might be time to ask what the greatest risk is to the current environment, and how to position for it.

    0
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    A New Look At The Housing Market

    When the US slides into recession, it generally does so because of a contraction in investment, either in the corporate sector or in the housing market. Today, returns on capital invested in housing exceed the cost of capital, signalling a positive outlook for US residential investment, construction, house prices, and the shares of homebuilders.

    3
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    Play A Longer US Cycle With Small Caps

    After a wobble late last year, the US economy looks to be stabilizing. The Atlanta Fed has revised up its estimate for 1Q19 GDP growth to 2.1%, while more timely indicators such as mortgage applications, PMI readings and durable goods orders indicate a steadying of the ship.The question is how to play this development.

    0
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    Recession Warning, Or False Alarm?

    On Friday, the three-month to 10-year portion of the US treasury curve inverted for the first time this cycle, heightening investors’ fears of impending recession. But although every US recession of recent decades has been preceded by an inversion of the yield curve, not every inversion has been followed by a recession; there have been cases of false positives.

    6
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    Gather Round The Punch Bowl

    US monetary policy tightening is over, at least for now. While the Federal Reserve is not adding any more hooch to the punch bowl, chairman Jay Powell has promised to stop cutting his serving sizes. Although not much of a surprise, the Fed’s guidance is broadly positive for just about everything but US dollar cash—especially equities and real assets.

    0
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    Believe In The US Consumer, Still

    Just as the Federal Reserve eases up on monetary tightening and negotiators struggle to avert a trans-Pacific trade war, the US consumer is emerging as the next source of worry. Americans are deferring big-ticket purchases, consumer confidence readings have softened and retail sales growth has slowed. Suddenly, the picture looks similar to the 2015-16 soft patch, or worse still it resembles the phase leading up to the 2008 crisis, when an...

    0
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    Productivity To The Rescue, For Now

    On first reading, Friday’s US payroll report for February made grim reading for most investors. The screeching slowdown in non-farm hiring seemed to point to a US economy that is flirting with recession. To compound matters, wage growth seemes to point to a very tight labor market. On closer inspection, however, a less concerning picture is revealed.

    0
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    Get Ready To Buy The Dip

    With the S&P 500 up a nifty 18% from its Christmas eve low, propelled by the Federal Reserve’s dovish turn and hopes of a US-China trade truce, it is natural to wonder if US stocks are due for a correction. The question for investors is whether they should fade the rally now before it is too late, or stay invested and look to buy the dip should a correction occur.

    0
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    The Trouble With Price Level Targeting

    The Federal Reserve is talking about changing the way it targets inflation. Currently it tweaks policy in an attempt to zero in on a specific inflation rate: 2%. Under the framework it is discussing, instead it would aim to hit a price index level consistent with a particular long term average inflation rate. The distinction might sound subtle, but by targeting a price level, the Fed would compensate for any undershooting by attempting to...

    6
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    The Mystery Of The Missing Stimulus

    Since late 2016, the US trade deficit has been widening. Usually, when the US trade deficit expands, the effect is stimulative for the rest of the world. However, this time around there have been no signs that non-US economies are enjoying a resulting pick-up. In this report, KX examines possible explanations for the failure of this longstanding relationship.

    0
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    A Catspaw, Not A Tailwind

    The publication of minutes from FOMC’s January meeting confirmed that the Fed has executed an about-turn in its policy stance and is now in dovish mode. More specifically, the minutes confirmed that the Fed is planning to halt the contraction of its balance sheet later this year, putting an early end to the quantitative tightening that began in October 2017.

    0
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    Fear Not The ‘Earnings Recession’

    US earnings growth is clearly slowing. As global growth ebbs and the effect of last year’s US tax cut wears off, 1Q19 will be worse according to US analysts who in aggregate are predicting EPS to fall -1.4%. Some commentators are even declaring an “earnings recession.” Time to take profits for the year and run to the hills? I’d say “no”.

    5
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    Fed To The Rescue

    It was no surprise on Wednesday that the US Federal Reserve promised to be “patient” about further interest hikes and flexible on the pace and extent of its balance sheet reduction. The Fed’s more dovish stance had been clearly signaled in a series of speeches ahead of yesterday’s policy meeting. As Fed chairman Jay Powell explained, with US inflation data subdued and other major economies slowing, it makes good sense for the Fed to take a “wait...

    0
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    Don't Fear Corporate Leverage (Yet)

    With Brexit, the US-China trade war and a synchronous global slowdown, these are anxious times for investors. But apparently, all these concerns pale in comparison with worries about US corporate leverage. According to a BofAML survey this month, corporate indebtedness is the biggest single worry among fund managers. We beg to differ.

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    The Bull Case For US Housing

    As the US government shutdown drags on, US-China tariff talks stutter, the Chinese growth engine slows, global trade slumps and GDP forecasts get cut, the stream of macro-misery in recent days has seemed relentless. On Tuesday, the US National Association of Realtors added its voice to the dirge, reporting that sales volumes for existing homes fell -10% year-on-year to a three year low in December. With new home sales and construction equally...

    10
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    Time For US Curve Steepeners

    Despite the risk-on move of the last four weeks in the US, the two-year to five-year portion of the yield curve remains inverted. And as recent data releases pointing to a slowdown in growth, fears persist that the US economy is heading towards a recession. However, while US growth set to moderate, forecasts of recession are premature.

    0
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    A Good News Story From The US

    As the record government shutdown denies Americans vital services and federal workers paychecks, the US has hardly been putting its best foot forward. While we don't expect this political impasse to change the growth trajectory, it does weigh on the market mood. Against such a dour backdrop, we think a good news story from the US economy can be easily missed.

    0
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    Rollover In The US, Not Recession

    This week’s revenue forecast downgrades from Apple and Delta Air Lines and Thursday’s steep dive in the ISM manufacturing PMI only appeared to confirm what market participants already knew: US growth is rolling over. Yet despite the recent sell-off in equities and the further flattening of the US yield curve, we see no recession on the horizon.

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