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E.g., 25-11-2020
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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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