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    Gavekal Research

    Sterilized QE?

    A WSJ article which quoted unnamed Fed officials as weighing another “novel bond-buying move” has unsurprisingly received a lot of attention. Any reader who glanced through our latest QSCB: The Global Bond Yield Conundrum, will know we think the US needs another round of QE like it needs a hole in the head. But the form of sterilization discussed in the WSJ article is actually long overdue, and could very well be implemented without further bond...

    2
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    Gavekal Research

    QSCB: The Global Bond Yield Conundrum

    2
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    Gavekal Research

    US Deleveraging: Still A Long Road Ahead

    It is three years since the nadir of the financial crisis that brought the US household credit boom to an abrupt stop. After the collapse in asset prices sent leverage ratios into the stratosphere in 2009, US consumers have been gradually reducing their debt; meanwhile the recovery in equity markets has done even more to bring leverage ratios back down. But US consumers have a lot more deleveraging to do. At best, household leverage is only...

    12
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    Gavekal Research

    Less Gov't, More Private Growth

    8
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    Gavekal Research

    The ECB’s 489 Billion Euro Christmas Gift

    After much anticipation, 523 banks tapped the ECB for €489bn of its new 3 year loans-significantly exceeding market expectations closer to €300bn. This confirms our initial take that this new facility, with longer duration loans and easier collateral requirements, is a major development. But what exactly does it accomplish?

    0
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    Gavekal Research

    Daily - Further Signs of a "Two Speed" US Economy

    The latest data from the US is comforting in two ways. First, with the shadow that Europe’s unresolvable crisis is casting over the global economy, any offsetting role that the US can play is obviously welcome. Second, the jobs data from the US fit the pattern of a “two-tiered” economic recovery; in other words, one which is led by the non-leveraged sectors (see our latest monthly chart book, USA: A Two-Speed Economy). This is crucial because...

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    Gavekal Research

    Daily - US Swaplines: What a Difference a Few Basis Points Make

    It would be easy to write off this week’s news on USD swaplines as a bit of technical trickery aimed at boosting market sentiment without any real costs. In fact, the adjustment to the Fed’s swap facility changed the very nature of the program in a way that greatly enhances its significance in today’s global financial environment. At the prior cost of 100bp over OIS, the USD swaps were analogous to high-deductible, catastrophic insurance—only to...

    3
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    Gavekal Research

    The ECB Is Already Doing QE, Its Own Way

    The current pleas for the ECB to start “quantitative easing” often miss one important detail: the ECB is already conducting QE, in every way but in name. The two core elements of what is commonly referred to as QE are: 1) the expansion of the asset side of a central bank’s balance sheet, well beyond what is required to simply target short-term policy rates and with the aim of easing credit conditions; and 2) the expansion of a central bank’s...

    1
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    Gavekal Research

    The Fed's Exposure to Interest Rate Risk

    It goes without saying that the bold policy measures by the Fed and the ECB have increased risks for both central banks, and in turn both of their currencies. But the risks taken on each side of the Atlantic are very different in nature. The ECB is primarily vulnerable to “balance sheet risks” stemming from increasingly suspect outright holdings and collateral (see today’s Daily). This is a real concern in today’s environment of weakening EMU...

    0
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    Gavekal Research

    Daily - Looming Balance Sheet Risks for the ECB

    Lately, as the EMU crisis intensifies, many of our clients have wondered when the ECB is going to get serious and start actual quantitative easing? Our first response to this question is that, semantics aside, the ECB has already effectively done €260bn worth (or $350bn) of QE thus far, and that figure is growing every week. This of course pales in comparison to the Fed’s QE operations of closer to $2 trillion. And given what is happening in EMU...

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    Gavekal Research

    Monthly Strategy Chart Book - USA: A Two-Speed Economy

    In the short term, it looks like the US will avoid recession once again. But there is the risk that the recovery could prove fairly anemic or short lived. The bigger question is what are the structural sources of growth that can get the US back on track to its long-term average growth rate of 3% plus?

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    Gavekal Research

    Daily - A Two-Speed Economy in the US?

    Our regular readers will know that we have argued recently that the current rally is largely dependent on US economic performance, since Europe’s crisis is not going to be solved anytime soon. On that basis, Friday’s reports of mixed and lacklustre data for US employment may not seem overly confidence-boosting. The household survey showed the unemployment rate unexpectedly ticked down from 9.1% to a six-month low of 9.0% in October; but the...

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    Gavekal Research

    Is the ECB Aiming for 'Stealth Cut' to 0.75%?

    Recent moves by the ECB are more significant than some may realize, and could prove significantly bearish for the Euro/USD as excess liquidity is flooded into the system by the end of the month. And yet the Euro has risen since the ECB announcements on October 6th, likely for the following reasons:

    0
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    Gavekal Research

    The US Needs Brent Below $90 and Gas Below $3

    Dark clouds loom—as US data teeters on the edge of recession territory, the EMU struggles to remain united and avoid its own recession, and Beijing continues to rein in credit growth despite evermore fears of a ‘hard landing’. But the silver lining to these dark clouds may be the resulting softness in oil prices. Along with developments in Libya, China tightening and lower global growth outlooks have killed the momentum in oil prices. But what...

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    Gavekal Research

    This is Not 2010: The Context of this Fed Meeting

    As the Fed sits down to discuss monetary policy options, the environment seems, at least on the surface, to bear an uncomfortable resemblance to the 2010 “soft patch”, which of course brought us QE2. Indeed, regional manufacturing surveys have plummeted to levels that incite double-dip fears, while national data such as the manufacturing and services ISMs, factory orders and industrial production have also rolled over and now hover uncomfortably...

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    Gavekal Research

    Central Banks Prepare for a Potential USD Squeeze

    When the Fed announced plans for US Dollar loans to a number of global central banks at last week’s meeting of finance ministers in Poland, it was easy to see this as confirmation that the long-awaited Dollar crunch was now upon us. Yet, while the USD has risen some recently, it has not yet shot up in the fashion of the late 2008 Dollar short squeeze. Likewise, USD LIBOR rates and spreads have ticked up some, but remain quite low, especially...

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    Gavekal Research

    The Swiss Version of QE

    How far is the SNB willing to go to defend its new ceiling of 1.20 Francs per Euro, and for how long? The short answer is that, assuming the Euro remains, the SNB will likely defend the ceiling aggressively, so long as this is consistent with the SNB’s desired domestic monetary policy stance. Here is why...

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    Gavekal Research

    A Big Week for the Euro

    Our readers know we have long been structurally cautious on Europe’s single currency, due to its significant design flaws. These flaws have of course come to the forefront in recent years, and yet the Euro has pushed higher (in nominal terms and on a PPP basis). Our best explanation for this Euro resilience is twofold: 1) The fiscal/political situation in the US has recently looked just as bad, if not worse; and 2) the ECB did not loosen as...

    0
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    Gavekal Research

    Daily - The ECB's Stealth Rate Cuts

    This week there seems to be an inordinate amount of focus on what Ben Bernanke might say at Jackson Hole on Friday, and whether we are due for another round of QE from the Fed. However, the real news on central bank policy actually comes from across the pond: not only has the ECB been more aggressively buying assets of distressed sovereigns as part of its “solvency management” policy, but significant liquidity provisions have resulted in stealth...

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    Gavekal Research

    The Good & the Bad in Recent US Money Growth

    In the US, M2 has swung from a weak +1.5% YoY growth rate in mid-2010 to a frothy +10.2% today. And this is not due to a low base effect; M2 has grown at an annualized rate of +42% in the last month! This has raised quite a few eyebrows and we have received several questions on this topic. Should we be excited or cautious, in view of these impressive moves in money supply growth? Our answer is, well, both:

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