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.

2018
April 09, 2018
SGH Insight
In his keynote speech, Xi is likely to announce the harmonization, this year, of domestic and international standards for entry of banks into China’s markets, and also the easing of restrictions this year on the share of foreign owned equity in companies in sectors including banking, securities, fund management, futures and financial asset management.

From what we understand, Xi has also considered an announcement that China will open up its general manufacturing sector, including granting easier access to sectors such as new-energy vehicles, telecommunications, medical services, and education.

Market Validation
CNBC 4/10/18
Stocks rallied on Tuesday as Wall Street breathed a sigh of relief after China's president said he would work to "open" the country's economy, easing trade war fears.

The Dow Jones industrial average gained 500 points, with DowDuPont as the best-performing stock ion the index. The S&P 500 gained 1.6 percent, with energy leading 10 of 11 sectors higher. The Nasdaq composite also advanced 1.6 percent.

Boeing rose 3.5 percent as concerns of a trade war were alleviated.

Chinese President Xi Jinping discussed plans Tuesday to further open up the country's economy, with measures including lowering import tariffs on autos, enforcing legal intellectual property of foreign groups and reducing duties on other consumer products.
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January 23, 2018
SGH Insight
From what we understand, Xi then conveyed a message to Trump that Pyongyang believes the stability of the Korean peninsula now depends on US actions. If the US were to continue to refrain from conducting joint military exercises with its allies, as it has for the duration of the Olympic games, the DPRK would not fire ICBMs or conduct nuclear tests beyond the duration of the Olympics as well.

Xi expressed China’s support for such an agreement, and held out hopes that officials from the US and the DPRK would engage in direct dialogue at the Olympics in Pyeongchang, leading to a resumption of bilateral discussions between the two countries as well a resumption of the Six-Party Talks.

Beijing, from what we understand, will furthermore seek to build on the new-found rapprochement between North and South Korea to organize a summit in the not too distant future between Kim Jong-Un and South Korea’s President, Moon Jae-in, who Xi Jinping has been actively courting.
Market Validation
(Bloomberg 3/9/18)
BFW 03/09 00:14 *CHUNG SAYS TRUMP, NORTH KOREA'S KIM WILL MEET BY MAY
BFW 03/09 00:12 *CHUNG SAYS NORTH KOREA WILL REFRAIN FURTHER MISSILE TESTS

(FT 3/6/18)
Hopes for North Korea nuclear accord lift sentiment
Agreement for talks with the south helps extend risk rally and boost the won

North and South Korea have agreed to hold direct talks between their leaders with Pyongyang signaling it is willing to abandon its nuclear programme if its security can be guaranteed.

The won is gaining 1 per cent at Won1,065.94 per dollar, its strongest level in 11 sessions.

The dollar index is slipping by 0.4 per cent to 89.726 and the euro is up 0.5 per cent at $1.2398, with the pound 0.4 per cent higher at $1.3889 The dollar tends to face selling pressure on positive geopolitical news, since its status as the world’s reserve currency gives it lingering haven characteristics.

Similarly, investors are reducing their exposure to US government debt, drawn by the prospect of stronger returns elsewhere, sending the yield on 10-year Treasuries back to 2.9 per cent for the first time in four sessions and up by 2.2 basis points. The yield was lower by a similar margin before the Korea news broke.

According to futures trade, New York’s S&P 500 will rise 0.5 per cent at Tuesday’s open, adding to a climb of over 1 per cent on Monday.

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2017
December 14, 2017
SGH Insight
There is a general sense among the conferees that Florida Republican senator Marco Rubio will probably get something in his demand for an increase in the child tax credit, but will back off from his threat to vote against the tax bill.

Market Validation
Bloomberg 5/15/17

Marco Rubio will be a ”yes” on tax bill, Fox says in Twitter post, citing unidentified person familiar.
*S&P 500, USD, UST YIELDS RISE AFTER REPORT ON RUBIO TAX VOTE
*USD/JPY FRESH HIGH 112.67 AS USD ADVANCES ON TAX OPTIMISM
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December 01, 2017
SGH Insight
Events are moving very quickly in the Senate in the last few hours that are pointing to likely passage of the Senate tax cut bill late tonight.

*** A crucial concession won by Maine Republican Senator Susan Collins just in the last hour, to put the state and local tax deduction back into the Senate tax bill, is not only key to its probable Senate passage with 51 likely (but at least the minimal 50) Republican votes later today, but it may also smooth the way to a very fast vote by the conference committee that will be tightly controlled by Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan. ***

*** The Republican leadership is pressing to get the tax cut legislation to a conference vote as soon as the end of next week, ideally before the current FY2018 Continuing Resolution expires on Friday, December 8, and certainly before the special Alabama Senate election on December 12. If so, the “Tax Cut and Jobs Act of 2017” could go to President Trump for his signature into law by mid-December. ***
Market Validation
(Reuters 12/4/17)

The dollar jumped on Monday versus the currencies of most other developed and emerging nations while Treasury yields rose and Wall Street was primed for a another record-setting day after the U.S. Senate voted to approve a wide-ranging tax overhaul.

Markets reacted broadly to the Senate’s approval on Saturday for the biggest tax law change since the 1980s, taking President Donald Trump closer to his goal of slashing levies on businesses.

European stocks rose more than one percent on average , with German stocks outperforming with a 1.4 percent surge, in anticipation of a strong New York session - futures for the Dow Jones, S&P 500 and Nasdaq indexes rallied as much as 0.9 percent .
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October 13, 2017
SGH Insight
The likelihood that President Trump will select Stanford University's John Taylor as his nominee to succeed Federal Reserve Chair Janet Yellen when her term ends next February should be taken very seriously.

Taylor met with President Trump, Vice President Mike Pence, and Treasury Secretary Steven Munchin for around an hour on Wednesday afternoon. The President is understood to have been very impressed.
Market Validation
(Bloomberg 10/16/17)

The dollar extended gains late Monday after economist John Taylor was said to make a favorable impression on President Trump during an interview for the position of Fed chairman.

* The Bloomberg Dollar Spot Index rose 0.3% as people familiar said Taylor impressed Trump, while the prospects of former Fed Governor Kevin Warsh faded.

(Bloomberg) -- Treasuries extended overnight losses, led by belly of the curve, pushing 5s30s through 87bp level; morning weakness was added to over afternoon session as report suggested that Fed chair candidate John Taylor made a favorable impression on Trump.

UST yields rose as much as 4.5bp, in 5Y tenor, shortly after the close; 5s30s flattened to 86.5bp, lowest level since 2007.

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October 13, 2017
SGH Insight
Specifically, our sense is that two options under consideration would be a taper of purchases from 60 down to 40 billion Euros a month, for six months, or down to 30 billion Euros for nine months, with the latter far more likely to be adopted than the first. ECB officials can then take a lay of the land, and re-assess the Eurozone growth and inflation forecasts around the middle of next year to decide how to advance with the final leg of the program. Factoring in the reinvestments, the ECB is going to remain a significant player in the markets for some time.
Market Validation
(Bloomberg 10/26/17)

The euro fell back to a 1.1700 handle vs the dollar and was lower against a majority of its G-10 peers after the ECB unveiled plans to extend its asset purchase plan until at least September 2018 at a pace of EU30b per month. EUR fell to the lowest since Oct. 6 at 1.1707 after Draghi’s press conference ended, extending losses that began after the decision was announced.
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September 18, 2017
SGH Insight
Despite the dovish remarks by several Committee members in recent weeks, we think it is very unlikely the median projections for rate hikes this year will drop to zero. There will be some downward drift in the 2017 rate projections, but we strongly expect the median to display one more rate hike this year. The rate dot plots will, however, probably drop across 2018 and 2019, reflecting the renewed doubts across the Fed system about longer run neutral levels. But the most interesting thing about the 2020 rate dots, unveiled for the first time, may be how many are marked above the assumed neutral levels, indicating an outright tightening
Market Validation
(Bloomberg 9/20/17)

Fed fund futures indicate odds of an additional rate hike by year-end have increased as the central bank kept its 2017 median fed funds forecast unchanged at 1.375%, implying that it still has room for one more rate hike.

* Odds of December rate hike currently ~60% from about 50% before the FOMC decision; fully pricing next rate hike around mid-2018; chances of one more hike by year-end have risen from as low as 22% since Sept. 8
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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 9/6/17)

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.
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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.
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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.
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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.
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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.
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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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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.
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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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