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E.g., 18-05-2021
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    Gavekal Research

    The Euro's Solid Ground

    After a breakneck 10% rally against the US dollar since mid-May, the euro faces headwinds as rising Covid-19 cases means that European nations must re-instigate social distancing measures. Still, Europe’s newly-agreed common purpose in facing such travails makes any sell-off in the single currency a buying opportunity as the unit looks set on a path of structural appreciation.

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    Gavekal Research

    Europe’s Job-Protection Choices

    Between February and April, some 22mn Americans lost their jobs. The rate of unemployment soared to nearly 15%—four percentage points above its last record high in 1982—but across the pond in Europe joblessness barely budged, inching up to 7.8%, from 7.2% in March. Taking the lead from Germany, governments across Europe decided it was better to keep people in jobs than to fire and rehire them later. As Europe again faces a worsening Covid-19...

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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

    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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    Gavekal Research

    Buy Europe, Sell The UK

    In past crises the UK has emerged more quickly than the eurozone. In 2008-09, it restructured its banks, slashed interest rates and embraced quantitative easing before European policymakers had eaten breakfast. As a result, UK domestically-focused stocks outperformed those in the eurozone. Don’t count on a rerun in the aftermath of the Covid-19 crisis.

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    Gavekal Research

    A Dismal Best Case

    The crowds that Monday swarmed British shops, allowed to open for the first time in 12 weeks, at first sight bodes well for a V-shaped recovery. Yet despite plentiful accumulated savings and considerable pent-up demand, the UK’s consumption-driven economy faces formidable post-lockdown headwinds, with consequences for equities and sterling.

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    Gavekal Research

    Europe Flexes Its Fiscal Muscles

    Another day, another big fiscal expansion from Germany. Yesterday, Berlin outlined a €130bn stimulus package, representing 3.8% of GDP. If there was any doubt, Europe has clearly ditched its decade-long infatuation with austerity and is back in the Keynesian camp. This situation is bullish for eurozone stocks and in time could yet spur a long-forgotten problem—inflation.

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    Gavekal Research

    ‘No Limits’ Now ‘No, Limits’

    Markets have largely taken in their stride Tuesday’s decision by the German Constitutional Court that the European Central Bank exceeded its mandate by launching quantitative easing in 2015. The euro's move against the US dollar and the 10bp uptick in Italian 10-year yields were modest by the standards of recent volatility. This may be overly complacent.

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    Gavekal Research

    Italy’s Debt Sustainability Question

    In the short term, Italy’s sovereign spreads are unlikely to be greatly troubled by the decision late Tuesday from Fitch to downgrade the country’s debt rating. In the longer term, however, in the absence of some form of eurozone fiscal union, Italy will remain caught in a vicious debt trap, which must call its continued membership of the single currency into question.

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    Gavekal Research

    The Trouble With Eurozone Banks

    European leaders trod a fine line on Thursday, opening the way for a hefty “recovery refund”, but not committing to one and not saying how the money may be spent. Eurozone capital markets—except for bank stocks—have been fairly calm, and so do not need a hasty bailout. That exception, however, is a problem that may end up consuming a big part of any rescue fund.

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    Gavekal Research

    The Atlantic Divide

    Second order economic effects from the Covid-19 outbreak are ripping through industrialized economies, with soaring unemployment, shuttered industries and a fall in corporate profits. While China has eschewed large-scale government support, Europe and the US have adopted massive fiscal and monetary responses. These Western initiatives do, however, differ in key respects and when lockdowns finally end, one or other approach will likely have...

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    Gavekal Research

    Another Crisis, Another Euro-Fudge

    “Europe will be forged in crises, and will be the sum of the solutions adopted in those crises,” wrote European Union “father” Jean Monnet in his 1976 memoirs. Today Europe is once again facing a crisis. And once again the solution adopted by Europe’s fractious leaders is likely to be a short term fudge that defers hard decision-making to another day.

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    Gavekal Research

    Why Europe Can Survive The Storm

    Economic activity indexes in Europe have collapsed to never-before-seen levels, yet markets have rallied as investors have become persuaded that policy responses are enough to avoid a full blown euro crisis from unfolding. Europe for once appears to be more decisive in managing a crisis situation than the US and it is possible it may manage a swifter pick-up once the public health situation stabilizes.

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    Gavekal Research

    Europe In The Eye Of The Storm

    After the US slapped a 30-day travel ban on visitors from Continental Europe the world’s three biggest economic areas are now effectively cut off from most human contact. As China sees its infection rate level off, the growth dynamic of this pandemic has shifted to Europe. Economic effects will depend on government responses.

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    Gavekal Research

    What Will End The US Dollar’s Run?

    Among the confounding effects of the coronavirus has been its impact on foreign exchange markets. The last few weeks have seen heavy flows into the US dollar, on the grounds that the US economy is relatively insulated from the ill-effects of the outbreak. As fears have grown of a dismal first quarter for the eurozone on diminished external demand (see Just When Things Were Looking Up), the euro has slumped to a near three-year low against the US...

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    Gavekal Research

    Just When Things Were Looking Up

    It seems the European economy can’t catch a break. After a grim year in 2019, especially for the manufacturing sector, the old continent entered 2020 with reasons for cautious optimism. Survey-based indexes of business optimism appeared to bottom out late last year. Then the Wuhan coronavirus hit China.

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    Gavekal Research

    Britain’s Soggy Prospects

    Despite a worsening coronavirus situation and worries that a Brexit bounce could be short-lived, the Bank of England defied the expectations of many by not cutting interest rates. The UK’s weak medium term growth outlook and difficult impending trade talks with the EU means that policy will remain dovish and sterling’s upside prospects are likely capped.

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    Gavekal Research

    Playing The ECB Strategic Review

    When a government agency announces a “strategic review”, the presumption is that some knotty issue is being kicked into the long grass. That was the vibe yesterday when Christine Lagarde kicked off the European Central Bank’s year-long navel gazing exercise. In this case, however, investors would do well not to check out entirely from ECB watching.

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    Gavekal Research

    The Long Slow Road To German Fiscal Expansion

    To read the media headlines, you would either think that Germany’s coalition government is on the brink of collapse, or that Europe’s largest economy is on the eve of a massive fiscal expansion. The headlines are exaggerated. Yes, at the weekend the coalition’s SPD partner did elect a duo of free-spending leftists as its new leaders. But the government is likely to survive intact for its remaining two years. And although political thought in...

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    Gavekal Research

    Europe's Political Paralysis

    With the Spanish general election unlikely to produce a proper government, the country looks increasingly ungovernable. For an economy that weathered the financial crisis intact but has chronic productivity problems, this is a worry. However, the result of Europe’s fragmenting political landscape is long-term policy stasis rather than a near-term collapse of the single currency.

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