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
August 31, 2017
SGH Insight
If the plan holds together, the combined authorization bills would likely pass with large majorities and, in theory, could be rapidly brought to floor votes as soon as the end of next week, though the following week is more likely. Democratic support would, in effect, neutralize the objections of the House Freedom Caucus, already objecting to the leaks about the plan and who are demanding spending cuts be tied to the debt ceiling suspension, while the Houston relief should silence the objections of the large Texas GOP delegation.

We would caution, however, that the expected near term rapid progress on the debt ceiling will not ease the still difficult path to the Republican-promised tax cuts, or indeed passing a Continuing Resolution to avoid a government shutdown October 1 or for that matter, again on a second go in probably December.
Market Validation
FT September 6th

US stocks pushed higher and gold dropped following reports that US President Donald Trump has reached an agreement with Democratic congressional leaders on a short-term debt limit extension.

Reuters reported on Wednesday that Democratic congressional leaders had agreed with Mr Trump to pass Harvey aid along with a debt limit increase to December 15. Such a measure would also need support from Republicans, Mr Trump’s party, who control a majority of both the House of Representatives and the Senate.

The Dow Jones Industrial Average had climbed to a gain of 0.35 per cent at 21,828, while the S&P 500 pushed higher to 0.37 per cent increase for the day, at 2,466. The Nasdaq was up 0.25 per cent at 6,391.
Read full report
May 31, 2017
SGH Insight
A dovish ECB - even as it exits from QE and negative rates - may put some initial downward pressure on the Euro. But an ECB embarked on policy normalization that faces little if any inflation pressures can remain highly supportive of the Eurozone recovery, and in the context of a market eager to embrace a positive European growth story, capital flows may if anything support and push the Euro higher. We think that could be all the more so when juxtaposed with a US outlook that has turned cautious over political gridlock, second half rate hikes, and inflation.

Market Validation
(Bloomberg 6/29/17)
Euro at 13-Month High as Bulls See Opportunity in ECB Taper Talk

The euro rallied to the highest level in more than a year while a slump in German bunds deepened on speculation that the European Central Bank is edging closer to a decision to scale back monetary stimulus.
Europe’s common currency has strengthened against all but two of its major peers in the past week as President Mario Draghi said Tuesday that reflationary forces had replaced deflationary ones in the region. Yields on German 10-year bonds are headed for the biggest weekly increase since early March.
While the sharp currency and bond swings may have vexed ECB officials, prompting comments that markets had misinterpreted Draghi’s remarks, many analysts and investors remain convinced that this week marked a turning point in the outlook for euro-area monetary policy.

The shared currency rose 0.4 percent to $1.1425 as of 9:57 a.m. in London, taking its gains in the past five days to 2.4 percent.
Read full report
May 23, 2017
SGH Insight
We expect a momentum to build towards a proposed "smaller and sooner" test start to portfolio normalization. A well telegraphed, smaller scale of assets initially rolling off -- we assume something like $10 to $15 billion in Treasuries and MBS -- would ease the Fed's anxieties over a repeat of the 2013 "taper tantrum" and potentially allow an earlier start with a "well underway" normalization of rates still below 1.5%.
Market Validation
(WSJ 5/24/17)
U.S. Government Bonds Strengthen as Fed Outlines Gradual Portfolio Tapering

U.S. government bonds strengthened Wednesday after the Federal Reserve suggested it would likely start reducing its bondholdings later this year in a more cautious manner than some had expected, while laying out early details of a proposed method for tapering the portfolio down.

Traders greeted the new details warmly after a long period of anticipation. The yield on the benchmark 10-year Treasury note settled at 2.266%, down from 2.285% Tuesday. Yields fall as prices rise.
Read full report
May 10, 2017
SGH Insight
Among all the likely aftershocks in the wake of President Trump’s stunning sacking of Federal Bureau of Investigation Director James Comey, the most certain will be a pre-occupied White House that was only just establishing a coherent policy planning and coordination process with the Republican leadership on Capitol Hill.

When it comes to what it may all mean for the closely-watched tax reform legislative efforts, a distracted White House may not necessarily be a bad thing. There is a sense on Capitol Hill that a White House taken out of the tax reform equation for a while may on the margin improve, rather than derail, the prospects for passing a tax reform bill in some form later this year.
Market Validation
(Politico 5/11/17)
HILL REPUBLICANS SAY COMEY WON'T SLOW TAX REFORM - MM checked in with several senior GOP congressional aides on Wednesday and their message on the impact of President Trump's firing of Jim Comey on prospects for finishing health care and moving on to taxes was the same: there won't be any.

Markets seemed to agree with Hill Republicans that the Comey firing alone won't mean that much. Stocks barely budged on Wednesday with the Dow finishing down just 33 points and the S&P and Nasdaq marginally higher.
Read full report
May 05, 2017
SGH Insight
Saudi oil officials are irritated but hardly panicking over the recent plunge in oil prices, attributing the drop to long positions being unwound among some hedge funds, and remain confident crude oil prices will rise back within the $50 to $55 per barrel target range.
Both Saudi Arabia and Russia are firmly committed to a six-month extension of the Vienna OPEC-non-OPEC agreement they believe is steadily working towards a crude oil supply and demand rebalancing.

Market Validation
(WSJ 5/11/17)
Oil Jumps on Confidence in OPEC Cuts
Crude futures gained on Thursday as investors became more positive that production cuts made by major oil producers are finally making a dent on global crude stocks.

Concern that these cuts weren’t reducing the global crude glut has put pressure on oil prices for several months. Oil prices hovered around five-month lows at the beginning of this week but have gained since data from the Energy Information Administration showed U.S. crude stockpiles dropped by 5.2 million barrels in the week ended May 5, far exceeding market expectations.
Read full report
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
Read full report
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.
Read full report
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%
Read full report
March 03, 2017
SGH Insight
By June, the ECB will know whether a political crisis that could hit the economy will have materialized from France (they are far less concerned about the Dutch elections). Assuming there is none, at the June meeting they will have a clean look at what they hope will be consistently stabilizing data. A timeline is envisioned in which they could then change their forecast and guidance more aggressively at the June meeting, and by the September meeting announce the actual next leg of the asset-purchase taper for 2018
Market Validation
(Bloomberg, 4/25/17)
Bund, Bobl futures dip to session lows and Euribor strip edges steeper after Reuters reports that ECB officials see scope for sending small signal in June toward reducing monetary stimulus, citing three unidentified people familiar with the matter.
Read full report
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.

Read full report
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
Read full report
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.
Read full report
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.
Read full report
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.
Read full report
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.
Read full report
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
Read full report
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.
Read full report
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
Read full report
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.

Read full report
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.
Read full report