Highlights

SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

2017
March 23, 2017
SGH Insight
On balance, we think the probabilities are nevertheless tipping, perhaps to 60-40 odds if not worse that the Republican-crafted legislation to replace Obamacare will collapse, either in failing to secure the 215 votes needed to pass in a vote tomorrow, or in the Speaker pulling the bill despite the President's intervention.Instead, we think it more likely the White House will quickly shift the political agenda within days to an accelerated drive for the tax reform legislation, on which the President is said in fact to be restless to get going. Legislation to replace Obamacare would be shuffled to the back of the legislative queue, to be revived in a newly written bill late into the second half of this year.
Market Validation
(Bloomberg 3/24/17)
BREAKING: Stocks sharply rebound after news that House pulled GOP health plan
USD/JPY rebounded to above 111.20 after matching Thursday’s 2017 low at 110.63 after House Republicans canceled vote on health care reform, lacking sufficient support. S&P 500 Recovers, Now Positive; VIX Falls Back Below 13
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March 14, 2017
SGH Insight
We suspect Chair Yellen will resist affirming a high likelihood of four rate hikes this year in her post-meeting press remarks. The rate dot projections are highly likely to show another upward migration in all three years of forecasting horizon. While it is more or less a toss-up, on balance there may not be quite enough movement in the 2017 dots to nudge the median from three to four.
Market Validation
(WSJ 3/15/17)
U.S. government-bond prices posted their largest one-day gain since June on Wednesday after the Federal Reserve raised interest rates for the second time in three months.

Traders said investors bought stocks and bonds after the central bank released economic forecasts showing that Fed officials continue to expect two more rate increases this year. Some market participants had expected indications for a potential fourth rate increase this year, after the pace of economic gains picked up and some influential Fed speakers took a more hawkish tone in recent weeks.

The yield on the 10-year U.S. Treasury note tumbled to 2.50%, down from 2.595% on Tuesday. Yields fall when bond prices rise. Stocks surged, with the Dow Jones Industrial Average jumping 112.73 points, or 0.5%, to close at 20950.10.
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March 03, 2017
SGH Insight
Against a backdrop of steadily improving inflation data and the likelihood that the quarterly economic forecast will be tweaked up at the meeting, our understanding is the Council will discuss the appropriateness of its current forward guidance language on Thursday, and there is a good chance President Draghi will agree to some changes to the wording of the ECB policy messaging.
Market Validation
(The Street, 3/9/17)
Speaking to reporters during his regular press conference in Frankfurt, Draghi told reporters that while the Bank's official forward guidance suggested rates could remain "at present or lower levels for an extended period of time", improving economic fundamentals would imply that the "or lower" clause is not likely to be applied, indicating a "lower sense of urgency" on further rate reductions.

The Bank also lifted inflation forecasts for this year and next and Draghi said that he and his Governing Council colleagues -- comprised of central bankers from around the Eurozone -- had agreed to remove a previous reference to the use of "all available instruments" in the Bank's policy toolbox.

The collective suggestions helped the euro gain sharply against the dollar, with the currency rising to as high as 1.0614 from 1.0555. Benchmark 10-year bund yields were also rising as Draghi spoke in Frankfurt, gaining 4 basis points to a two-week high of 0.41%
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February 22, 2017
SGH Insight
The takeaway from the Minutes released this afternoon to the two-day Federal Open Market Committee meeting ending February 1 was unmistakably clear: a rate hike is indeed being prepared for as early as the March 14-15 meeting.

*** We have been steadily edging up our odds on a March rate hike since just before Fed Chair Janet Yellen's Capitol Hill testimonies when she first test drove the "upcoming meetings" language. We now think, barring an unexpectedly southern turn in the March 10 Nonfarm Payroll print, that a March meeting rate hike is more likely than not. ***

*** If a rate move does come as soon as March -- and it would be a fairly remarkable shift in the pace of Chair Janet Yellen's policy normalization strategy -- it would be more about maximizing flexibility in the timing to later rate hikes this year rather than making room for a fourth rate hike, which we think unlikely. ***
Market Validation
(Bloomberg 2/28/17)
The market odds of a March increase in US interest rates shot up to 80 per cent on Tuesday as Federal Reserve policymakers insisted they did not need to see Republican tax reforms and other policies before they act.

William Dudley, influential head of the New York Federal Reserve, said that the prospects for adding to the December 2016 rate increase had become “a lot more compelling”.

“It seems to me that most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased,” he said in an interview with CNN.

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February 13, 2017
SGH Insight
While we do not expect Federal Reserve Chair Janet Yellen to send an overt signal about March in her twin testimonies on Capitol Hill tomorrow and Wednesday, we do think she will affirm the Fed’s confidence in the near term outlook and the high likelihood for a gradual pace of continued rate hikes.

And if that is taken by the market to be relatively hawkish, from the Fed’s perspective, that may not be a bad thing.

*** We still think a March rate hike is more unlikely than not, but there does seem to be an undercurrent of sentiment within the FOMC strongly leaning to a more tactical positioning for a March rate hike or at minimum, to open the door more explicitly to a rate move in May. In that sense, the “every meeting is live” mantra of the previous years is finally more real than rhetoric. ***
Market Validation
(Bloomberg 2/14/17)
USTs Fall, Eurodollars Steepen, as Yellen Raises March Odds 10:12
Treasuries sharply lower in response to Yellen text which says “waiting too long to remove accommodation would be unwise,” and that further adjustment would likely be needed if economy is on track.
• 5s30s aggressively flattens in response, reaches 109.5bp, flattest since Jan. 20 and 1.7bp flatter on the day
• 10Y futures sell off around 12 ticks, reach 124-03, matching Feb. 3 lows
• Eurodollar strip bear steepens with whites lower by 1bp-3bp and greens, blues lower by 6bp
Fed fund futures based on April 2017 contract show about 34% chance of a rate hike at the March FOMC meeting vs 30% pre-testimony
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February 08, 2017
SGH Insight
In the last 24 hours or so, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell have been reassessing their legislative options to keep corporate tax reform on track after it had become apparent it was in serious danger of delays or even derailment due to the need to move first on Obamacare.

*** We understand this afternoon that one of the "procedural options" being given serious consideration though not yet adopted by the Republican leadership on Capitol Hill would be to break the Obamacare legislation into "phases of replacement" over an extended period rather than as one near-term heavy political lift. ***

*** The aim is to give a priority to the House Ways and Means Committee to move on a "first phase" on the tax portion of the Obamacare legislation as soon as mid to late March. That, in turn, would free its chairman, Kevin Brady, to get back on track with a mark-up of the corporate tax reform bill in April. ***

Market Validation
(Bloomberg 2/9/17)
USTs Fall to Lows After Trump Promises Action on Taxes 10:16
Treasuries fall sharply to session lows led by 5Y after Trump says something will be announced on taxes in the next 2-3 weeks.
• 10Y futures contract moved 7 ticks to lows at 125-02; 65k traded over 5 minutes before 10am ET • Move coincides with advance for U.S. stocks and 50-pip surge in USD/JPY 50 to highest level since Jan. 3 Heavy Selling in Eurodollars as June Hike Odds Rise
Trading volume in Jun17 eurodollars jumped after Trump said something will be announced on taxes in the next 2-3 weeks; odds of Fed rate hike in June climbed to ~74% from 69% Wednesday.
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January 26, 2017
SGH Insight
Some pressure against early elections is mounting within the PD’s southern region governors, who are resisting Renzi’s leadership, and would like to challenge him internally in a party conference to decide the PD’s prime minister candidate. Even though this challenge is unlikely to succeed, Renzi cannot force an election without first dealing with internal opponents – lest having to fight an election without the unconditional support of his party.

Furthermore, Renzi does not control the majority of the PD Deputies. Without their support, it would be impossible to force Mattarella’s hand to elections through a no-confidence vote against Prime Minister Paolo Gentiloni.

Market Validation
(Bloomberg 2/14/17)
Italian bonds led gains in Europe after former Premier Matteo Renzi called a congress of his Democratic Party, reducing the chances of an early election in the nation.

Italy 10-year yields drop 3 basis points to 2.20 percent; analysts now look to early 2018 as most likely time for new elections; Italy-Germany 10y spread now tighter by around 10bps this week.
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January 13, 2017
SGH Insight
FTA

The British government will aim for a Free Trade Agreement with the EU, from the “outside” – something unique, but that might look similar to the one recently negotiated by the EU and Canada, the Comprehensive Economic and Trade Agreement, or CETA – in order to maintain a level of access to (but not membership in) the single market for goods and service.

Financial Services

EU officials also pointed out that up to 80% of EU transactions happen in London, and therefore some very specific work has to be done in this area. Officials acknowledge they will be called to think outside of the box – e.g., on equivalences, financial markets etc. – in order to avoid financial instability.

But eventually, they are optimistic that a special relationship with London is likely to be carved up, one with a perhaps much less dramatic change to the status quo than currently expected.
Market Validation
(UK Telegraph 1/17/17)

The pound has surged by the most against the dollar since the immediate aftermath of the EU referendum.

Smashing the $1.23 barrier against the dollar, the pound leapt 2.29pc to $1.2344, its biggest rise since July 12 last year when it jumped 2.41pc.

Theresa May's Brexit plan

Europe's bank index turns positive on May's comments on 'transition' deal

Europe's bank index has turned positive and is now up 0.3pc after Prime Minister Theresa May said the government will seek a transition for financial services regulations.

May will seek 'greatest possible access' to EU

May has said she will pursue a "bold and ambitious" free trade agreement.

"What I am proposing cannot mean membership of the EU single market," she said.

"Being out of the EU but a member of the single market would mean being subject to rules without a say in them. Staying in the EU would mean not leaving the EU at all."

Instead, the Prime Minister, will seek the "greatest possible access" to the EU.
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2016
November 28, 2016
SGH Insight
We still believe an OPEC agreement for up to 1 million barrels per day in total announced production cuts — built around firm output cuts of as much as 800,000 bpd by Saudi Arabia, Kuwait, and the United Arab Emirates — and supported by the cooperation of Russia in freezing its current output, is, on balance, still more likely than not at the Summit in Vienna this week.
Market Validation
(Bloomberg 12/1/16) Oil traded above $50 and crude producers rose after OPEC approved its first supply cuts in eight years, with the focus now shifting to how strictly the group will implement the deal. Futures advanced 2.6 percent in New York. Prices surged 9.3 percent Wednesday, the largest gain since February amid record volumes. OPEC agreed to reduce collective production by 1.2 million barrels a day to 32.5 million and Russia pledged a cut of 300,000.
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November 02, 2016
SGH Insight
In the last 24 hours or so, a compromise on Iraq’s participation looks imminent, which in turn should clear the way for a credible agreement at OPEC’s November 30 Summit in Vienna on the first cuts in OPEC output since 2008. The key breakthrough is what looks likely to be a Saudi concession to accept an Iraqi quota at their higher 4.7 million bpd output figure they recently asserted as their current output rather than the 4.1 million bpd figure used to formulate the 32.5-33 million bpd total OPEC output target in Algiers, which was initially based on secondary industry sources.
Market Validation
(Bloomberg 11/3/16) Brent Rebounds Above $47 After String of Declines
-- Brent, WTI gained, stemming the longest run of declines since Sept. as market seen as underestimating prospects of an OPEC production deal. Dec. WTI +23c at $45.57/bbl at 9:03am ET, rising 1st time in 5 days
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October 28, 2016
SGH Insight
US Treasury Secretary Jacob Lew and China’s Vice Premier Wang Yang appear to have held a phone conversation on Sunday night (October 23, Beijing time) to discuss the sliding Chinese currency, BIT trade negotiations, US elections, and US Treasury Bonds. While not an official protest over the weakness of the CNY, the call from Lew was, in effect, exactly that, and indeed was initiated at the suggestion of Washington.

Wang explained the reasons behind the slide in the currency to Secretary Lew, while keeping open the option of a further orderly decline if justified in the future. Wang also, however, expressed his “view” that the currency will likely trade between 6.6600 and 6.8000 for the rest of the year, with assurances of support in that period from China’s central bank if the CNY looked to be breaking 6.8000 again.
Market Validation
(FT 10/30/16) China’s central bank kicked off the week by strengthening the midpoint of the renminbi’s trading band against the dollar by the most in more than a week.

The People’s Bank of China set the fix around which the currency can trade 2 per cent against the dollar in either direction stronger by 0.32 per cent on Monday at Rmb6.76410.

That was the largest strengthening of the fix since Friday 21 October and follows a week that saw the midpoint move weaker overall by a 0.44 percentage points to 6.7850.
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October 18, 2016
SGH Insight
Finally, there are reports that the ECB will continue on a limited, as needed basis, to allow for some minor deviation from the strict “capital key” guidelines for bond purchases if needed, meaning if there is any particular scarcity in a sovereign bond at a given time. That is correct.

Market Validation
(Bloomberg 2/16/17)
Sharp Jump in Italian, Spanish Bonds on ECB Capital Key Comments 07:40
Italian and Spain 10-year yields drop around 5bps, with smaller drop in France, after ECB meeting minutes show “limited and temporary deviations” from the capital key “were possible and inevitable”.
• The gains in these countries are due to their larger overall outstanding debt, as deviations from capital key suggests the ECB may end up buying a more bonds from these countries
• Bonds rallied sharply, before paring some advances
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September 23, 2016
SGH Insight
We would watch for confirmation of technical working groups that will be formed — which will be focused on establishing new quotas — and for an affirmation from Iran that it will soon be approaching its 4 million bpd pre-sanctions production target. Those two signals would underscore what we understand to be substantial momentum in Saudi and Russian-led talks to shift OPEC away from an output freeze to a new overall ceiling and quotas agreement that could come into place as soon as the OPEC Summit in Vienna on November 30. It would include Iranian participation at its pre-sanction level, Russian “observation” of an implied quota and, crucially, a Saudi/GCC output cut.
Market Validation
(Bloomberg 9/18/16) OPEC agreed to the outline of a deal that
will cut production for the first time in eight years,
Oil jumped more than 5 percent in New York after ministers
said the group agreed to limit production to a range of 32.5 to
33 million barrels a day.

The agreement was possible because Iran will be exempt from
capping production, a major concession by Saudi Arabia, the
group’s dominant producer. Still, many of the details remain to
be worked out and the group won’t decide on targets for each
country until its next meeting at the end of November.

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July 07, 2016
SGH Insight
Prime Minister Shinzo Abe’s LDP Party is entering the weekend with momentum for a strong victory, possibly even for a slim outright majority, in this Sunday’s Japanese Upper House elections. That would be a positive for markets.

We expect the Bank of Japan to then follow through at its July 28-29 Monetary Policy Meeting with additional monetary stimulus through asset purchases, while refraining from cutting the deposit rate deeper into negative territory.

And in August the Cabinet will start planning for a second supplementary budget that will provide a fiscal stimulus of 10 trillion yen, or possibly even a bit more, to the Japanese economy.
Market Validation
(Bloomberg 7/11/16) -- The yen tumbled the most since April as Japanese Prime Minister Shinzo Abe said he planned to add fiscal stimulus following the ruling party’s victory in Sunday’s upper-house elections.

(FT 7/11/16)
The broad Topix benchmark ended 3.8 per cent higher for its biggest one-day rise since February 15 and its third-largest advance so far this year. The Nikkei 225 closed 4 per cent higher for its biggest one-day gain since March 2 and its fourth-largest rise this year.
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July 01, 2016
SGH Insight
It is September that is now shaping up to be the pivotal meeting. There may be enough clarity in the data and in market conditions to either proceed with that elusive second rate hike in the policy normalization path — not impossible despite the low odds — or to signal a shift to a neutral or even an easing policy stance. Despite the market pricing, the latter is not the Fed’s base case.
Market Validation
(FT 8/28/16) European bond yields crept higher and stocks across the continent slipped in trading thinned by a holiday in the UK, as investors digested the message delivered late last week by Federal Reserve chair Janet Yellen that the case for rise in the central bank’s key short-term interest rate has strengthened.

The remarks delivered by Ms Yellen at a gathering of central bankers in Jackson Hole, Wyoming, have been enough to pull higher the probability traders attach to policymakers lifting borrowing costs when they meet next month to 42 per cent, up from below 30 per cent before she spoke late on Friday.
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June 10, 2016
SGH Insight
Perhaps most dangerous of all for the Remain camp, with only two weeks to go to the polls, we believe could be the spate of recent high profile defections from the Labour party, ostensibly strongly pro-Remain despite widespread suspicions over the true sympathies of its leader Jeremy Corbyn, to the Brexit side.

And while market participants take solace in betting lines that have consistently shown an overwhelming lean to Remain, these should be treated with caution, as the odds are reflective of bet size, and the typical Remain vote bet is much larger than the Leave vote.
Market Validation
(Bloomberg 6/24/16)
The Stoxx Europe 600 Index sank 7 percent at the close of trading, joining a global market selloff as 52 percent of U.K. voters opted to leave the European Union and Prime Minister David Cameron resigned. The FTSE 100 Index fell 3.2 percent, trimming a slump of as much as 8.7 percent as exporters gained amid a plunge in the pound to 30-Year Low as U.K. Stocks Slide on Brexit Sterling slumps below $1.35, weakening as much as 11%.Treasuries surged, pushing benchmark yields down the most in seven years, as Britain’s surprise vote to leave the European Union drove a rush for the safest assets.
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May 27, 2016
SGH Insight
There is virtually no chance Saudi Arabia will change its three-decade old peg of 3.75 riyals to the dollar, as we have written before (SGH 11/25/15, “Saudi Arabia: A Devalued Riyal Peg Highly Unlikely”). Contrary to some market beliefs, there is nothing to be gained in budget revenue through a devaluation as it would only mean higher import costs, likely higher inflation, and probable capital outflows, nor would exports become more competitive when the primary export is dollar-denominated crude oil.
Market Validation
(Bloomberg 6/3/16) Saudi Arabia ordered banks in the kingdom to stop selling
some products that allow speculators to bet against its currency peg just days
after demanding information from lenders on the offerings, according to people
with knowledge of the matter.

The Saudi Arabia Monetary Agency sent a circular to banks this week saying
that dollar-riyal forward structured contracts are banned with immediate
effect, said the people, asking not to be identified because they are not
authorized to comment publicly. Forward foreign-currency transactions backed
by actual goods and services will still be allowed, the people said.

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May 17, 2016
SGH Insight
"A Fed messaging offensive is underway, culminating with Chair Yellen's twin speaking engagements on May 27 and June 6, to move market pricing higher for a June rate move. Chair Yellen's scheduled remarks will in fact mark the culmination of what has been something of a concerted Fed communications offensive underway in earnest since last week to push market pricing to a significantly higher probability for a June rate hike. Indeed, while not entirely certain, we think the odds on a second rate hike in the policy normalization path as soon as the Federal Open Market Committee's June 14-15 meeting are better than even."
Market Validation
(Bloomberg 5/17/16)--"Two-year notes fell, pushing yields to the highest since April, as comments by Federal Reserve officials and gains in inflation bolstered speculation the central bank will raise interest rates this year.

Yields rose as San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart said two or three rate increases are possible in 2016, and after data showed the cost of living in the U.S. climbed by the most in three years. Futures traders added to wagers that the Fed will lift interest rates as soon as next month.

The market-implied probability of a rate increase in June is 14 percent, up from 4 percent Monday, according to futures data compiled by Bloomberg. It rises to about 65 percent for a move by year-end, up from 56 percent a day earlier. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase."

(Bloomberg 5/18/16) -- "After FOMC minutes indicating most officials saw June hike as appropriate if economy continued to improve, probability of a June hike rose to 28% from 14%; hike first priced at more than likely remains Sept.
July hike priced at 42%"
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April 04, 2016
SGH Insight
It is our strong sense, however, that despite the young Deputy Crown Prince's reported remarks last week, there is no shift underway in Saudi oil policy away from the oil output freeze and efforts to stabilize oil prices at a higher level. The Kingdom will be attending the Doha meeting on April 17, and we believe it will in the end accept an Iranian exemption to the oil output freeze. The Kingdom, as we wrote previously is still seeking an oil price equilibrium of around $40 to $50 a barrel by the end of the year.
Market Validation
(Bloomberg 4/7/16)
Oil reversed losses amid speculation about whether an accord can be reached at a meeting between OPEC members and Russia on freezing oil production.

Futures rose as much as 1.2 percent in New York after slipping 1.3 percent Thursday. The meeting is set to take place April 17 in Doha to discuss freezing output to stabilize the markets. Saudi Arabia has said it will only agree if it’s joined by other suppliers including Iran, while Kuwait said a deal can be done without Iran’s support.
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March 14, 2016
SGH Insight
First, we cannot emphasize enough that the Iranians were already exempted from the oil output freeze, by both of the key oil powers, Saudi Arabia and Russia, until a revisit on the OPEC quotas later this year.
Second, when the Russian oil minister noted that “within the framework of major oil producers, Iran is liable to have an exclusive way for increasing its oil production,” he was referring specifically to the understanding as we have been writing since January. And third, the freeze meeting is all but certain to be moved to Doha from Moscow, at a date still to be set, but probably in the first half of April.
Market Validation
(FT 3/16/16)

Alexander Novak, Russia’s energy minister, said on Monday after talks in Tehran that Iran had the right to boost output after years of restrictions against its oil industry.
“Producers agree Iran’s exports will remain gradual and lower than expectation,” said one Gulf Opec delegate.

Some of the world’s biggest oil producing countries will meet in Doha next month to discuss a freeze in output, Qatar’s energy minister said on Wednesday.
Mohammed Bin Saleh Al-Sada, also president of the Opec producers’ group, said in a statement that the April 17 gathering of ministers “comes as a follow-up to the meeting that was held last month in Doha”.

A provisional deal has helped to support prices, up 20 per cent in the past month alone. On Wednesday the price of Brent crude, the international benchmark, rose 59 cents to $39.33 a barrel by 11am in London.
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