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    Gavekal Research

    5C Overview: Regime Change In The Oil Market Only Just Starting

    Since late last year, when the battle for oil market share broke out between OPEC and the US frackers, we have argued that this is not just a contest between rival groups of producers, but between distinct pricing regimes, based on very different economic principles (see Will US$50 Be Oil’s Floor, Or Its Ceiling? and The Macro Dividend From Oil).

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    Gavekal Research

    5C Europe: Russia’s Diminished Pricing Power

    Is Russia a player to be reckoned with in the oil pricing game? Last year Russia accounted for 11.7% of global oil production, ranking below the US (12.6%) but above Saudi Arabia (10%). In theory this elevated position should lend Russia formidable pricing power. In practice, however, Russia lacks the flexibility to make the most of its market share, a failing it is unlikely to overcome in the next couple of years.

    0
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    Gavekal Research

    The Ruble Reconfigured

    Yesterday the Central Bank of Russia announced it had embarked on a program of foreign exchange purchases that will see it buy between US$100mn and US$200mn a day. It explained its move by saying the purchases are intended to replenish Russia’s foreign exchange reserves, depleted by last year’s currency market interventions. In effect, however, the central bank is serving the market with notice that it does not want the ruble to strengthen any...

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    Gavekal Research

    More Air In The Reflation Balloon

    If investors were wondering what triggered the recent spike in eurozone bond yields, perhaps an answer emerged in yesterday’s 1Q15 GDP report. A month ago the yield on bunds out to 9-year maturities were negative and the 10-year touched 0.05%, implying a lost decade of growth—today the curve is positive beyond the 4-year. The argument of our Paris-based team has been that the eurozone is at the start of a cyclical pickup aided by low oil prices...

    0
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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

    0
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    Gavekal Research

    When Bond Markets Become Silly

    Investors are understandably spooked by recent bond market ructions given a backdrop of weakening growth in major economies, and continued accommodative central bank policy. Francois argued yesterday that this “tantrum” was partly technical, but also the result of markets looking through to higher inflation expectations due to an apparently better economic outlook (see Tantrum II And European Portfolios). I agree with him that markets are being...

    2
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    Gavekal Research

    The Liberties Of England, And What They Mean For Europe

    When the Conservative-led government of the last parliament started to show that it was serious about deficit-reduction and lessening the role of the state in the British economy, I turned very bullish on UK financial assets (see A Supply-Sider’s View Of The UK for a detailed exposition of this view). Perhaps unsurprisingly over the last five years the UK mid-cap index has outperformed the German and French equivalents. I admit to having had a...

    7
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    Gavekal Research

    Tantrum II And European Portfolios

    The curious thing about the bond market tantrum of the last two weeks is that it happened despite big economies such as the US and China reporting weak growth. Moreover, the average bond yield across the G7 has bolted 50bp higher despite none of the G7 central banks announcing a meaningful shift in their monetary policy settings. To my mind, these violent market moves have three immediate drivers with a bigger secular factor lurking in the...

    2
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    Gavekal Research

    The UK Drama Has Only Just Started

    Although the Tory victory came as a huge surprise, it changes very little about the UK's economic or financial prospects. In that sense the absence of any big reaction in the financial markets is understandable. The pound and the stock market would have fallen steeply in the event of a “hung parliament”—and, certainly, that is the outcome I expected (see The UK Cliffhanger). But now that the prospect of domestic political instability has...

    6
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    Gavekal Research

    More Tantrum Than Crash

    Nothing lasts forever, not even bond market bubbles operating under the tutelage of ultra-dovish central banks. Despite the promise of limitless financial repression in the eurozone and Japan, bond-buyers look to be going on strike. Long-dated US yields have crept higher over the last month, while yesterday’s market action saw investors throw in the towel on the eurozone’s peripheral bond markets. We even got the odd sight of the Australian...

    1
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    Gavekal Research

    Five Corners (6 May): The Weakness In Wages

    Overview: Charles Gave wonders why in spite of policymakers having the best of intentions, their efforts have caused declining productivity, lower median incomes and fewer quality jobs. United States: The labor market is no longer a clear indicator of the US economic cycle, says Will Denyer, who looks for new insights into what variables may guide the Fed in its policymaking. Europe: Although jobless numbers have fallen across much of the...

    0
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    Gavekal Research

    The UK Cliffhanger

    Conventional assumptions about British elections say that the incumbent party of government generally enjoys a swing of one or two percentage points in the final period of campaigning. Like most electorates, once all the shouting is done, British voters typically focus on livelihood issues and tend toward “the devil they know”. In recent days the Conservative Party has seen the opinion polls move slightly in their favor, but nothing so...

    1
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    Gavekal Research

    Growth & Markets Monthly (May 2015)

    While our growth readings ticked higher last month, the big shift came with a sharp rise in our risk appetite indicators. We also note an easing of deflationary pressure with the US breakeven inflation level registering a nine-month high. On the liquidity side, the European Central Bank has cranked up its expansionary efforts and its balance sheet is rising at 16% YoY. Taken together, these moves have benefited equity markets (notwithstanding...

    0
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    Gavekal Research

    5C Overview: The Real Message From Labor

    So how are we to understand the less than thrilling message emanating from the labor markets of the main economies. Is this evidence of some unescapable “secular stagnation”, or is something else going on?

    0
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    Gavekal Research

    5C Europe: Still Waiting For Pay Day

    Although it started from an extremely low base, the recovery of the eurozone’s job market since 2013 has been significant, with employment rising by almost 1% YoY in 4Q2014—the highest growth rate since 2008. Recent business surveys indicate that this trend has continued and even accelerated into 2015.

    0
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    Gavekal Research

    Beware Of Crowds, And False Prices

    The world’s largest economy is on the cusp of a deflationary depression—at least according to yesterday’s US GDP report. Real growth was up a mere 0.2% annualized in the first quarter, while nominal growth was even lower, at just 0.1%, due to a -0.1% drop in prices. Yet the markets largely looked past this “shocking” report. There were some notable moves yesterday, but not because the market was pricing in economic disaster—far from it.

    6
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    Gavekal Research

    Whither US Manufacturing

    US economic data has started to surprise on the downside, and much of this can be attributed to the manufacturing sector. This is worrying since the sector often leads the general economy. Hence, the $64,000 question is whether we should be bracing for an unscripted recession? Our answer is no, but investors should underweight the US manufacturing sector. In the near term, price adjustments, largely stemming from the energy and commodity price...

    3
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    Gavekal Research

    Starving The Greeks Out

    After Friday’s near-total breakdown in the negotiations between Greece and the eurozone, it is clear that both sides need a Plan B. In the case of Greece the alternative to a negotiated solution has always been clear. It is to default on its debts to other European governments, thereby presenting those nations with a stark alternative: either expel Greece from the euro and risk contagion to Portugal, Spain and Italy, or offer Greece the money it...

    12
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    Gavekal Research

    The Rebirth Of CEE Banking - Cedric Gemehl & Nick Andrews

    Who will benefit most from Europe’s extraordinary monetary easing? Will it be struggling giants such as Italy and France, or those lapping up liquidity on the fringes? Our contention is that Central and Eastern Europe is at the early stage of a “deflationary boom” while financial institutions have sufficiently recovered to transmit the European Central Bank’s quantitative easing program into credit expansion.

    0
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    Gavekal Research

    A Tactical Shift On Greece

    As angry rhetoric between Athens and eurozone finance ministers escalated last week, the drumroll towards Grexit appeared to be reaching a crescendo. But having raided the coffers of state enterprises this week, the Greek government can now pay its bills until June. No less significant was the move by the European Central Bank to prop up Greek banks in the face of deposit flight by upping its Emergency Liquidity Assistance limit by €1.5bn to €...

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