E.g., 09-05-2021
E.g., 09-05-2021
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    Gavekal Research

    A Dove With Ammunition

    Hawks want the European Central Bank to wind down its monetary stimulus once the immediate Covid crisis is over. On Wednesday, ECB president Christine Lagarde poured a large bucket of cold water over that idea. Speaking in Frankfurt about the central bank’s current strategy review, she made clear that the ECB regards deflation, not inflation, as the main monetary risk, and opened the door to a symmetric inflation target going forward. In the...

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    Gavekal Research

    Lockdown-Lite

    A series of controls have been announced by European countries in reaction to sharp increases in the numbers testing positive for the Sars-CoV-2 virus.This has raised fears of renewed lockdowns and economic havoc. But it appears European policymakers are opting for a lockdown-lite approach to public health restrictions in order to minimize the economic damage.

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    Gavekal Research

    Riding Europe’s Second Wave

    The latest Covid figures from Europe make sobering reading, with countries including France, Spain and others seeing pronounced second waves of new cases. Equity markets, however, have reserved judgment. Yes, the rebound that started in mid-March has been stalled for the last two months as infections have mounted. However, European markets have not sold off significantly, despite this month’s US volatility. And an examination of the opposing...

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    Gavekal Research

    Better Days For Europe’s Domestic Plays

    It is hardly surprising that euro strength is generally bad for European exporter stocks and good for domestically-focused firms; or that exporter-heavy markets, like Germany, tend to lag at such moments. We saw this in 2017, when the euro rose almost 12% against the dollar between April and August, spurring a -2.4% fall in the DAX and a 0.7% gain in the broad Eurostoxx. So how to explain this year’s topsy-turvy markets, where the sprightly DAX...

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    Gavekal Research

    Europe's Covid-19 Loan Drag

    In response to the Covid-19 crisis, central banks in Europe have shoveled money to banks in a bid to have them deliver liquidity to stressed companies. A worry is that this new debt binge will weigh down corporate balance sheets for years to come, and limit growth. These concerns are probably overdone.

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    Gavekal Research

    Europe Stares Down A Second Wave

    Europe beat back the Covid-19 outbreak in March and April with decisive responses and reaped the benefit by reopening its economy in the early summer. Now, however, the price of fun in the sun has come due, with a rising case count that has led Britain’s prime minister, Boris Johnson, to label it Europe’s “second wave”. In response to rising infections in Spain, the UK has reimposed quarantine rules on returning travelers from the country, while...

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    Gavekal Research

    The EU And The Bond Markets

    The European Union’s decision last week to issue an additional €750bn of debt in its own name has profound implications for the euro-denominated bond markets. Firstly, the decision will mark the emergence of the EU (or more specifically the European Commission) as a major—and relatively attractive—issuer, on a par with sizable European sovereigns. Secondly, EU supranational issuance will be a stabilizing force in the market, reducing the risk...

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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

    Germany's Moment

    Could this be Germany’s moment? The prospect of a disgruntled Italy walking away from the European Union spurred a German move towards new burden-sharing arrangements, but the conditions have been brewing within Germany for a few years as it became clear that its old export-led development model was cooked. Such existential fears are driving a newly creative approach to Europe at a time when the EU’s biggest economy may be set to benefit from...

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    Gavekal Research

    The Club Med’s Cruel Summer

    France, Italy and Spain suffered the deepest contractions in their economic activity in the first quarter and through April. Yet government programs have successfully supported both business cash flows and household incomes. Beyond the immediate bounce-back from lockdown, however, their economic trajectories are set to diverge.

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    Gavekal Research

    From A Tax To A Subsidy

    There will be some hard bargaining ahead when the European Union’s 27 heads of government meet by video conference Friday in an attempt to thrash out details of the bloc’s proposed €750bn recovery fund. German chancellor Angela Merkel is urging a quick deal. But with the “frugal four” countries led by Dutch premier Mark Rutte holding out for strict conditions, a final agreement could yet take several months, with the fund unlikely to start...

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    Gavekal Research

    Europe’s Big Guns

    If the worry was that European Central Bank activism was threatened by German judicial chastisement, Christine Lagarde yesterday showed no sign of being cowed. The Pandemic Emergency Purchase Program was topped up to an almost bazooka-qualifying €1.35trn from €750bn and extended a further six months to June 2021. The move added fuel to the rally in euro assets. Rightly so.

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    Gavekal Research

    It’s Looking Hamiltonian

    It wasn’t quite the dawn of a new epoch, but the European Commission’s plan to boost its seven-year budget with €750bn of borrowing certainly ranks as a moment for the European Union. The plan needs unanimous backing from all member states and is far from a done deal. Yet it is likely to pass and in so doing it will change the nature of financial risk in Europe.

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    Gavekal Research

    Phase Two Beckons

    Europeans have spent big to freeze their economies as if held in suspended animation since mid-March. On the whole, this plan is working quite well but EU member states must now agree to a post-pandemic plan for demand stimulus if they are to avoid an all-too-predictable double-dip downturn. They will get a shot next week, when the blueprint for a “recovery fund” is unveiled.

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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

    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.

    0
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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.

    0
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    Gavekal Research

    Italy Gets Interesting Again

    After almost five months of calm, there is a quickening in Italian politics. Luigi Di Maio yesterday stepped down as head of the governing Five Star movement as it faces the prospect of a drubbing in a regional election this weekend. The man most likely to capitalize on his troubles is Matteo Salvini, whose Lega Party is the most popular in Italy, polling 30-35%. The result may be more volatility in Italian assets, but a return to crisis...

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