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    Gavekal Research

    The Clash Over Fossil Fuels

    Over the weekend in Paris, the leaders of 195 nations announced a landmark deal to address climate change that its more optimistic supporters say heralds “the end of the fossil fuel era.” But both market action and many government policies point in the opposite direction. Crude oil prices continue to tumble towards the US$30 mark, and coal prices have also collapsed—both moves that reflect abundant global supplies of fossil fuels. The Paris...

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    Gavekal Research

    The Cure For Low Prices Is Low Prices

    What is the latest rout in commodity prices telling us? Certainly, China’s demand for many commodities is weak—but everyone knows this. The most important signal is rather on the supply side: low prices are finally pushing commodity producers to cut output. It is this restructuring that will eventually bring stability to commodity prices.

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    Gavekal Research

    What A Brexit Means For Markets

    This week David Cameron has been on the road in Eastern Europe arguing that British voters will vote for “Brexit” unless it gets a new deal with the European Union. As polls suggest that Britons are pretty much split down the middle on the issue, the prospect of the UK bidding adieu to Brussels is getting more real by the day. Indeed, with the negotiation expected to reach a head early next year, the question of a British exit is likely to...

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    Gavekal Research

    The Apex Of Market Stupidity

    In some 40 years of watching financial markets, my dominant emotion has been a mixture of curiosity, amusement and despair. It seems the stock market must have been invented to make the maximum number of people miserable for the greatest possible amount of time. The bond market, meanwhile, has just one goal in life: to make economists’ forecasts for interest rates look even more silly than their other predictions.

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    Gavekal Research

    A Year-Defining Week

    Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organization of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were...

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    Gavekal Research

    Video: On Brexit

    Nick Andrews discusses the possibility of a "Brexit"

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    Gavekal Research

    On Course Through The Squall

    The market reaction to the European Central Bank’s announcement yesterday of additional monetary easing—including a -10bp cut in the ECB’s deposit rate to -30bp and an extension of its €60bn a month program of bond purchases to at least March 2017—suggested that the central bank’s moves were a massive disappointment. Instead of letting off a firework, the ECB seems to have set fire to the house. In the immediate aftermath of the announcement,...

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    Gavekal Research

    Equities And The Euro

    It is likely that 2015 will be remembered as a strong year for eurozone equities. With only a few weeks of normal trading activity remaining, the MSCI EMU has delivered a solid 17% total return in local currency terms (the benchmark small and mid-cap index is up 24%). Still, we doubt that many investors will be celebrating a bumper year. The standard view was that the European Central Bank’s huge asset purchase program, which started in March,...

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    Gavekal Research

    Osborne’s Masterful Tack

    “Since 2010, no economy in the G7 has grown faster than Britain,” boasted George Osborne, the Chancellor of the Exchequer, presenting his autumn public spending review yesterday. Indeed it is true that, according to the latest estimates, GDP in both Britain and the US has increased by exactly the same number, 12.4%, since the first quarter of 2010.

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    Gavekal Research

    Financing Europe’s Soaring Defense Costs

    François Hollande has rightly made it clear that France is at war (see France Under Attack). And wars cost a lot of money, as keeping an army in the field and airplanes in the air is expensive. There is a reason for the military adage “amateurs talk strategy; professionals talk logistics”. Moreover, fighting a terrorist organization involves both military costs and large domestic security costs. As such, the increase in security spending for the...

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    Gavekal Research

    Stick With The Dollar

    With the US set to raise interest rates and the eurozone more likely to ease policy, a long-dollar, short-euro position has been an obvious bet. Yet as the DXY inches closer to its March high, the question is whether a breakout is feasible. After all, the long US dollar trade looks crowded, with the world and its dog convinced that Janet Yellen and Mario Draghi will soon be travelling quite different monetary pathways. Such a comfortable...

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    Gavekal Research

    A Britisher At Heart

    On Monday, Anatole argued that a British exit from the European Union would rank as a foreign policy disaster of historic proportions (see Brexit: A Blunder To Rank With The Boston Tea Party). This is not the first time I have disagreed with my partner on UK matters, and it will likely not be the last. In recent years Anatole worried about the impact of public spending cuts being pushed through by the Conservative-led coalition government; I...

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    Gavekal Research

    Europe’s Equity Bet

    On the face of it, the opportunity in European equities is hardly exciting. US stocks may be close to their high while European equities languish 10% below their April peak, but on a valuation basis the two markets are similar. A comparison of their price-to-earnings ratios, both on a trailing and forward basis, sits near its historical average. Things, however, start to look more interesting when a cyclically-adjusted P/E ratio is applied—CAPE...

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    Gavekal Research

    France Under Attack

    In the worst days of the Northern Ireland troubles, British policymakers spoke of a “tolerable level of violence”. It was taken for granted that senseless and murderous acts would be committed, but what mattered was ensuring that these did not “get out of hand”.

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    Gavekal Research

    Brexit: A Blunder To Rank With The Boston Tea Party

    Ask any divorced couple whether their relationship would have been different had they never married. Actually, don’t bother asking, since the answer is obvious. Strangely, most conservative politicians do not seem to understand this—and neither do 48% of British voters. That is the number, according to recent opinion polls, who want a divorce from the European Union.

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    Gavekal Research

    A Happy Apologist

    At Gavekal the conversation with clients never stops and from time to time we like to offer up a taste of debates that strike us as interesting. Louis got into just such a discussion earlier this week with one of our smarter, free-market embracing US clients. The topic of discussion was China and why Louis is such an apologist for the Chinese Communist Party when he clearly has little time for governments meddling with markets elsewhere?

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    Gavekal Research

    Drifting In The Mid-Atlantic

    On the one hand the United Kingdom looks to have similar dynamics to recovering European economies, where growth is picking up nicely even though deflationary pressure still looms—Britain’s headline CPI rate stands at -0.1% and real rates have swung positive from a low of -4.7%. Such a cautious view explains why the Bank of England offered a report last week whose dovishness surprised some. Yet, on the other hand mid-Atlantic Britain in many...

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    Gavekal Research

    The Catastrophe Of Negative Rates

    Yesterday both Reserve Bank of India governor Raghuram Rajan and Bundesbank president Jens Weidmann broke ranks, daring to suggest that ultra-low interest rates may not be such a good thing after all. If rates were held too low for too long, warned Rajan, the risk of financial instability would be greatly heightened, a concern Weidmann shares. Unfortunately, that’s not the half of it.

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    Gavekal Dragonomics

    China And Russia: Locked In Reluctant Embrace

    China’s economic activity is gradually reducing Russian influence in Central Asia. Despite that, shared authoritarian values keep the two countries closely aligned on many issues.

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    Gavekal Dragonomics

    CEQ: China Reshapes Asia

    In the last two years China has made a bold push to expand its influence in Asia, using both the carrot of well-funded infrastructure diplomacy and the stick of forceful assertion of territorial claims in the South and East China Seas. What explains this newly assertive foreign policy, and what are its effects likely to be? This special issue of the China Economic Quarterly tries to answer these questions.

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