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
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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February 11, 2016
SGH Insight
"We have learned that on President Xi Jinping's instructions, four departments led by the People's Bank of China presented a joint policy document entitled "China's Strong RMB Strategy" to the State Council and the Central Financial Leading Group, in which a five to fifteen year currency plan will target a gradual appreciation of the RMB against the basket of 13 currencies and for the RMB/US dollar exchange rate to be held within a relatively tight range in the near term."
Market Validation
(Bloomberg 2/15/16) -- "China’s yuan surged by the most in more than a decade, catching up with dollar declines during a week-long holiday, after the central bank chief voiced support for the exchange rate and set its fixing at a one-month high. The currency advanced 0.9 percent, the most since the nation scrapped a peg to the dollar in July 2005, to 6.5170 a dollar as of 10:50AM in Shanghai, according to data compiled by Bloomberg. The offshore yuan fell 0.16 percent to 6.5186 to almost match the onshore rate, compared with a 1 percent premium last week when mainland Chinese markets were shut for the Lunar New Year holidays."
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February 11, 2016
SGH Insight
“We take the news of a possible visit in March to Moscow by Saudi Arabia’s King Salman bin Abdul Aziz Al Saud very seriously, as potentially marking the culmination of an extended, high-stakes diplomatic maneuvering between the Kingdom and Russia to reach terms on both an OPEC, non-OPEC oil output cut as well as the resumption of the Syria peace negotiations in Geneva. … On the oil front, there is still nothing more than a basic framework to an agreement for now, and the negotiating process is fraught with potential setbacks, for instance when it comes to the actual terms of market share, quotas, or production standstill agreements and the like; but we do believe as we first reported in January, there has been steady, even substantial movement towards an eventual agreement between the OPEC and non-OPEC oil-producing countries for a coordinated cut in crude oil output, probably sometime in March …
Market Validation
(FT 2/12/2016) -- Oil prices rose by more than $2 a barrel on Friday in volatile trading.

Brent, the global benchmark, increased $2.49 a barrel to $32.56 while West Texas Intermediate, the US marker, jumped $2.92 a barrel to $29.15 in afternoon trading.

Market chatter and comments from the UAE oil minister pointed toward potential collaboration on production cuts between Opec and non-Opec producers, which helped to buoy markets.
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January 28, 2016
SGH Insight
"It is a very close call whether the BOJ will choose to ease tomorrow or not, with most analysts leaning towards policy remaining on hold. While a hold for now is very possible and we do not have strong conviction either way, we nevertheless suspect BOJ Governor Haruhiko Kuroda, citing global pressures, just might push his fellow board members to ease further tomorrow."
Market Validation
(Bloomberg 1/29/16) -- "Stocks and bonds rallied around the world as the Bank of Japan unexpectedly stepped up monetary stimulus, joining other central banks responding to this month’s financial-market turmoil. The yen tumbled 1.7 percent versus the dollar, its biggest loss since December 2014. Against the euro, it dropped 1.6 percent.Japan’s 10-year bond yield touched 0.09 percent. Treasury 10-year note yields fell four basis points to 1.94 percent, while those on similar-maturity U.K. gilts dropped five basis points to 1.62 percent."
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January 21, 2016
SGH Insight
"With today's modest upward turn in crude prices, there are indications Saudi policymakers are eyeing ways to lend support to stabilizing oil prices, sensing a near bottom to the renewed plunge in crude oil.

*** While Saudi Arabia has no intention of pivoting away from its current policy to maximize output and market share, Saudi policymakers are willing, however begrudgingly, to work behind the scenes in something of a tit-for-tat support to oil prices as Iran attempts to bring additional crude to market with a minimum of price disruption. ***"
Market Validation
(Bloomberg 1/26/16) -- "Oil rose above $30 a barrel after Iraq’s oil minister said at a conference in Kuwait that Saudi Arabia and Russia are now more flexible about cooperating to cut output. WTI for March delivery climbed 48 cents, or 1.6 percent, to $30.82 a barrel at 9:35 a.m. on the New York Mercantile Exchange."

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January 15, 2016
SGH Insight
SGH Insight
"And finally, on another market point of interest, Riyadh is not going to devalue the Riyal or alter its currency peg (see SGH 11/23/15, “Saudi Arabia: A Devalued Riyal Peg Highly Unlikely”)."
Market Validation
(Bloomberg 3/1/16)
Contracts used to bet whether Saudi Arabia and the United Arab Emirates will allow their dollar-pegged currencies to weaken fell to the lowest levels since December.

One-year forward contracts on the Saudi riyal were poised for the biggest drop in a month at 3:48 p.m. in Riyadh, according to data compiled by Bloomberg, heading for the lowest finish since Dec. 28. Similar contracts for the U.A.E. dirham retreated to a three-month low on a closing basis.
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