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    Gavekal Research

    The Price Of Policy

    Wherever you look, energy prices are shooting up, and shortages abound. The global economy, it seems, is in the grip of a full-blown energy crisis. Drill down, and it appears this is not one crisis, but many. The effects—worsening shortages and surging prices—are much the same in differentregions. But the immediate causes of the crunch seem to differ widely.

    0
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    Opec Frays

    Last year, when Opec+ talks broke up without an agreement on setting production quotas, the oil price collapsed. On Monday, when Opec+ talks broke up without an agreement on setting production quotas, the oil price surged. The majority of market watchers see no inconsistency, but they are making some large assumptions, which deserve close scrutiny.

    3
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    What’s Your Linchpin Made Of?

    Writing here on Tuesday, Louis argued cogently that energy prices will be the “linchpin” that decides the future direction of inflation. But, in asking whether governments can successfully engineer a green energy transition, it’s fair to say he was thinking in terms of years ahead. Energy prices also have a major influence on inflation and inflation expectations on the scale of months.

    1
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    Gavekal Research

    Like A Hell-Broth Boil And Bubble

    Last week began with a -15% fall in the Turkish lira in Asian trading on Monday morning. This week started with a -16% fall in the share price of Nomura in Asian trading on Monday morning. It would be easy to dismiss the two events as entirely unrelated. At first glance they have nothing in common, but in this piece Tom takes a closer look.

    4
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    Gavekal Research

    Game Theory, With Complications

    Devotees of game theory are set to enjoy a rare drama playing out in front of their eyes in the oil market over the coming months. Since April last year the price of Brent crude has more than tripled. Now, with production constrained, inventories being drawn down, and vaccines promoting hopes of a return towards normal economic activity, expectations are high of further near-term price gains.

    0
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    A Debate On The US Dollar

    In investment, few things can prove as dangerous as a “safe bet” in the foreign exchange market. So, when 2021 began with a firm consensus that the US dollar was destined to fall, only for the DXY index to rally 1% over the last week, people quickly began to question the prevailing consensus. Within Gavekal, this sparked a spirited debate on the direction of the dollar. Readers will not be surprised to learn that there was a range of views, with...

    12
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    Webinar: Hong Kong Under The National Security Law

    Hong Kong has spent five months living under a tough national security law imposed on it from Beijing. The direct impact has been a sharp curtailment of opposition political activity that has sparked sanctions from the United States. Now, China has plans for more changes to Hong Kong's legal system, with a requirement for judges to be patriots. In yesterday’s webinar, Vincent Tsui, Dan Wang, Tom Holland and Simon Pritchard discussed the...

    0
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    Gavekal Research

    The Realignments Begin

    It was no coincidence the first-ever visit to Saudi Arabia by an Israeli prime minister took place a day before US President-Elect Joe Biden announced his choice of Antony Blinken as Secretary of State, indicating a conciliatory stance towards Israel and Saudi's mutual enemy Iran. It was, however, coincidence that the price of oil should advance to its highest since early March on Tuesday.

    0
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    Gavekal Research

    Oil’s Unintended Consequences

    On Wednesday, ministers from the Opec+ oil exporting cartel will meet to decide whether to begin scaling back their production cuts, but with the prospect of a renewed increase in infection rates, it's safe to say they will adopt a cautious approach. More interesting is whether they will err on the side of excess caution, causing the oil price to rise.

    0
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    Gavekal Research

    The Derating Of The Dollar

    In the last four weeks as market participants have reassessed relative risk premiums, they have found it increasingly easy to identify currencies which at the margin are looking more attractive than the US dollar. As a result, the dollar has weakened both against developed world and emerging market currencies. This weakness is acquiring momentum, and may have further to run.

    0
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    Gavekal Research

    Video: The Upsurge In Oil

    The price of Brent crude oil has doubled in the past six weeks, supported by the beginning of a recovery in demand as economies come out of lockdown and by expectations that the Opec+ cartel will extend the deep production cuts it agreed in April. Tom weighs the forces likely to drive the oil market over the coming months.

    0
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    Saudi's Peso Problem

    Two weeks ago in early May, the Saudi Arabian Monetary Agency issued an unusual statement. Sama, it insisted, is committed to maintaining the Saudi riyal’s exchange rate peg at SAR3.75 to the US dollar, and has the resources to do so. Stress signals don’t come much clearer.

    0
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    Video: Pandemics, Protests And Outperformance

    Hong Kong’s GDP contracted almost -9% year-on-year in the first quarter, as the impact of the coronavirus hammered an economy already severely weakened by the last year’s anti-government street protests. In this video interview, Tom examines the storms battering Asia’s premier financial center, and accounts for the resilience of its financial system.

    0
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    Gavekal Research

    Whale Watching In The Gulf

    Gavekal’s dynamite fishing analogy maintains that the biggest impact of a market shock only shows up after a delay, much like the effects of an underwater explosion. First the small fry float to the top, then the mid-size fish. Only much later does the dead whale break surface. After the oil price shock investors are asking if the Saudi riyal's peg to the US dollar could be that whale.

    5
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    Gavekal Research

    The Truth In Trump’s Tweets

    Oil market pundits were quick to dismiss Donald Trump’s tweeted claim Thursday that Saudi Arabia and Russia are ready to agree crude production cuts of 10-15mn bpd as “absurd” and “incredible”. But oil production cuts of the magnitude flagged by Trump are certainly in the pipeline—whether as the result of a new Opec+ agreement or not.

    1
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    Fiscal Intubation

    “This is not a time for ideology or orthodoxy,” said UK chancellor Rishi Sunak on Tuesday. Policymakers across Europe and in the US agree. They have now thrown orthodoxy out of the window in an all-out attempt to support economies hammered by Covid-19 countermeasures. In the US, the administration announced fiscal support worth as much as US$1.2trn, or 6% of GDP, complete with the immediate mail-out of a US$1,000 check to each and every member...

    2
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    Gavekal Research

    The Conditions Needed For A Bottom

    Financial markets are now in full-blown panic mode. For investors, the key question is: What will it take for markets to form a bottom, and when will this happen? No one can answer with any precision. However, it is possible to discern the broad conditions needed to allow the markets to find a bottom. We are nowhere near them yet.

    0
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    Video: Regime Change In The Oil Market

    The breakup of the Opec+ oil cartel and the ensuing price war between Russia and Saudi Arabia triggered a -30% fall in the price of oil and spooked financial markets. Moscow has upended the monopolistic pricing regime that has supported the price of oil over the last three years. Tom Holland examines the consequences of the oil market’s regime change.

    0
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    Gavekal Research

    A Hand Grenade In A Bloodbath

    If you ever wondered what would happen if someone lobbed a hand grenade into a bloodbath, now you know. Markets were always going to be shaky on Monday, as it became increasingly clear that the US is set to see a sharp rise in recorded coronavirus cases. Then, on Friday Russia walked out of the Opec+ oil producers’ cartel, initiating an all-out price war in the oil market.

    1
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call February 2020

    In yesterday’s research call, Vincent Tsui and Tom Holland joined Arthur Kroeber to discuss the coronavirus outbreak, what it means for Chinese and regional economic growth, and how investors should position themselves during this period of rapid news flow and high market volatility.

    0
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    Gavekal Research

    Video: When Oil Hits The Floor

    No financial market has been hit more heavily by the Wuhan coronavirus than oil, with the price of crude falling by more than -20% from its early-January high on fears the outbreak will crush China’s demand for fuels. In this short video, Tom examines the global implications of the oil price slide, and asks “where next?” for the price of the world’s key commodity.

    0
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    Gavekal Research

    Don't Count On Oil To Fall Further

    Nowhere in markets has the impact of the Wuhan flu made itself felt as forcefully as in the oil price. The price of Brent crude has fallen -24% in just four weeks to US$54.58/bbl on Wednesday morning in Asia on fears of massive demand destruction in disease-hit China. WTI has fallen by a similar amount. This slide has great immediacy for investors in the energy sector.

    0
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    Strategy Monthly: Covid-19 And Emerging Markets

    The rapid spread of Covid-19 has spooked investors and triggered steep sell-offs in Chinese and Asian markets. But there are good reasons to hope the spread of the disease will be contained in the coming weeks, at which point Chinese and regional equities can recover.

    0
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    Lessons From Last Time Around

    Beijing shops have sold out of high-spec surgical masks, scared customers are stockpiling medicines, and financial markets are looking shaky. The parallels between the current coronavirus outbreak and the 2003 epidemic of Sars are obvious. But there are also important differences, especially in the backdrop against which today’s outbreak is occurring.

    0
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    Gavekal Research

    Oil Again

    Less than two weeks after the price of oil briefly spiked to a four-month high on fears of a war between the US and Iran, crude has again been looking bid on trouble in the Middle East. This time, the bulk of Libyan shipments have been cut off amid the country’s civil war, while in Iraq anti-government protests have reportedly caused two minor fields to curtail production.

    0
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    Gavekal Research

    The Message Behind The Missiles

    At very first glance, the Iranian missile attack on two US airbases in Iraq early Wednesday might appear to confirm worst case fears that the US and Iran are heading irreversibly towards all-out war. However, a preliminary examination of the information available suggests there are still solid reasons to believe that the tensions can be de-escalated, and that outright conflict can be avoided.

    0
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    A Dispassionate View Of The Iran Crisis

    To judge by the tone of the media coverage and much of the analysis since Friday, the world is teetering on the brink of an apocalyptic war in the Middle East between the US and Iran. But a dispassionate examination of the US-Iran confrontation indicates that the probability of an all-out shooting war between the two sides remains small. As a result, while markets are right to price in an elevated risk premium following Friday’s strike, the...

    0
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    Strategy Monthly: Risk Assets In 2020

    World stock markets have enjoyed a solid couple of months as geopolitical risks have abated and the manufacturing slowdown appears to have leveled off. With major central banks all printing money simultaneously for the first time since the financial crisis, and fiscal policy easing at the same time, there are good reasons to believe the rally will be sustained into 2020.

    0
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    Saudi, Peak Oil Demand And Aramco

    With the rise of environmental concerns and alternative energy sources, the preoccupation is that peak oil demand could be as few as 10 years into the future. The fear that come the 2030s or soon after, it could be left sitting on 300bn barrels of stranded assets is behind the Saudi Arabian government’s decision to sell shares in its monopoly petroleum producer, Saudi Aramco.

    1
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    At Home In The Range

    Almost a month after missile attacks on key Saudi Arabian oil production and processing facilities pushed benchmark global oil prices up by 20% overnight, the market has moved on. Saudi Arabia has defied industry expectations by continuing to supply oil to the market in abundant quantities. The current market pricing reflects that.

    0
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    Gavekal Research

    Video: Washington, Iran And The Price Of Oil

    This week’s sacking of John Bolton as White House national security advisor triggered a fall in the price of oil as traders concluded the notorious war hawk’s departure paved the way for a relaxation of US sanctions on Iranian oil exports. That may be unlikely; US officials insist their policy of “maximum” pressure on Iran remains in force.

    0
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    The Meaning Of The Iran-China Deal

    Reports that China has signed a long term agreement to buy large quantities of Iranian oil in defiance of US sanctions will weigh on global crude prices and further complicate US-China talks, reducing the chances of a deal before the 2020 US election. In effect, the world is now facing a four-way tug of war over the oil price.

    0
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    Gavekal Research

    The Importance Of Oil

    The world’s fixed income markets are priced for a severe bout of demand destruction and deflation. Yet, outside Europe at least, growth in the world’s major economies continues to tick over. However, could a sudden oil price rise spark an uptick in inflation pressure that triggers an abrupt repricing in which bond yields spike sharply higher?

    0
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    Gavekal Research

    Return Of The Widowmaker

    If shorting Japanese government bonds is the ultimate widowmaker, calling the top of the gravity-defying Hong Kong property market cannot be far behind. The International Monetary Fund, for example, has been warning about the dangers of an unsustainable bubble since 2010. Now suspicions are growing that the stopped clock’s hour may finally be at hand.

    2
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    The Iran Wildcard

    Of the many risks besetting investors right now, the hardest to assess is the confrontation between the US and Iran. Should tensions escalate into a shooting war, the consequences would be far-reaching and severe. However, looking beyond the bellicose rhetoric there are reasons to believe that the balance of probability still weighs against a marked escalation.

    1
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    Strategy Monthly: Who Suffers Most In A Long Trade War?

    Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

    0
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    Video: Iran And The Oil Price

    Angry rhetoric between the US and Iran reached blood-curdling intensity after the US announced in late April that it wouldn't grant waivers for sanctions on Iran's oil exports. While this caused a short term spike in the oil price, it has since fallen about -8% from its high. Are oil traders too complacent about the risks, or does the market have it right?

    0
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    Gavekal Research

    Oil Market 1, Commentariat 0

    As if the macroeconomic impact of a full-blown US-China trade war weren’t enough to worry about, over the last couple of weeks investors have also had to contemplate the risk of a real shooting war between the US and Iran, the effect it would have on the price of oil and the threat that would pose to a fragile global economy and jittery world markets.

    0
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    Iran Waivers And The Oil Price Spike

    US Secretary of State Mike Pompeo has announced that the US will not roll over waivers on its sanctions on Iranian oil exports when they expire in May. The question for investors is this: If Washington does make good on its threat, to what extent are other oil producers able and willing to increase output in order to make up any supply shortfall in global markets?

    5
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    Good News For Goldilocks

    Last Thursday, with the price of oil approaching a four-and-a-half month high, Donald Trump took to Twitter. “Price of Oil getting too high.” Trump’s tweet had little effect, with Brent crude hitting US$69/bbl on Monday. Prices are likely to continue to push higher over the coming months towards 2018's highs—a troubling prospect.

    0
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    Video: Intervention To Support The HKD Signals Strength, Not Weakness

    In the last two weeks, the Hong Kong Monetary Authority has been forced to sell US dollars in the foreign exchange market to maintain the Hong Kong Dollar's peg to the US dollar. Yet far from signaling a crisis, the interventions are a symptom of confidence in Hong Kong’s financial system, which is swimming with liquidity.

    0
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    What Huawei To Go

    The arrest last Saturday in Vancouver airport of the CFO of Chinese telecoms giant Huawei at the request of US prosecutors will have major consequences for investors beyond the short term market volatility it contributed to this week. Reaching a permanent US-China agreement is now much more complicated, and the arrest shows the US can use more than tariffs against China.

    0
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    What's Changed In The Oil Market

    “Sanctions are coming,” proclaimed Donald Trump in a tweet last week, three days before the imposition of the latest US embargo on Iranian oil exports. The oil market was not impressed. Since late September, when crude hit four-year highs, the Brent price has slumped -16.7% from US$86.29 to US$71.91, with WTI falling -19.1%.

    0
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    No Renminbi Line In The Sand

    The renminbi has jumped over the last two days after the central bank signaled it would squeeze offshore liquidity. However, argue Long and Tom, it would be wrong to interpret this as a sign the PBOC will defend a line in the sand at 7. Embracing flexibility makes more sense as an exchange rate policy. The PBOC is just aiming to smooth volatility.

    0
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    Hidden Leverage In Hong Kong

    Last month, for the first time in 12 years, Hong Kong banks raised their prime lending rates. This increase, coming at a time when the Hong Kong government has pledged to boost housing supply, has prompted fears that rising mortgage rates and falling home prices could expose a dangerous accumulation of hidden leverage in the local property market.

    1
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    Back To A Three-Figure Oil Price

    Oil broke higher on Monday, with the price of Brent decisively breaching US$80/bbl, a level it had repeatedly tested since early May, when the US administration announced it would reimpose sanctions on Iranian exports. The immediate trigger for the break-out was the decision at the weekend by the Opec cartel plus Russia not to increase their formal output target in the near term. At first glance, the market response might appear an over-reaction...

    5
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    Last Place In The FX Beauty Contest

    In mid-August, the US dollar hit a 12-month high against developed country currencies, and a multi-year high against emerging market currencies. Two weeks on, the burning question for investors is whether those highs represent a turning point, whether the dollar strength that prevailed from mid-April to mid-August has now played out, and whether the US currency is about to resume the softening trend that predominated through 2017. As always,...

    8
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    The Trouble With Trade Retaliation

    When this week US president Donald Trump threatened to slap tariffs on an additional US$200bn of imports from China, on top of the US$50bn already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.

    2
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    Video: The Hong Kong Peg Under Pressure

    The Hong Kong Monetary Authority has again been intervening in the foreign exchange market after it stepped in last month when the Hong Kong dollar fell to its weakest in 35 years. So far the HKMA has bought HKD62bn, selling almost US$8bn to defend the Hong Kong dollar’s peg to the US dollar. In this video interview, Tom Holland explains what’s going on, and why there is zero risk Hong Kong will be forced to devalue its currency.

    0
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    The Curious Case Of The HK Dollar

    One of the longest awaited adjustments in financial markets may finally be about to happen. Last year, betting that Hong Kong dollar interest rates would rise to converge with US dollar rates was reckoned to be among the surest trades in world markets. Yet the convergence never happened. Over the last 12 months, one-month Hong Kong dollar Hibor has consistently traded at a discount to one-month US dollar Libor of more than 30bp. And since the...

    0
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    Gavekal Research

    Gauging The Strength Of The Oil Bid

    It made headlines around the world earlier this month when the US government’s Energy Information Administration announced that US oil production had hit 10.25mn bpd in the last week of January. At that rate, the US was not just pumping more crude than at its previous production peak in 1970, it was very likely pumping more than Saudi Arabia, lifting the US into second place in the global production league table behind Russia.

    5
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    Real Yields, The Euro And The Dollar

    The global bear market in bonds growls on. Yesterday the yield on 10-year US treasuries climbed to a new 45-month high at 2.7%. Even more striking, the yield on five-year German bunds rose to zero for the first time since November 2015, marking the beginning of the end of an era for eurozone negative yields as market expectations grow that the ECB will reduce its monetary accommodation sooner rather than later.

    4
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    Mnuchin’s Weak Dollar

    If Robert Rubin were dead, he would be turning in his grave. Speaking in Davos yesterday, US Treasury secretary Steven Mnuchin shook markets by declaring: “A weaker dollar is good for us.” His remark broke the precedent set by Rubin in 1995 and adhered to by Treasury secretaries ever since, of insisting: “A strong dollar is in the best interest of the US.”

    5
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    Equities, The Yen And The BoJ’s Exit

    Last month Bank of Japan governor Haruhiko Kuroda participated in an ECB panel on the importance of communications as a tool of monetary policy. He seems to have taken the message to heart. In the couple of weeks since, scarcely a day has gone by without Kuroda or one of his colleagues on the BoJ’s policy board talking publicly about the “reversal rate”, hinting heavily that the central bank is looking to dial back its ultra-accommodative stance.

    0
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    The Catalan Question And The Future Of Europe

    Yesterday the world was treated to the unedifying sight of the national police of a democratic state using violence in an attempt to prevent peaceful crowds of citizens from voting. If any investors still believed that the electoral defeat of the far right earlier this year in the Netherlands and the election of Emmanuel Macron in France had resolved the structural forces working to fragment the European Union, yesterday’s footage from the...

    5
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    Is The Whale Breaking Surface?

    Charles has often said that the impact of a market shock shows up with the same sort of delay as the effects of dynamite fishing. First the small fry float to the top, then the mid-size fish. Only later does the dead whale break surface. With that analogy in mind, Louis has long maintained that investors will not be able to call the end of the oil price slump with any confidence until they have seen major bankruptcies and/or consolidation among...

    4
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    The Wile E. Coyote Moment

    Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...

    0
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    Saudi, The Oil Price & Capital Markets

    It says a lot about the dynamics currently at work in the oil market that the king of Saudi Arabia yesterday promoted his firebrand young son to crown prince, yet the price of oil still fell -2.7%. The question now is whether Saudi will double down on its current policies in a fresh attempt to goose up the oil price, whether Riyadh will be forced by its rapidly eroding finances to change direction entirely and devalue the riyal, much as Russia...

    0
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    The UK’s Pre-Election Wobble

    In mid-April, when UK prime minister Theresa May took the decision to call a general election for June 8, she did so because she was confident her Conservative party would be returned to government with a massively increased parliamentary majority. Six weeks later, and with just one week of campaigning still to go, that confidence is a distant memory.

    0
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    The Upside Of The Commodity Downside

    Once again, commodity prices are taking a beating. Since Wednesday the price of Brent blend crude oil has slumped by 7%. Over the last two months copper has slipped 8%, and iron ore futures traded in China are down a precipitous 30%. Coming on top of data that showed the US economy grew by a meager annualized 0.7% in the first quarter, and the recent tightening in China’s credit conditions, the latest slide in commodity prices has been...

    2
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    Pound’s Rally Based On Flawed Assumptions

    The spring sun was shining on UK prime minister Theresa May yesterday when she stood in Downing Street to announce a cut-and-run general election for June 8. The sun was shining too on sterling, which rallied 2% against the US dollar and 1.3% against the euro on the news. The market clearly expects that a greatly increased parliamentary majority for May’s Conservative government following the vote will boost the chances of a softer Brexit deal...

    2
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    The Dollar In The Coming Quarter

    The first quarter of the year demonstrated once again that there is little more uncertain than a sure thing in the foreign exchange market. Rewind to mid-December, just before markets eased back for the holiday season, and the consensus firmly favored a stronger US dollar in 2017 . Of course, when sentiment is so strongly aligned, it means there are few marginal buyers left to enter the market. As a result, the consensus was confounded, as the...

    0
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    Hong Kong Seminar — March 2017

    In Gavekal’s Asia focused seminar in Hong Kong last week Arthur Kroeber, Udith Sikand and Tom Holland presented their outlooks for the rest of the year.

    0
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    On Borrowed Time In Hong Kong

    Last month, home prices in Hong Kong’s secondary market climbed to a record high, up more than 150% from the depths of the financial crisis. At the same time, Hong Kong’s stock market has been among the world’s strongest major markets so far this year, comfortably outperforming the S&P 500. The buoyancy of Hong Kong assets owes more than a little to investor enthusiasm for the global reflation trade, and to inflows of Chinese money. But more...

    2
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    The Big US Dollar Risk

    The US dollar enters 2017 up by 25% against a broad basket of currencies over the last two-and-half years. The single biggest question for investors in the new year must be whether the dollar continues its bull run.

    4
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    The Dollar Surge Continues, For Now

    Louis likes to say that the foreign exchange market is a serial monogamist. At any one time, the market is faithful to a single idea. The trouble is that at any moment it is liable to switch the object of its affections. Right now the foreign exchange market is clearly still smitten by the Trumpflation trade. Following the US Federal Reserve’s decision earlier this week to raise interest rates, yesterday the US currency’s DXY index climbed to...

    2
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    Gavekal Research

    The Unsustainable Oil Price Spike

    It took a while, but the spike in the oil price expected at the end of November finally occurred this morning in Asia, when front-month Brent crude futures briefly hit US$57.89/bbl, up from US$54.33/bbl on Friday. The jump higher was triggered by news over the weekend that a handful of major non-Opec producers led by Russia have agreed to cut their output by 558,000 barrels per day on top of the 1.2mn b/d reduction announced by Opec at the end...

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    The Cost Of Italy’s “No” Vote

    Europe lurched another step towards the eventual break-up of the eurozone yesterday, when the Italian electorate rejected constitutional reforms that would have broken the country’s legislative logjam, allowing much-needed economic restructuring. For European policymakers, the simultaneous rejection across the Alps of far-right candidate Norbert Hofer in Austria’s presidential election was small consolation. Hofer’s defeat shows that the...

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    Why Oil Production Cuts Won’t Work

    In January 1991, in a last-ditch effort to avoid all-out war, United Nations secretary general Javier Perez de Cuellar flew to Baghdad in an attempt to persuade Saddam Hussein to withdraw his forces from Kuwait. On his return to Paris, the secretary general spoke to the press in an address that was carried live on television. Nowhere was the broadcast watched more keenly than on the floor of the International Petroleum Exchange in London....

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    Gavekal Research

    That Sinking Feeling

    You almost have to feel sorry for poor Haruhiko Kuroda. Just over a week after the Bank of Japan governor announced his intention to overshoot the central bank’s 2% inflation target, it is painfully obvious that investors believe he will fall short. That much is clear from the Japanese government bond market. At last week’s meeting the BoJ announced that from now on it will tailor its JGB purchases to target a 10-year yield of zero. In the days...

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    Gavekal Research

    When Cartels Become Impotent

    Opec has become impotent. Despite the 6% overnight rally in oil triggered by news that the exporters’ cartel has struck an agreement in principle to make modest production cuts, the group’s members no longer have the ability, or even the desire, to maintain crude prices substantially above present levels. As a result, even if the proposed production cuts are confirmed, yesterday’s deal will be no game-changer for the international oil market.

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    Neil Newman: BoJ Policy Meeting In A Nutshell

    After the Bank of Japan’s announcement earlier today of quantitative easing “with yield curve control”, Neil delivers a quick-fire video assessment of the new policy slant, and what it will mean for markets and the broader Japanese economy.

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    Gavekal Research

    Don’t Misread The BoJ’s Signals

    The monetary policy committees of both the Federal Reserve and the Bank of Japan meet tomorrow. But whereas the Fed faces a simple binary call—either raise rates or don’t—the decision confronting the Bank of Japan is more complex.

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    The ECB And BoJ: Brothers Disarmed

    The combination of negative interest rates and quantitative easing is not working as central banks had hoped. Yesterday European Central Bank president Mario Draghi conceded that more than two years after introducing negative rates and 18 months after commencing asset purchases, the ECB is no closer to hitting its 2% inflation target than when it first adopted its unconventional policies. Although headline inflation is set to tick up over the...

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    Real Yields Still Favor A Strong Yen

    Haruhiko Kuroda didn’t quite say he will do “whatever it takes” to push up inflation expectations, but he did the next best thing. Speaking at Jackson Hole on Saturday, the Bank of Japan governor promised “to take additional easing measures without hesitation”. Declaring there is “ample space” to expand the size and the scope of the BoJ’s asset purchases, as well as to push short term interest rates further into negative territory, Kuroda...

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    Gavekal Research

    It Still Pays To Pump

    The dog days of August have proved anything but dull for the oil market. As chatter began to circulate about a production freeze next month, funds rushed to cover their shorts and put on new longs in the futures market. In response the benchmark Brent crude price rebounded some 17% in the first two weeks of the month to within a whisker of US$50/bbl, reversing much of its -21% correction since early June. It feels very much as if we have seen...

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    Gavekal Research

    The Death Throes Of The JGB Market

    While the Japanese government was rolling out its latest stimulus package yesterday—with a headline value of ¥28trn, but only ¥4.6trn of additional fiscal spending this year—investor attention was fixated on the spasms in the JGB market. Having touched a record low of -0.3% last Wednesday, the yield on 10-year JGBs leapt 28bp in just five trading days to hit a four and a half month high of -0.02% yesterday morning. On one level the spike in...

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    The Options For Italy

    In the wake of the Brexit vote, investors fearful of contagion have woken to the slow-burn banking crisis in Italy. It should have been news to no one that Italy’s banks are sitting on non-performing loans. Yet with the sector index down -30%, banks are suddenly front and center in investors’ minds as the next source of European uncertainty.

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    Positioning For Uncertain Times

    Regular readers will know that Gavekal is a broad church. And while the church choir only occasionally sings in perfect unison, the different singers can often hit harmonies that are all the more powerful for being unexpected. This may be one of those occasions. Yesterday, Anatole, Charles and Louis took part in a conference call in which they laid out their different views of Brexit and what it will mean for the economy and markets of the UK,...

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    Gavekal Research

    Towards A Fiscal Union By Stealth

    Unlike most fish, sharks possess no swim bladder, which means they rely on dynamic lift to maintain their buoyancy. If they stop moving forwards, they sink. In that much, at least, Europe resembles a shark. Following the UK’s Brexit vote, if the EU does not press forward with closer union, it risks sinking under the weight of the forces dragging it into the abyss.

    2
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    Oil’s Busted Flush

    Buoyant expectations that the world’s major oil producers could agree a production freeze when they meet in Doha on Sunday have helped push the price of crude to a four-month high this week. The international Brent blend benchmark reached just shy of US$45/bbl, up 66% from its late January low of US$27, with at least some brokerage houses predicting the price could breach US$50 in the event of a deal. Maybe—but forecasts that the crude price...

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    Gavekal Research

    No Need To Fear For The HK Dollar

    In times as volatile as these, a currency move of 0.8% in a week hardly sounds remarkable. But when the currency is the Hong Kong dollar, people sit up and pay attention. As sentiment towards China’s renminbi has turned deeply bearish over the last few weeks, the Hong Kong dollar has moved away from the strong side of its HKD7.75-7.85 convertibility band against the US currency. In early trading on Wednesday, the Hong Kong dollar reached HKD7....

    2
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    Gavekal Research

    Hong Kong Finally Rolls Over

    One of the world’s great bull markets may finally be rolling over. In the 12 years to August 2015, Hong Kong’s residential property prices climbed 557%, with most of the increase occurring since the 2008 financial crisis as prices surged on the back of plentiful liquidity and ultra-low mortgage rates. Now evidence is mounting that the market has peaked. Over the last three months, secondary market prices have slipped by -5%. With the US Federal...

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    A Cosmetic Victory For The Reformers

    On the face of things, it looks as if last week brought two major victories for Europe’s structural reformers. On Friday Greece’s finance minister Yanis Varoufakis was forced to blink first and accept an extension of his country’s existing bailout package under austere terms dictated largely by the German Finance Ministry. Just two days earlier the French government resorted to presidential decree to force a package of structural reforms...

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    Gavekal Research

    5C Asia: Hong Kong's Pro-Cyclical Property Roller Coaster

    Nowhere is the US Federal Reserve’s eventual decision to raise interest rates awaited with greater trepidation than in Hong Kong’s property market. The territory’s currency board link to the US dollar means that Hong Kong had no choice but to import US interest rates when the Fed cut its own benchmark short term rate to zero at the end of 2008. With safe haven funds flooding into the city’s financial system, Hong Kong banks cut their residential...

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    Our Holiday Reading List

    For the third year we are publishing a year-end books round-up. The topics covered by the 17 books in our compendium include hardy Gavekal perennials such as economics, politics and the effect of technological transformation on modern life. In addition Charles considers ancient Rome’s decline due to its apparent embrace of socialism over liberalism. Louis kicks us off with a look at the roots of our most basic human urges.

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    Gavekal Research

    Hong Kong's Democracy Protests

    The inhabitants of Hong Kong were treated over the weekend to the unusual spectacle of police battling political protesters in the city’s streets. Baton charges and volleys of tear gas might be common enough tactics in New York or London, but not in Asia’s leading international financial center. The rapid escalation of the protests over the weekend and the police’s strong-arm response shocked locals, and triggered a -2% fall in the city’s...

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    Gavekal Research

    Killing Democracy To Save Capitalism

    Beijing is tightening its control over Hong Kong’s institutions and political processes. Last week anti-corruption agents raided the homes of three of the city’s prominent pro-democracy figures. Then on Sunday Beijing handed down a long-awaited decision on constitutional development which crushed the city’s hopes for open elections. China’s increasing influence over the nominally-autonomous territory is deeply resented by many in the former...

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    Gavekal Research

    The Hong Kong Crisis That Isn’t

    Over the weekend 700,000 inhabitants of Hong Kong, China’s dominant international financial center, voted in an unofficial referendum calling for full democracy and universal suffrage in the territory from 2017. The poll comes just over a week before a pro-democracy movement known as Occupy Central—or Occupy Central With Love And Peace, to give it its full name—has threatened to blockade key roads in the city, bringing the main financial...

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