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E.g., 16-05-2021
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    Gavekal Research

    Hardly Transitory, But Not A Spiral

    After headline and core CPI readings hit multi-year highs for April, investors have inflation on their minds. The rise in US bond yields and continued fall in equities reflects fears that the Federal Reserve is behind the curve, and could be about to slam on the monetary brakes. My view is that these price pressures are far from transitory, but a spiral higher does not beckon.

    4
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    Gavekal Research

    The Changing State Of US Liquidity

    When it comes to creating and distributing US money, there are three main players: the Federal Reserve, the US Treasury and commercial banks. Recent events call for a status update on the prospects for money flows from each, and what it all means for the bond market.

    4
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    Gavekal Research

    Video: Towards A Sustainable Boom?

    With a shoot-the-lights-out number universally expected when the US reports first quarter GDP data this week, Tan Kai Xian looks at the drivers propelling growth to determine whether US performance is sustainable, or just a flash in the pan. As a number of risks continue to loom large on the radar screen, in this video interview he assesses the implications of US growth for investors in risk assets.

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    Gavekal Research

    A Renter’s Housing Market?

    When GDP for 1Q21 is released on Thursday, the US economy will be shown to be booming. An exception to this cheery trend is the US residential property market, which, having led the recovery, now looks pretty anemic. The worry is that a pronounced housing downturn could even choke off the broader recovery.

    1
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    Gavekal Research

    Trading The Vaccination S-Curve

    Vaccination programs around the world have gotten off the ground at widely varying speeds. But everywhere they tend to follow a similar S-curve trajectory. While most countries are still in the early stages of their vaccination programs, a very few are in their late stages, where the S-curves begin to flatten. Their experience provides an investible roadmap.

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    Gavekal Research

    Living In A Stock Picker’s Market

    When only one major factor affects equities, correlations rise. At such points, the name of the game is not to pick the best stocks, but to get the ebb and flow of that key factor right. At other times, multiple factors are in play and these affect different stocks differently; in such periods, picking winners is vital. For most of last year, the US market was macro-dominated as the Covid-induced economic collapse caused equity correlations to...

    2
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    Gavekal Research

    Webinar: Global Investment Roundtable, April 2021

    In the long years between the 2008-09 financial crash and the 2020 Covid crisis the US stock market massively outperformed equities in the rest of the world. In recent quarters, however, the US market has lost its edge. Yesterday, Louis, KX and Udith weighed the merits of ex-US equities versus US stocks in a post-pandemic world.

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    Gavekal Research

    Living With The Next Covid Wave

    Global markets are looking ahead to a post-pandemic world, but Covid-19 is still very much with us. Globally, new infection rates have risen sharply since late February, reversing their earlier decline. In the last few weeks, the US has experienced an alarming uptick in infections. The European Union is struggling to contain its latest Covid wave, which in several major countries compares with November’s for severity. And across the developing...

    2
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    Gavekal Research

    Strategy Monthly: The Case For Ex-US Equities

    The US trade deficit cycle suggests the world is heading towards a protracted period of US dollar depreciation. With valuations outside the US relatively attractive, and deglobalization meaning ex-US equities will offer greater diversification benefits in future, investors should consider increasing their exposure to ex-US equities.

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    Gavekal Research

    The Costs Of Biden’s Spending Plan

    On Wednesday, Joe Biden unveiled an ambitious US$2trn program of public infrastructure investment, to be funded by corporate tax hikes. In a nutshell, the plan is a proposal to transfer wealth from the broad US market to sectors favored by the government. The sectors that benefit from this largesse stand to enjoy a multi-year boom, with the cost to be borne by the rest of the market. However, the extent of this cost should not be exaggerated....

    2
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    Gavekal Research

    Webinar: The Future Of The Great US Rotation

    Much has happened in the US in the last eight weeks. More than 80mn Americans have been vaccinated against Covid, Congress has passed a stimulus bill worth 9% of GDP, and the Fed has confirmed its determination to remain among the most peaceable of inflation doves. In response, 10-year US treasury yields have leapt, and the rotation from growth stocks to value has grown more violent even as the broad equity market has ascended new heights. In...

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    Gavekal Research

    The Short And Long For The US Dollar

    After ending 2020 amid heavily negative sentiment, the US dollar has confounded near-term bears by edging higher year-to-date. The DXY dollar index has gained 2.75%, clawing back just over a third of its -7.5% decline in 2020. Perhaps this should not be too surprising. First, by the end of 2020, the US dollar was no longer blatantly overvalued. Second, the DXY found support at 90, its low of early 2018. Third, the near-term outlook for nominal...

    2
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    Gavekal Research

    The Strengthening Case For Value

    In the last two weeks, US value stocks have given up some of the outperformance relative to growth that they racked up over the previous five. So has value’s spurt of outperformance now run its course, leaving the S&P 500 value index’s 11pp of outperformance relative to growth since the beginning of February as just a counter-trend blip against a backdrop of more than a decade’s underperformance? Or are the relative gains in value since the...

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    Gavekal Research

    Let's Twist Again

    When they sit down on Wednesday, the members of the Federal Open Market Committee will face a couple of knotty questions. Should they attempt to do anything about rising bond yields? And if so, what?

    4
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    Gavekal Research

    Enduring Cognitive Dissonance

    As yields continue to test new highs, Jay Powell is set to deliver a speech today reasserting the Federal Reserve’s view that inflation can push above its 2% target due to base effects and pent-up demand without monetary tightening being needed. This could offer temporary relief to equity investors, but resulting uncertainty in the bond market is likely to ensure an unstable trading environment.

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    Gavekal Research

    The Changing Composition Of US Inflation

    Investors are all in a tizz about US inflation as the economy begins to normalize and the effect of a huge fiscal stimulus is factored into calculations. Inflation expectations are above the Federal Reserve’s target at 2.2% and energy base effects mean the personal consumption expenditure reading is sure to rise from December’s 1.3%. So far, market action has been focused in the bond market (see A Discussion On Treasury Yields) but equity...

    2
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    Gavekal Research

    Webinar: The Economic Impact Of A New Era

    Vaccines, fiscal stimulus and cheap money are working together to bolster the outlook for growth and inflation in the United States. The US is also under new leadership with new priorities. Our US team of analysts explained what this all means for the economy and asset markets.

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    Gavekal Research

    US Banks And The Steepening Curve

    The brightening of the US economic outlook and the steepening of the US yield curve over the last three months have been positive for the shares of US commercial banks. The prospect of a return to normal as vaccination quells the pandemic means banks are more willing to extend credit. According to the Federal Reserve’s January senior loan officer survey, far fewer banks are now tightening their lending standards. Experience suggests this will...

    5
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    Gavekal Research

    The US Turns A Corner

    It was not surprising that the US economy grew at a mere 4% quarter-on-quarter annualized in the final period of 2020, but there was a grim recognition that the next phase of the recovery will be hard fought. There are, however, reason to be optimistic.

    0
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    Gavekal Research

    Follow The Money

    After last spring’s lockdowns, the Federal Reserve undertook a huge liquidity response and the US government borrowed hand over fist to keep a range of economic actors afloat: US companies got forgivable loans, households received cash grants and the jobless were offered enhanced unemployment payments. Even after this splurge, the Treasury is still left with wheelbarrow-loads of cash. In the year ahead, how these record sums of money are...

    6
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    Gavekal Research

    An Unfavorable Risk-Reward Bet

    Today sees the US vaccination program initiated, and investors are enthused that some kind of return to normal life is finally becoming visible. Nowhere has this “glass half full” view been stronger than in the US corporate credit market, as yield spreads for both investment-grade and high-yield bonds have broken new lows. These moves have occurred despite treasury yields creeping higher, and are starting to look overcooked.

    0
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    Gavekal Research

    Rising Yields And US Housing

    Investors are looking ahead to us economic growth picking up as vaccines are deployed and restrictions dialed back. With the Federal Reserve having anchored short rates near zero, this dynamic is causing a yield-curve steepening. The question is whether higher yields feed back into a still vulnerable US economy and choke off the recovery.

    0
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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.

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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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