-
Gavekal Research
Charles Gave
Feb 20th 2017
It’s Time To Buy French Equities
As regular Gavekal readers may remember, I have always maintained that over the long run the returns delivered by two different stock markets— adjusted for exchange rate fluctuations and differences in pay-outs—must be the same. This is just another way of saying that in an open economy the returns on invested capital generated by well diversified stock markets have to be the same.
6 -
Gavekal Research
Cedric Gemehl
Feb 15th 2017
The Eurozone’s Silver Lining
Just as it has been hard to work up much excitement over the last couple of years about the eurozone’s grinding emergence from economic despond, so investors should not be too downhearted at the latest lackluster growth data. Yesterday Eurostat revised down its flash estimate for 4Q2016 eurozone GDP growth to 0.4% QoQ, compared with its advance estimate of 0.5% released two weeks ago. The downward revision was due mainly to weaker than expected...
-
Gavekal Research
Charles Gave
Feb 14th 2017
In Dutch With The Electorate
There is a tendency to divide Europe into the “serious” beer drinkers of the north and the not so serious wine tipplers of the south. Using such a dichotomy reinforces a common assumption that trouble in modern day Europe always arrives from the Mediterranean regions. It explains why there is a cottage industry of politicos watching developments in Italy, Spain, France and Portugal, while precious little energy is expended on political goings on...
-
Gavekal Research
Charles Gave
Feb 10th 2017
Choosing Between Disadvantages
It was a record that Germany would rather not have announced, at least not this week. Yesterday official data showed that Europe’s über exporter racked up a current account surplus in 2016 of US$281bn versus a mere US$210bn for China. With the US running by far the largest offsetting deficit, such data means that the temperature between Washington and Berlin is likely to get hotter.
-
Gavekal Research
Nick Andrews
Feb 08th 2017
Germany And The Greek Question
Last month Cedric Gemehl and I argued that the new geopolitical back-drop offered by Donald Trump had changed the basic strategic equation for Germany. Berlin could respond by doubling down on its mercantilist impulses, or alternatively embrace its eurozone partners. An interesting test case of our hypothesis has just arisen: yes, the Greek problem is back on the agenda.
-
Gavekal Research
Charles Gave
Feb 06th 2017
The End Of The European Dream
Back in 2002 I wrote a book, Lions Led By Donkeys, whose main point was that the euro’s adoption would kill the competitive and heterogeneous Europe that I so loved. It was prefaced by Milton Friedman who predicted that Europe was set to enter a period of rigor mortis. Fifteen years on and it is clear that Europe as a unitary concept is indeed dying.
-
Gavekal Research
Cedric Gemehl
Feb 01st 2017
The Eurozone Upturn Continues
The data flow out of the eurozone—both forward and backward-looking—continues to paint a picture of accelerating activity, subdued core inflation, ongoing monetary accommodation, and—most notably for investors—improving corporate earnings.
-
Gavekal Research
Charles Gave
Jan 31st 2017
The Real Political Risk In France
There are many areas where Anatole and I agree to disagree. But one in which the two of us see eye to eye is the heightened influence political risk may have on markets this year. Consider France, where the political situation threatens to get complicated. The problem is not so much the presidential election, due to be held in two rounds in April and May, but the legislative elections set to be held a month later.
-
Gavekal Research
Anatole Kaletsky
Jan 31st 2017
Points Of Agreement And Dissent
Last week Louis laid out his roadmap for navigating financial markets in 2017. In this follow-up, Anatole picks up on five debating points, and details where and why he agrees or disagrees with Louis.
-
Gavekal Research
Anatole Kaletsky
Jan 30th 2017
The “Experts” May Yet Be Right
Last week Louis set out a comprehensive roadmap for 2017. I have just five points to add: two points of strong agreement (on Europe and the oil price); two of dissent (on US bonds and Britain); and one that echoes Louis’s uncertainty and anxiety, but for slightly different reasons (about the pressures on the US dollar and what they could mean for emerging markets). I will explore these specific issues of agreement and dissent in a lengthier...
-
Gavekal Research
Louis Gave
Jan 26th 2017
Drawing Meaning From 2016, And A Roadmap For 2017
Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.
-
Gavekal Research
Nick Andrews
Jan 25th 2017
The Return Of German Inflation
Inflation is re-emerging in Germany, and a tightening labor market implies inflationary pressures will continue to mount in what could promise to become the great German reflation that many have long looked for to rebalance the eurozone economy. Yet rising inflation threatens to erode one of the central tenets of the German economic model.
-
Gavekal Research
Cedric Gemehl, Nick Andrews
Jan 20th 2017
Germany’s Date With Destiny
Germany, more than any other European economy, has relied on the US-dictated, rules-based international system to define its post-World War II identity. Germany’s highly specialized export-orientated economy has thrived within the World Trade Organization and its security has been ensured by the American nuclear umbrella. It is not clear whether Donald Trump’s recent broadside against Berlin reflects a permanent rupture in that order, but...
-
Gavekal Research
Anatole Kaletsky
Jan 18th 2017
Hard Brexit Means Soft Sterling
Since the June referendum the only real choice for Britain has been Hard Brexit or No Brexit. The No Brexit option disappeared as soon as Theresa May became prime minister under the slogan “Brexit means Brexit”. Barring some deus ex machina that swept May out of power, that left only one possibility: a rock-hard Brexit.
-
Gavekal Research
Arthur Kroeber, Charles Gave, Will Denyer
Jan 18th 2017
Audio & Transcript — Gavekal Research January Call
Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.
-
Gavekal Research
Arthur Kroeber
Jan 18th 2017
Video: A Coming US-China Trade War?
In this video interview Arthur explains how a US-China trade war may play out and the implication for capital outflows from China
-
Gavekal Research
Arthur Kroeber
Jan 17th 2017
Video: The Dissonance In US-China Relations
Once Donald Trump occupies the White House he is sure to take aim at China in the form of new tariffs, anti-dumping actions and the labeling of the country as a currency manipulator. What is unclear is whether such actions reflect a tough negotiating stance, or instead a fundamental shift in the strategic equation. In this video interview, Arthur explains why the mixed messages coming out of Washington have the potential to spark a dangerous...
-
Gavekal Research
Charles Gave
Jan 16th 2017
Political Fiction
European economic indicators have turned up in recent months, causing many investors to conclude that the eurozone’s banishment in the desert of economic stagnation is over, and the promised land of a normal recovery beckons. I am not convinced and judging by recent moves in the bond market, I’m wondering if the next eurozone crisis is already upon us.
-
Gavekal Research
Louis Gave
Jan 12th 2017
A Very Turkish Mess
Get into a taxi in Rio de Janeiro, Jakarta or Cape Town, and ask for that day’s US dollar exchange rate, and the chances are that the driver will know the answer to within a decimal point. Try the same thing in Tokyo, London or Berlin and you will likely receive a blank stare. My anecdote reflects a simple reality: most people in emerging markets think in two currencies: their own and the US dollar. This highlights most emerging market consumers...
-
Gavekal Research
Cedric Gemehl, Nick Andrews
Jan 11th 2017
Firing On Three Cylinders
The upturn in the eurozone continues to gain momentum. The recovery in France which long has been among the European economy's laggards, coupled with brisk activity in Germany and Spain, suggests that the eurozone is now firing on three of its four main cylinders in a cyclical upswing that promises to become self-sustaining.
-
Gavekal Research
Research Team
Jan 06th 2017
The Gavekal Monthly: Our Top 12 Questions For 2017
For our first Monthly of the year, we depart from our normal format to offer our thoughts on the dozen most important questions investors must face this year. Not surprisingly, the issues that rose to the top were the impact of the new Trump administration's policies on the dollar and US bond yields, and whether the eurozone will spend the year tearing itself apart. Also,oil prices, the risk of financial implosion in China, and where to...
-
Gavekal Research
Cedric Gemehl
Jan 05th 2017
A Higher Headline CPI Does Not Spell ECB Tapering
According to the financial media, eurozone inflation is “soaring”. The initial estimate released yesterday showed that consumer price index inflation picked up to 1.1% year-on-year in December, from 0.6% the previous month. That is the fastest rate since 2013. What’s more the rise occurred against a background of generally accelerating economic activity. In December, the eurozone composite PMI ticked up to 54.4, its highest reading since May...
-
Gavekal Research
Anatole Kaletsky
Jan 03rd 2017
The Crisis Of Market Fundamentalism
After 2008, the prevailing market fundamentalism forbade political interventions that could have shared the benefits of capitalism while mitigating its costs to specific people. The result was a post-crisis confusion and disillusionment whose political effects we witnessed last year—and which has not yet ended.
-
Gavekal Research
Nick Andrews
Dec 20th 2016
A €20bn Start In Italy
Yesterday the Italian government said it would seek the permission of parliament to raise €20bn in new debt to fund the recapitalization of the country’s weakest banks. Although Italy’s politicians had been earnestly hoping to avoid overt state involvement in bank restructuring, this could well turn out to be a positive development. Coupled with encouraging progress towards the private sector clean-up of Italy’s biggest bank, a well managed...
-
Gavekal Research
Nick Andrews, Tom Holland
Dec 16th 2016
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...
-
Gavekal Research
Research Team
Dec 14th 2016
Our 2016 Holiday Reading List
“All books are divisible into two classes,” said John Ruskin, “the books of the hour, and the books of all time.” This year’s list of works enjoyed by Gavekal staff in 2016 includes books from both categories; among them are an account of Russian nationalism, an examination of the sharing economy, and a look at the future of Japan. Happy reading.
-
Gavekal Research
Anatole Kaletsky
Dec 13th 2016
Between A Rock And A Hard Brexit
Sterling has gained almost 7% against the euro this month, partly because of comments from British ministers hinting at a softer version of Brexit than the sharp and rapid break implied by Theresa May’s early speeches. For example, sterling’s rebound through US$1.25 and from £0.90 to the euro was directly caused by a parliamentary answer from David Davis, the minister in charge of Brexit, suggesting that Britain might continue to make...
-
Gavekal Research
Cedric Gemehl, Nick Andrews
Dec 09th 2016
For The ECB, Less Really Is More
Mario Draghi and his colleagues in the European Central Bank had a difficult line to tread yesterday. On one hand the ECB president faced pressure to wind down his program of quantitative easing. On the other, lingering risks in Europe’s periphery argued for a continuation of ECB asset purchases in order to avoid rocking the financial boat heading into next year’s packed political calendar.
-
Gavekal Research
Dec 07th 2016
Audio & Transcript — Gavekal Research December Call
Louis and Anatole outlined their views on the new investment environment. Louis focused on the apparent contradictions in investors’ reaction to Donald Trump’s win in the US presidential election. Anatole argued that the US has almost certainly transitioned to a more inflationary growth path, but said it would be a slow build-up.
-
Gavekal Research
Charles Gave
Dec 06th 2016
Putting The Boot Into Italy
Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would...
-
Gavekal Research
Joyce Poon, Leonor du Jeu
Dec 06th 2016
Assessing EMs Vulnerability To The Trump Trade
Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...
-
Gavekal Research
Nick Andrews, Tom Holland
Dec 05th 2016
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...
-
Gavekal Research
Joyce Poon
Dec 02nd 2016
How Bad Is The Dollar Squeeze?
This has not been your regular dollar squeeze. Over the last month, the cost of obtaining US dollars offshore has soared to levels last seen in “crisis” periods, yet bank equities have rallied the most in six years. Rather than a new crisis unfolding, we seem to be transitioning to a macro environment where dollars are structurally scarce. This will be challenging for weak link economies, as shown yesterday by adverse market moves in Brazil and...
-
Gavekal Research
Louis Gave
Dec 02nd 2016
Something's Gotta Give
Louis Gave held a conference call on December 6 where he discussed the state of global markets as the US gets ready for a Trump presidency. The fundamental challenge for investors is that while equities and the US dollar have rallied strongly and bonds have sold off in a “Trump reflation trade,” it is not clear how long that trade can withstand the reality of Trump’s economic program.
-
Gavekal Research
Anatole Kaletsky, Louis Gave, Will Denyer, Nick Andrews, Arthur Kroeber
Dec 01st 2016
The Gavekal Monthly: Preparing For The Trumped-Up Economy
Markets have been on a startling trajectory since Donald Trump upended investors’ assumptions with his win in the US presidential election. In this issue of the Monthly two Gavekal partners ask whether the macro environment really has fundamentally shifted due to the emerging policy platform of the president-elect.
-
Gavekal Research
Nick Andrews
Nov 30th 2016
Italy Down To The Wire
In Italy “less is more” when it comes to opinion polling in the final days of an election campaign, hence the last formal snapshot of voting intentions in Sunday’s constitutional referendum was released on November 18. That poll put the “No” camp squarely ahead by 55% to 45%, which if born out would likely spark the resignation of Matteo Renzi, Italy’s pro-reform prime minister. Still, nature hates a vacuum and the ban on formal polling is...
-
Gavekal Research
Louis Gave, Cedric Gemehl
Nov 28th 2016
Polls, Big Data And The French Primary
It’s been said that big data is like carnal knowledge in teenage boys’ locker rooms: everyone talks about it, but noone really knows much about it. A slew of election results in the last few years supports such a viewpoint, for in an age when everything can supposedly be measured, political forecasts have been proven hugely flawed—the UK general election in 2015, the Brexit vote, the Colombian peace-process referendum, Donald Trump winning the...
-
Gavekal Research
Nick Andrews
Nov 25th 2016
The Rally In European Banks
More than four months after it bottomed out one and a half standard deviations below its 200-day moving average, the Euro STOXX banks index has rallied 34% and is once again trading at the levels it was at immediately before the summer’s steep post-Brexit losses. Yet despite the rebound the index remains down -18% year to date, and with a clutch of the factors that precipitated the initial sell-off—notably negative interest rates, shaky capital...
-
Gavekal Research
Cedric Gemehl, Nick Andrews
Nov 25th 2016
The Lady Is Not For Turning
As she kicked off her general election campaign this week, Angela Merkel declared that Germany “had never had it so good”. The economy is humming so nicely that Germany’s council of economic advisors recently warned about overheating. This would seem to rule out a fiscal stimulus, which conflicts with Brussels’ policy of engineering a more expansionary fiscal environment.
-
Gavekal Research
Anatole Kaletsky
Nov 24th 2016
Austerity Lingers In Britain
Rumors of the death of fiscal austerity are greatly exaggerated, at least in Europe. That is the most important lesson for global markets from the UK Treasury’s long-awaited budgetary response to the Brexit vote. Many investors believed in the immediate aftermath of the British referendum that this shock might be the catalyst for more expansionary fiscal policies all over the world. In the past two weeks, the prospect of a Trump fiscal stimulus...
-
Gavekal Research
Charles Gave
Nov 23rd 2016
The Italian Domino Teeters
My thesis has for a while been that we are living in an era characterized by the “little man” revolting against the global elite. I explained this idea in May using the perhaps apocryphal tale of a South Pacific island made up of home-loving tree dwellers and more adventurous boat travellers (see Trump And The Tree People). The point was that the normally laid back people of the trees were stirring from their torpor as shown by the Brexit vote...
-
Gavekal Research
Nick Andrews, Stefano Capacci
Nov 23rd 2016
Video: European Political Dominos
In the aftermath of the Brexit vote and Donald Trump’s win in the US presidential election, attention has shifted to the eurozone with the assumption that more dominos must topple under the gathering populist political wave. In this video interview Nick considers the good, the bad and the ugly of the European political scene and offers pointers for navigating these risks.
-
Gavekal Research
Cedric Gemehl
Nov 17th 2016
Better Late Than Never
When Brussels officials admitted in May that there was scope to loosen Europe’s fiscal straitjacket, this seemed like an expedient measure so that counties could breach their deficit limits without being penalized (see Fiscal Rules Are There To Be Broken). It is now clear that this shift was more than a one-off accommodation and the policymaking ground has moved. Yesterday the European Commission updated its view on state spending with a...
-
Gavekal Research
Cedric Gemehl
Nov 15th 2016
A Trumpian Europe?
Donald Trump’s win in the US presidential election has emboldened populist movements in continental Europe and raised the specter of a similar anti-establishment electoral wave taking hold. The next 10 months will see national votes that could reshape Europe, with perhaps the most important happening in Italy on December 4. Myself and Nick Andrews have argued all year that the European Union is in the grip of destructive centrifugal forces due...
-
Gavekal Research
Nov 11th 2016
Audio & Transcript — Gavekal Research November Call
Anatole Kaletsky, Arthur Kroeber and Charles Gave presented their views on what a Donald Trump presidency means. Anatole outlined both positive and negative potential outcomes. On the positive side, US growth could see a boost from expansionary fiscal policy, but isolationist trade policies could threaten US firms and equity prices. Arthur warned of the geopolitical risk of a power vacuum should the US pull back from its treaty obligations....
-
Gavekal Research
Anatole Kaletsky, Nick Andrews
Nov 04th 2016
Heaping Uncertainty On Brexit Doubt
Markets and media were shocked by yesterday’s High Court judgement that UK prime minister Theresa May must seek parliamentary approval before pursuing her Brexit strategy. But for London’s legal community the decision was not unexpected. Many senior lawyers had predicted that the ruling would go against the government, if only because its case was so poorly presented by the Attorney General, who was forced for political reasons to concede the...
-
Gavekal Research
Neil Newman
Nov 04th 2016
The New Frontier In Aerospace
The highlight of this week’s Zhuhai airshow in Southern China was a fly-past by two of the People’s Liberation Army’s new J-20 warplanes, touted as China’s first stealth aircraft. Western military analysts reserved their judgment, pointing out they had learned nothing new about the aircraft, except that it was very noisy. Nevertheless, the broader message from Zhuhai was clear, echoing a similar message broadcast by the Japan International...
-
Gavekal Research
Nick Andrews
Nov 01st 2016
A European Head Fake
Should investors be worried by a German bond market sell-off that has seen 10-year bund yields rise some 30bp over the last month? The last time European yields climbed this quickly, in early 2015, eurozone stocks swooned in the following year, with the benchmark index falling -27% peak-to-trough. Moreover, unlike the US which has seen a long expansion, it is not clear that a still weak eurozone can handle a rise in the cost of money.
-
Gavekal Research
Arthur Kroeber, Rosealea Yao, Nick Andrews, Neil Newman
Nov 01st 2016
The Gavekal Monthly: Deflation Ends; What Next?
The biggest market move of the past month was a significant rise in bond yields across the US and Europe. Much commentary has suggested that this might be a symptom of a sustained rise in inflationary pressures, as wages and rents start to push up prices in the US, and Chinese producer prices end four long years spent in negative territory. We are skeptical. The recent rise in yields has so far reversed only half of the decline in the first half...
-
Gavekal Research
Charles Gave
Oct 28th 2016
Sterling Sellers Look Flushed Out
Here is a simple question: “Why has the pound fallen so far, so fast?”. My simple answer is that the City of London is the world’s dominant financial center, and so pretty much anyone who deals in global markets has a significant exposure to sterling. As a result, the near term movements of sterling are being dictated less by every twist and turn of the Brexit process, but rather by more prosaic financial transactions.
-
Gavekal Research
Anatole Kaletsky
Oct 27th 2016
When The Facts Change, I Change My Mind
After the Brexit vote, Anatole became deeply bearish, fearing that a populist insurgency could unleash a destructive retreat from globalization. With the US electorate seemingly set to reject that pathway on November 8, the likelihood of other nations following Britain by turning in on themselves is greatly diminished.
-
Gavekal Research
Cedric Gemehl, Nick Andrews
Oct 25th 2016
Europe’s Breakout Problem
The eurozone’s cyclical recovery remains less than stellar, yet at least it lives. The single currency area’s composite flash PMI for October recorded its strongest reading since January 2015, rising to 53.7 against an expected 52.8.The reading was flattered by weakness in the last two months, but confirms that Europe has, for now at least, weathered the Brexit vote shock. What is especially encouraging is the breadth of the improvement, which...
-
Gavekal Research
Charles Gave
Oct 20th 2016
Is The Second Shoe About To Drop?
Keynesian beliefs are based on two key ideas. Firstly, recessions are caused by an excess of savings among nasty types known as rentiers. Secondly, if there is a shortage of demand, the government should conjure it up out of thin air by borrowing money to spend as needed. In the last few years we’ve seen what happens when the first of these two ideas is put into practice. Policymakers around the world have attempted to euthanize the rentier, and...
-
Gavekal Research
Oct 19th 2016
London Seminar — October 2016
Charles Gave, Joyce Poon, Tom Miller and Anatole Kaletsky outlined their views on issues ranging from the end of the Pax Americana, global asset allocation in the face of increasingly ineffectual monetary policy, India's growth potential, and the imminent uncertainty for markets in the face of political risk.
-
Gavekal Research
Cedric Gemehl
Oct 19th 2016
No Change In Frankfurt
Despite multiple European Central Bank officials protesting a steady-as-she-goes approach to monetary policy, the recent rise in eurozone bond yields reflects market concern about a potential tapering of its bond buying. After all, inflation has ticked higher, European banks continue to grumble about a profit-sapping yield curve and the ECB’s dealing desk in Frankfurt will soon run out of eligible bunds to buy. Despite all that, tomorrow will...
-
Gavekal Research
Louis Gave
Oct 17th 2016
Is Perfidious Albion Undermining The 'Shanghai Agreement'?
Back in the early 1980s, foreign exchange volatility wreaked havoc on business spending plans and countries’ ability to repay foreign currency debt. To remedy this situation, the world’s key financial policymakers got together to agree on a plan for coordinating monetary policies; the idea was to reduce currency volatility and so limit the scope for financial shocks.
-
Gavekal Research
Louis Gave
Oct 13th 2016
What Does The Italian Elite Want?
Should we care about the Italian referendum? Without wanting to sound smug toward what remains Europe’s second prettiest country, I can’t remember ever witnessing an Italian election with consequences beyond its own borders. But the December 4th referendum could be such a first: an Italian election that matters.
-
Gavekal Research
Tan Kai Xian
Oct 12th 2016
Tan Kai Xian & Leonor du Jeu: The US Trade Deficit Conundrum
-
Gavekal Research
Oct 10th 2016
Audio & Transcript — Gavekal Research October Call
Will Denyer presented a newly minted dynamic asset allocation tool which was developed from an ROIC-based framework that has helped us to better map and predict US economic cycles. He then answered listener questions on these themes.
-
Gavekal Research
Charles Gave
Oct 10th 2016
The British Pound: A Two Year View
The British pound has been on a roller coaster ride to the point that on a purchasing power parity basis it is undervalued by about 10% against the euro and 17.5% versus the US dollar. As a result, sterling has been left 2% below its lower bound against the euro (in average standard deviation terms) and 9% versus the dollar on the same measure. Put another way, the pound is undervalued by more than one standard deviation against the euro and by...
-
Gavekal Research
Nick Andrews
Oct 07th 2016
As Goes The Pound, So Go Eurozone Exports
In European capitals this week schadenfreude will no doubt have been expressed at the diminished status of the UK economy and its currency. This morning’s “flash crash” in the pound most likely had technical causes, but the fact the exchange rate could fall so hard without generating automatic buying responses says much about confidence in the unit. Sterling has been under pressure since Prime Minister Theresa May earlier this week said she will...
-
Gavekal Research
Pierre Gave
Oct 06th 2016
Pierre Gave: Can Sweden Escape The Negative Rate Trap?
On the surface, Sweden’s two-year experiment with zero, and then negative, interest rates appears to have worked well. Growth is strong by developed world standards, and the economy has escaped deflation. But this success has come at the price of an asset price bubble that looks increasingly dangerous. Pierre Gave assesses the risk, and examines possible exit routes for the Riksbank.
-
Gavekal Research
Louis Gave
Oct 05th 2016
Angela Merkel’s Catch 22
Back in April, we pondered whether, with their negative interest rate policies, central bankers were showing themselves to be particularly incompetent by condemning commercial banks to years of unprofitability, or whether their greater design was to drive weaker banks to the wall to advance a consolidation of banking industries around the world under the umbrella of nationalization (see NIRP: Machiavellian Design Or Policy Mistake?). In other...
-
Gavekal Research
Nick Andrews
Oct 04th 2016
The Pain Behind The Agony
The agony at Deutsche Bank is overshadowing the pain elsewhere in the European banking system—but pain there is. Last week Commerzbank, Germany’s second largest bank and biggest Mittelstand lender, announced 9,600 job cuts and sold its Frankfurt headquarters to Samsung of Korea. Yesterday ING said it would lay off some 20% of its Dutch and Belgian headcount and trim its branch network, while in recent days banks elsewhere in the eurozone have...
-
Gavekal Research
Anatole Kaletsky
Oct 03rd 2016
A Hardening Brexit And Softening Sterling
The second phase of the post-Brexit sterling devaluation probably started this weekend. Theressca May's announcement of March as the deadline for Britain to launch the “Article 50 process” of formally withdrawing from European Union achieved its immediate objective of averting a battle between the Hard Brexit and Soft Brexit factions at this week’s Conservative Party Conference. Unfortunately, May’s party management success is likely to...
-
Gavekal Research
Arthur Kroeber, Tan Kai Xian, Joyce Poon, Tom Miller, Udith Sikand
Oct 03rd 2016
The Gavekal Monthly: What Price On A Trump Victory?
Markets seem sanguine about the prospect of a Donald Trump victory in next month's US presidential election—too sanguine. Expert opinion gives Hillary Clinton a 75% chance of winning. But remember that four months ago in the UK, expert opinion discounted polls showing a strong chance of Brexit, and the experts were proved wrong. And the consequences of a Trump win are so huge and potentially destabilizing that even a 25% chance means...
-
Gavekal Research
Cedric Gemehl
Sep 30th 2016
The Eurozone Construction Revival
The eurozone’s construction sector is on the turn as super low interest rates feed through to improved housing demand and as infrastructure building starts to pick-up. The implication is that a reliable new driver of growth should help sustain a moderate eurozone recovery. Investors are advised to take note as the sector has a decently investable universe, which is generating not too shabby earnings growth.
-
Gavekal Research
Nick Andrews, Simon Pritchard
Sep 28th 2016
The German Banking Problem
These are not happy times for Europe’s commercial bankers. The adoption of negative interest rates may have averted the slide into a deflationary abyss, but the policy has hit lending margins, and with them profits. Exhibit A is Deutsche Bank, the dominant financial institution in Europe’s largest and most dynamic economy. Deutsche, whose market value has shrunk to just US$14bn, has problems of its own making in the US, yet its plight has been...
-
Gavekal Research
Cedric Gemehl
Sep 23rd 2016
Why The ECB Will Not Turn Japanese
European bank stocks have enjoyed a near 5% bounce in the last two trading sessions on hopes that the European Central Bank will follow its Japanese counterpart by explicitly adopting policies that help steepen the yield curve and so lessen the squeeze on bank lending margins. There are reasons to be more cheery about the outlook for European financials, but a Japanese-style rescue mission may not be one of them.
-
Gavekal Research
Sep 21st 2016
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.
-
Gavekal Research
Cedric Gemehl
Sep 19th 2016
The EU’s Post-Brexit Paralysis
It was billed as a show of post-Brexit unity of purpose. Without the fractious Brits to obstruct progress, leaders of the remaining 27 members of the European Union would come together to affirm their unshaken commitment to the goal of “ever-closer union”. Unsurprisingly, the reality of the weekend’s Bratislava gathering failed to live up to its billing. Without the presence of the habitually adversarial British to unite them in antagonism, the...
-
Gavekal Research
Will Denyer, Tan Kai Xian
Sep 16th 2016
Will & KX: Soft Growth And Volatile Markets
Will and KX present the quick view on the US economy and financial markets
-
Gavekal Research
Louis Gave
Sep 14th 2016
The End Of A Bubble?
Ask three economists for the definition of a financial bubble, and you will be lucky to get fewer than four different answers. Even in our little shop, we like to make distinctions between bubbles in productive assets (US railroads, the internet, fiber optic cables, shale gas wells...) and bubbles in unproductive assets (gold, tulips, Japanese land, Florida condos…). We also like to make distinctions on how bubbles are financed: equity (good) or...
-
Gavekal Research
Joyce Poon, Tan Kai Xian
Sep 13th 2016
Real Yields In The Driving Seat
Notwithstanding yesterday’s bounce, the stock market is a nervous place just now. After riding a post-Brexit rebound that saw both the S&P 500 and the Nasdaq Composite scale record highs on minimal volatility, investors are increasingly wondering about the extent of the potential near term downside, not just in the US but around the world
-
Gavekal Research
Anatole Kaletsky
Sep 12th 2016
Prepare For Hurricanes
After months of contented lethargy, Friday’s big sell-off seemed to confirm the main points that Louis and I made in our conference call two days earlier. Firstly, the faith in “lower forever” bond yields is not a reason for reassurance, but a cause for concern. Secondly, political risks have not been eliminated by the summer’s market rally, merely ignored. Thirdly, what I call the “financial hurricane season” usually starts in early autumn—and...
-
Gavekal Research
Tom Holland
Sep 09th 2016
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...
-
Gavekal Research
Charles Gave
Sep 09th 2016
The New Ineptocracy
In times past, capitalist systems were organized on a simple premise. At the centre sat “money” as the medium to express all values. The primary operating dynamic of this system was that surplus money (savings) got channelled into economic activity, with a secondary effect that “unused”, or “left over”, money ended up in financial assets, usually equities, such that at times of great optimism a bull market resulted. After running for a year or...
-
Gavekal Research
Sep 08th 2016
Gavekal Research Monthly Conference Call — September 2016
In the inaugural Gavekal Research monthly conference call, Louis, Anatole and Arthur addressed the global growth environment and offered asset allocation suggestions.
-
Gavekal Research
Nick Andrews
Sep 07th 2016
How Deep Is That Rabbit Hole?
It is only three months since the European Central Bank crossed its latest “unconventional” threshold with corporate bond purchases, yet when policymakers meet tomorrow, more monetary expansion is in the cards. Eurozone economic growth is not collapsing, but it remains weak as shown by the latest flash PMI reading which slumped to a 19-month low, and consumer inflation running at just 0.2%. With the ECB’s quantitative easing program set to...
-
Gavekal Research
Arthur Kroeber
Sep 06th 2016
A Better G-20 Communiqué
Another year, another G-20, another yawn. Though the group of the world’s 20 biggest economies was useful in the aftermath of the 2008 financial crisis, it has since degenerated into another global drawing room where leaders explain to one other how the world would be a better place if only it were a better place. This was a missed opportunity.
-
Gavekal Research
Nick Andrews
Sep 01st 2016
When New Policy Easing Becomes Contractionary
For the European Central Bank, achieving its target of inflation “below, but close to, 2%” is proving harder than anticipated. Eurozone consumer prices rose just 0.2% year-on-year in August, unchanged from July despite more than two years of negative interest rates and nearly 18 months of quantitative easing. With core inflation actually slipping in August, the ECB is facing calls to ease policy even further. However, the central bank now finds...
-
Gavekal Research
Louis Gave, Tan Kai Xian, Andrew Batson, Nick Andrews
Sep 01st 2016
The Gavekal Monthly: How Long Can The Rally Last?
Investors enjoyed a surprisingly upbeat summer with the World MSCI close to an all-time high and emerging markets continuing to benefit disproportionately. Yet with the Federal Reserve sounding increasingly hawkish, earnings looking soft and political uncertainty remaining the order of the day, this Gavekal Monthly focuses on threats to the current benign market mood.
-
Gavekal Research
Charles Gave
Aug 26th 2016
The Falling Natural Rate Is No Mystery
As the high priests of global central banking congregate in Jackson Hole, much of the chatter ahead of the meeting has concentrated on the “mystifying” fall over recent years in the natural rate of interest, and possible reasons why it should have declined to such an extent. Having spent the last ten years attempting to apply the economic theories of the great 19th century Swedish economist Knut Wicksell, I have to say I am delighted with the...
-
Gavekal Research
Cedric Gemehl
Aug 25th 2016
Battered But Still Standing
Battered by terrorist attacks and crippling strikes, France has hardly been having a good time of it. These problems were amply reflected in second quarter growth data which stalled after a mildly encouraging 0.7% QoQ rise in the first quarter. Yet a decent flash PMI for August—which rose to a 10-month high of 51.6—suggests an underlying resilience, which may render the 2Q16 soft patch a blip on a modest, but concerted, economic upturn of the...
-
Gavekal Research
Nick Andrews, Stefano Capacci
Aug 24th 2016
Renzi’s Great Gamble
Italian Prime Minister Matteo Renzi has bet his premiership on a referendum over constitutional reform. It is a high stakes gamble. Renzi’s promise to step down if there is a “No” vote has turned the referendum into a vote of confidence in the government, its Europhile policies, and Italy’s membership of the eurozone itself.
-
Gavekal Research
Anatole Kaletsky
Aug 23rd 2016
A Brexit-Induced Recantation
Exactly two months have now passed since the Brexit referendum. It is now an appropriate time to review what has happened, and what hasn’t, since June 23. As a quintessential member of the elite that was angrily repudiated by a majority of British voters, this referendum was a profound emotional trauma. Therefore, my initial reaction turned out to be completely wrong.
-
Gavekal Research
Nick Andrews
Aug 21st 2016
Video: Italy's Constitutional Referendum
Nick presents what's at stake in Italy's upcoming constitutional referendum, and what it could mean for the European Union
-
Gavekal Research
Aug 20th 2016
Video: The Politics Of Italy's Referendum
Stefano Capacci On The Politics Of Italy's Referendum
-
Gavekal Research
Charles Gave
Aug 15th 2016
The Euro And Mean Reversion
Among my long-standing decision rules is one that generally proved reliable in the past. If two developed and open market economies trade freely with each other, then over the long run the return on invested capital in each economy will tend to be the same. In turn, this implies that over the long run, the ratio of total returns from each stock market will exhibit no trend in common currency terms. This makes intuitive sense—if one market...
-
Gavekal Research
Joyce Poon
Aug 12th 2016
Ripples In The Eurodollar Market
The Eurodollar market is making waves. While most benchmark interest rates around the world have been stable or softening, US dollar Libor has bucked the trend. Over the last seven weeks three-month Libor has climbed by almost 20bp to a shade over 0.8%. Meanwhile the TED spread, which effectively measures interbank credit risk by tracking the spread between Eurodollar rates and three-month US Treasury bill yields, has shot to its widest since...
-
Gavekal Research
Nick Andrews
Aug 11th 2016
Eurozone Equities Ride Again
Eurozone equities have been sucked higher in the post-Brexit global rally, but with earnings showing a mild pick-up and fears of a populist political contagion fading, the hope is that a 15 month downtrend has been broken. On a technical level the MSCI EMU’s 200-day moving average has flattened out nicely, and with the DAX on Tuesday hitting a high for the year, German stocks look as if they could break out. As to whether the broader market can...
-
Gavekal Research
Nick Andrews
Aug 05th 2016
Behind The BoE’s Positive Thinking
Yesterday the Bank of England rolled out the artillery it plans to deploy against the UK’s fast-materializing post-referendum slowdown. Yet for all the effect they are likely to have, the Bank’s big guns might as well be peashooters. Although the Bank’s new forecasts suggest the UK is heading for a period of stagnation, rather than outright economic contraction, all the latest forward-looking indicators point to a severe recession starting in...
-
Gavekal Research
Joyce Poon, Tan Kai Xian, Neil Newman, Udith Sikand
Aug 01st 2016
The Gavekal Monthly: Shall We Dance?
In a world in which the Fed shows no inclination to get ahead of the curve on inflation and in which both the ECB and the BoJ are in full quantitative easing mode, investors everywhere are on the hunt for yield. But the chase is a nervous one. Investors are all too aware that equities and bonds are sending conflicting signals, and that the favorable trends that have lifted most assets over the last six months could be disrupted by a sudden spike...
-
Gavekal Research
Nick Andrews
Jul 29th 2016
The Cracks Begin To Appear
Backward-looking data has held up surprisingly well in the UK since June’s Brexit vote. It is not that second quarter GDP growth came in ahead of expectations at 0.6% QoQ; only one week of 2Q fell after the referendum. However, despite dire warnings of the damage June’s “Leave” vote would inflict on the UK’s all-important property market, home prices proved remarkably resilient in July. The Nationwide house price index rose 0.5% MoM, an...
-
Gavekal Research
Joyce Poon, Udith Sikand
Jul 27th 2016
The EM Equity Question
Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.
-
Gavekal Research
Nick Andrews, Cedric Gemehl
Jul 26th 2016
One Certainty In An Uncertain World
In an uncertain world, in which Brexit, the US presidential elections, the future of the eurozone, are all strewn with wild cards whose potential impact is impossible to quantify, investors are left grasping for certainties. One is that whatever happens in the near term, the European Central Bank will continue to buy financial assets, including corporate debt.
-
Gavekal Research
Nick Andrews
Jul 26th 2016
The Way Ahead For Italian Banks
On Friday, the European Banking Authority will publish the results of its 2016 stress tests. Although 51 banks from across the European Union have been tested, attention will focus most closely on the results of the five Italian banks covered. With Italy’s banking system widely identified as the most likely locus of a new eurozone crisis, bankers, politicians and investors are all hoping for the “best” likely result. This would see all the banks...
-
Gavekal Research
Nick Andrews
Jul 20th 2016
The Constraints Of ECB Stimulus
Already fragile, eurozone confidence has taken a further beating in the last four weeks. In one of the first data releases since last month’s Brexit vote, the ZEW index of German economic sentiment plunged to -6.8 yesterday from 19.2 in June, its steepest fall since 2012. With growth in the eurozone’s principal economic driver likely to soften as confidence deteriorates, expectations are mounting that the European Central Bank will respond by...
-
Gavekal Research
Anatole Kaletsky
Jul 18th 2016
Why Brexit Still May Not Happen
With a newly installed British prime minister gravely intoning that “Brexit means Brexit” and having just appointed a cabal of Brexiters to run the UK’s exit strategy from the European Union, it would look to be game-over. Anatole would beg to differ and explains why there remains a strong likelihood that the UK government will change tack in the face of different circumstances than prevailed at the time of last month’s referendum.
-
Gavekal Research
Louis Gave
Jul 14th 2016
The Post-Brexit Rally: Head Fake Or Game-Changer?
Let’s face it, few expected the rally in global risk assets of the past ten days. Even investors who, like Charles, believed that Brexit was a fundamentally positive development did not expect positivity to erupt quite so suddenly. Yet, here we are, with the Nikkei up 10% since its post-Brexit low, the S&P 500 breaking out to new highs and the Shanghai benchmark above 3,000. Will it last?