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.

August 07, 2019
SGH Insight
And in response Beijing has, for starters, yet to confirm it will stick to the agreed plan after the brief July meeting in Shanghai between US Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin, and Vice-Premier Liu He to hold low level discussions through August that would be followed by a meeting of the principals again in early September. While that may still end up the case — after all talking is better than not talking — expectations that these meetings will proceed have for now only been confirmed by the US side.
Market Validation
(Bloomberg 8/9/19 )

USTs Gain as Stocks Slip; Trump Says China Talks May Be Canceled

Treasuries underpinned as S&P500 futures drop to lows of the day after Trump says September talks with China could be canceled.
UST 10-year futures climb back through 130 level, remain inside 130-08 Asia session highs; yields edge back under 1.70% level, remain richer by 2bp on the day
S&P500 e-minis lower by 0.8% on the day; software, media and tech sectors lead cash markets lower
Read full report
July 26, 2019
SGH Insight
We think Chairman Powell will seek to convey a tricky two-part message: that the July cut is likely to be the first of two cuts to “reset” policy back below neutral that might go no further, but that an even more aggressive easing cycle could still be undertaken if the probabilities rise significantly later this year for a marked economic downturn threatening a return to the Zero Lower Bound. Policy going forward will entail a reaction function more acutely driven by a meeting-to-meeting assessment of those risk probabilities.
Market Validation
(Bloomberg 7/31/19)

Powell Signals Rate Cut Isn't Necessarily Start of Easing Cycle
Short Treasuries Fall After Powell Calls Fed Rate Cut Insurance
S&P 500 Extends Decline To 1.5%, Most Since May; VIX Spikes

Treasuries sharply retreat from highs, with short-end yields erasing declines, after Fed Chair Powell says the FOMC views its rate-cut decision as a “mid-cycle adjustment” and that the rate cut was aimed at insuring against downside risks.
Treasury yields rise sharply from lowest levels of the session, reached during the initial reaction to rate cut and decision to end balance-sheet run-off earlier than planned
After declining nearly 4bp, 2-year yields rebounded to cheaper on the day and higher by more than 8bp, reaching 1.94%; 2s10s extends flattening, tighter by 10bp on the day while 5s30s tightens more than 8bp

Read full report
July 12, 2019
SGH Insight
We understand ECB officials are, for now, still leaning towards the September 12 meeting to announce an ease.

Waiting until September, the current thinking goes, would allow for quarterly forecast revisions, and it would afford the ECB more time to assess the most recent data, including specifically the extent to which the manufacturing slowdown to date has been feeding through to consumer and other sectors. The July meeting will at a minimum nevertheless provide an occasion for Draghi and ECB officials to further firm up their communications and forward guidance, perhaps in revising their already extended commitment to “low rates” to include “or lower rates,” and most certainly to hammer home the ECB’s new-found emphasis on a “symmetric” 2% target for inflation.
Market Validation
(Bloomberg 7/25/19)

ECB Signals Rate Cut, QE as Global Stimulus Push Picks Up
Governing Council changes policy language to prime for easing
U.S. Federal Reserve widely expected to lower rates next week

The European Central Bank sent its strongest signal yet that monetary support for the euro-area economy will be stepped up after the summer break, with lower interest rates and renewed asset purchases on the table.

President Mario Draghi and fellow policy makers said on Thursday they expect borrowing costs to stay at present levels “or lower” through at least the first half of 2020, opening room for a September reduction in the deposit rate from the record low of minus 0.4%. Officials also signaled they will restart their bond-buying program if needed.

Germany’s 10-year bond yield dropped to a record-low minus 0.42% and the euro slid 0.3% to as low as $1.1108. Bank shares rallied as policy makers said they’ll consider measures to offset the squeeze on lenders’ profitability from negative rates

Read full report
June 28, 2019
SGH Insight
From what we understand, Trump will be looking to de-escalate trade tensions with China, despite his recent threats in the press of a potential 10% tariff on the remaining non-tariffed $300 billion of imports from China as a “Plan B that is maybe my Plan A.” In practice, that would represent a moratorium on additional hikes, but no rollback yet of current tariffs. China’s Vice-Premier Liu He, at a politburo meeting in advance of Osaka, also indicated this to his colleagues as a most likely outcome. While yet to be determined, we also suspect a truce on additional tariffs, to allow negotiations to proceed, this time around may not come with a tight deadline, as was the case with the truce last year after the Argentina G20 summit.
Market Validation
(Bloomberg 7/1/19)

Nasdaq futures jump as much as 1.7% amid U.S.-China trade truce and Trump-Kim plan to resume nuclear talks; S&P futures 0.9% higher. Shanghai Comp rises 1.9% and Shenzhen Comp 2.9% higher; yuan 0.4% stronger. Treasury 10-year yield adds 2bps near 2.03%; Aussie bonds erase most losses ahead of Tuesday’s rate decision. Bloomberg dollar index gains first time in four days; Swiss franc and yen the biggest G-10 losers
Read full report
June 05, 2019
SGH Insight
*** We believe it is highly likely President Donald Trump will defy the immense and highly public resistance from his anti-tariff Republican Senate caucus, and deliver on his threat to institute 5% tariffs on imports from Mexico in a sign of continued dissatisfaction with the measures the government of President Andres Manuel Lopez Obrador (AMLO) is expected to propose today to address the White House’s concerns over the crisis at the US-Mexico border
Market Validation
(Bloomberg 6/6/19)

Yen Gains With Treasuries on U.S.-Mexico Tensions: Inside G-10
The yen snapped a two-day decline versus the dollar and Treasuries advanced as demand for haven assets rose after trade talks between the U.S. and Mexican officials ended without an agreement Wednesday.
Speculation that the U.S. will follow through with tariffs next week increased as President Donald Trump said “not nearly enough” progress was made in discussions with Mexico to mitigate the flow of undocumented migrants and illegal drugs. Talks will resume Thursday, he said.
USD/JPY slid as much as 0.3% before trading 0.2% lower at 108.21. USD/MXN jumped as much as 1.3% .

Read full report
May 20, 2019
SGH Insight
** A decision appears to have been made to strictly control the export of important materials such as rare earth minerals to the United States, one of the key areas of leverage Beijing does maintain over the United States and technology firms.

Market Validation
(Associated Press 5/29/19)

Global stocks plunge after China hints it could unleash a 'powerful' trade war weapon by limiting US rare-earth supply

State-aligned newspapers warned China is prepared to cut off supplies of rare-earth metals.

"We advise the US side not to underestimate the Chinese side's ability to safeguard its development rights and interests," one editorial read. "Don't say we didn't warn you!"

Investors' flight to bonds pushed the 10-year US Treasury yield to a 19-month low.

World markets slumped on Wednesday as traders braced for further escalation in the US-China trade war. State-aligned Chinese newspapers warned the Asian nation is prepared to cut off America's supply of rare-earth metals, spurring investors to ditch stocks for bonds.

"Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all?" wrote the editorial board of the People's Daily, according to Reuters. "The answer is no mystery."

The newspaper noted America's "uncomfortable" dependence on so-called rare earths, a group of 17 chemical elements used in a wide range of electronic devices including smartphones, car batteries, and missile-defence systems. The US relied on China for than 80% of its rare-earth imports between 2014 and 2017, and ramped up purchases by 17% to $160 million last year, according to Bloomberg.
Read full report
May 16, 2019
SGH Insight
Should talks stall and the two sides escalate into that dreaded “full-blown” trade war, we are also told there would be no line in the sand whatsoever on FX, and the PBoC would see no need to defend the 7.000 level against the dollar, presumably even if the break of that level at long last were to risk some potential domestic outflows in the process as well.

Market Validation
(Bloomberg 6/10/19)

Yuan Slides to Lowest of the Year After PBOC Chief's Comments

Onshore yuan tumbles as much as 0.29% to 6.9319 a dollar, the lowest level since Dec. 3, after the chief of China’s central bank hinted there’s no red line for the currency.
See: Yuan Slides as China’s Yi Gang Hints No Red Line, Open to Easing
Pares drop to 0.27% at 6.9306 as of 9:49am in Shanghai
Offshore yuan steady at 6.9469
Read full report
May 09, 2019
SGH Insight
Trade tensions were front and center on Friday as President Donald Trump’s increased tariffs as of 12:01 Eastern time Friday, with Beijing vowing to retaliate.

Two-day U.S.-China trade negotiators resumed Friday, but little progress has been made thus far, according to reports.
Market Validation
(Bloomberg 5/10/19)

Stocks continued their downward ways Friday following newly implemented
tariffs that marked the latest salvos in the escalating U.S.-China trade war
as talks between the two countries ended for the day.

The Dow Jones Industrial Average fell 326 points, or 1.26%, to 25,501, the S&P
500 declined 1.37% and the Nasdaq was down 1.75%.
Read full report
February 11, 2019
SGH Insight
The ECB will need to clarify a new liquidity program for banks by June, but the discussion over whether to proceed with another round of long-term operations will probably not be settled by the March meeting, despite suggestions from Banque de France Governor François Villeroy de Galhau and a small minority of others that it may be in order. For one, the ECB will wish to assess the macro economic environment and especially the fallout from Brexit negotiations that appear to have wreaked havoc on German investment activity. Second, there appears to be a general desire – if possible – to wean banks from reliance on long term funding to the previous Fixed Rate Full Allotment system.
Market Validation
(Bloomberg 2/20/19)
Italian bonds decline and Bunds rise as ECB’s Peter Praet says TLTROs will be discussed soon, even though it’s unclear yet whether a decision will be taken.
BTPs bear flatten and FTSE MIB falls, underperforming euro-area peers, led by the banking index
10-year yield spread to Germany widens 6bps to 274bps
Bunds pare gains as Bobl auction sees underbidding of 1c even as demand increases to 1.6x from 1.2x prior
German 10y yield -1bp to 0.10%; March Bund futures +17 ticks to 166.59; France 10y -1bp to 0.52%; Italy 10y +5bps to 2.84%
Read full report
December 18, 2018
SGH Insight
The Federal Open Market Committee began its year-end two day meeting this morning amid continued stock market gyrations and unrelenting pressure by the White House, now picked up by many investors as well. Against that backdrop, we would make two key points and a few supporting notes to recap our expectations for the FOMC tomorrow:

The FOMC will raise the fed funds target range to 2.25%-2.5% and there will be no change in its balance sheet policy. The 2019 rate dot median is more likely than not to drop to two from three hikes in what will otherwise be a modest flattening of a still upward rate trajectory across the forecasting horizon. The “further gradual” phrasing is likely to be dropped from the formal statement and Chairman Jerome Powell will stress instead the data-dependent, risk management policy approach going forward. It would be premature in December to offer a signaling to an end to the rate tightening cycle.
Market Validation
(Bloomberg 12/20/18)

Federal Reserve Chairman Jerome Powell
suggested he’ll be more cautious about raising interest rates
next year, disappointing investors who wanted even more
“There’s significant uncertainty about both the path and
the ultimate destination of any further rate increases,’’ he
told a press conference Wednesday after the U.S. central bank
bumped its target range for rates up by a quarter percentage
point to 2.25 percent to 2.5 percent.
Investors gave Powell and the Fed the thumbs down, with the
worst stock market decline for any Federal Open Market Committee
announcement day since 2011. The selling gathered pace in Asia,
with Japanese equities sliding into a bear market.
Some analysts attributed the global sell-off to
disappointment that the Federal Open Market Committee hadn’t
signaled that it was finished raising rates after its fourth
increase this year, which defied President Trump’s calls for
steady rates.
Read full report
December 10, 2018
SGH Insight
President Xi Jinping presided over a crucial meeting last Friday, December 7, in Zhongnanhai to discuss China’s global relations, the Buenos Aires trade summit with President Donald Trump, and the detention of the CFO of Huawei Technologies in Vancouver. At the meeting in Zhongnanhai, Xi nevertheless reinforced that China is still willing to reach a trade agreement with the US, and willing to import more American goods. Despite the negative impact of the Huawei incident, China will not suspend trade talks with the United States.
Market Validation
(Bloomberg 12/11/18)
U.S. equity futures and European stocks rallied while Asian shares slipped as investors weighed the prospects for success in American-Chinese trade talks. The pound rebounded.

Futures on the Dow Jones, S&P 500 and Nasdaq indexes all jumped, shrugging off losses in the Asian benchmark after China was said to move toward cutting tariffs on American-manufactured cars. Miners and carmakers advanced, helping the Stoxx Europe 600 Index extend gains. The pound rallied, trimming some of its tumble from a day earlier. The dollar weakened while Treasuries and European sovereign bonds fell.

The news on car tariffs followed reports that Chinese Vice Premier Liu He discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin, which also helped to bolster sentiment.

By holding the phone call, both sides are suggesting a willingness to keep the negotiations from getting derailed by Chinese anger at the arrest of a senior executive at China’s Huawei Technologies Co.

Read full report
December 06, 2018
SGH Insight
We think an output cut agreement will still fall into place by the end of the day on Friday. The final headline number for the size of the targeted cuts is likely to reach at least one million bpd, with a decent probability of a 1.2 million bpd cut that is being pressed by Saudi Arabia (SGH 9/26/18, “Oil: The Saudi Two-Stage Floor Strategy”). Assuming they get the blessing from Putin, the Saudis will press the case the cuts are to stabilize crude prices, not to spark a rally, in the hopes that pitch will be enough to stem a renewed tweet storm from President Trump.
Market Validation
(Bloomberg 12/7/18)
OPEC Meeting Ends W/ Deal on 1.2Million B/D OPEC+ Cut: Delegates

European Stocks Extend Gains on OPEC Deal, After U.S. Payrolls
By Ksenia Galouchko
Stoxx Europe 600 Index extends gains to 1.5% after OPEC meeting ends with agreement on 1.2m bbls/day OPEC+ cut.
Biggest gainers include Nestle +2.3%, Shell +4%, BP +3.8%, Total +2.7% Brent oil is up 5%
Read full report
November 30, 2018
SGH Insight
Senior Chinese officials are very pleased with the initial contacts with their US counterparts and remain confident the Buenos Aires talks will lead to a temporary truce on trade (see also this morning’s SGH Report 11/30/18, “China: Xi’s G-20 Proposals to Trump”).

Treasury Secretary Steve Mnuchin and President Trump’s son-in-law Jared Kushner have met, from what we understand, with China’s two lead negotiators, Vice Premier Liu He and China’s top diplomat, Yang Jiechi. Beijing understands these two are leading the US delegation as Trump’s most trusted confidantes and aides, supported in turn by US Trade Representative Robert Lighthizer.

While much remains still to be done, Beijing reads the initial signals from the US side so far as very positive towards reaching a mutual understanding and trade truce at the summit.
Market Validation
(Bloomberg 12/3/18)
Stocks Jump With Bond Yields on Trade
Read full report
November 26, 2018
SGH Insight
While a dovish-sounding turn of phrase may find its way into the Chairman’s speech, we suspect the thrust of his remarks will be less about near signals, dovish or otherwise, than it will be to prepare market expectations for the uncertainties to the rate path beyond the still likely December rate hike. Our sense is of a lean within the FOMC favoring a pause, if possible, but as rates reach or near an estimated neutral level next year, the data-driven rate moves could also quicken or stay at the same gradual pace in what is still an upward tilt to the FOMC rate consensus.
Market Validation
(WAPO 11/28/18)
Federal Reserve Board Chair Jerome H. Powell on Wednesday suggested the central bank could slow the pace of its interest rate increases, saying rates are now just slightly below what he considers a “neutral” level.

His comments marked a sharp change from his position last month, when he said the Fed still had a “long way” to go before it reached that equilibrium.
U.S. stock markets soared on Powell’s comments, as he appeared to signal that the Fed would not move forward aggressively to raise rates much further than it already has. The Dow Jones industrial average pushed up 500 points, an increase of nearly 2 percent, a surge that erased its November losses and put it back in positive territory for 2018.

Still, by saying rates were slightly lower than the level he perceives as “neutral,” Powell’s statement appears to be suggesting at least one more interest rate increase is coming in the near future.

Read full report
August 07, 2018
SGH Insight
*** From what we understand, Beijing may be ready to provide assurances, one more time, that it will reduce the total trade surplus with the US by an agreed amount. But any agreement from Beijing would not include concessions on China’s strategic drive towards dominance in technologies including robotics, artificial intelligence, and 5G telecommunications networks. ***

*** We believe this remains nothing more for the moment than a trial balloon to feel the Trump Administration out, and from what we understand there have been no communications of substance yet between China’s powerful Vice Premier Liu He and his US counterparts since talks broke down exactly one month ago, today. With November elections in mind, Beijing feels the time may be ripe, perhaps by the middle or end of August, to give it another try. ***
Market Validation
(Bloomberg 8/16/18)
China will dispatch Vice Commerce Minister Wang Shouwen to the U.S. for low-level trade talks in late August, the first official exchanges since earlier negotiations broke down two months ago.
The Chinese delegation led by Wang will meet with an American group led by David Malpass, under secretary for international affairs at the Department of the Treasury, at the invitation of the U.S., China’s Ministry of Commerce said in a statement on its website on Thursday.
The news buoyed risk sentiment in Asian trading, with futures on the S&P 500 Index rallying as much as 0.4 percent.
The offshore yuan gained against the dollar for the first time in seven days.
Read full report
July 12, 2018
SGH Insight
Indeed, and especially if the economy and markets can continue to demonstrate resilience in the face of the continued White House challenges to China, our understanding is that there will likely be “another 200 to follow this 200,” until essentially all $500 billion of US imports from China – a number often cited by Trump – is put under review for the threat of potential tariffs.
Market Validation
(Bloomberg 7/20/18)
U.S. equity futures turned lower with European stocks as President Donald Trump said he was “ready to go” with import tariffs on $500 billion of Chinese goods. Earlier in Asia stocks had reversed losses amid signs the Chinese central bank stepped in to stem weakness in the yuan.
S&P stock-index futures declined along with the Stoxx Europe 600 gauge after Trump told CNBC he was ready to ratchet up the tariffs “to do the right thing for our country”.

Read full report
June 07, 2018
SGH Insight
We do not believe Praet, who as Chief Economist of the ECB sets the agenda for policy decisions at every meeting, pre-emptively flagged the discussion on whether to end QE for this meeting without the intention to signal that the decision is likely to be made and the end of the program announced this month as well.
Importantly, while the ECB is, we believe, using the window created by some stabilization in the Italian markets to pull forward the announcement on QE a bit, that does not translate into an effort to bring expectations for liftoff on interest rates closer, and into the first half, of 2019. We expect President Mario Draghi to make that point clear in next week’s press conference, as well as to stress the extreme accommodation that will still be provided into 2019 by reinvestments and by the massive ECB balance sheet. If the forecasts hold, we continue to expect the first ECB rate hike to come in early Q3 of 2019.
Market Validation
(Bloomberg 6/14/18)
Euro bulls are losing confidence.
The shared currency declined against all of its Group-of-10 peers Thursday after the European Central Bank said it would keep interest rates at current levels until at least the summer of 2019.
The euro was down 1.4 percent at $1.1632, set for its biggest one-day slide since Oct. 2017.
Bunds Rally as ECB Signals No Hike Until at Least Summer 2019
Bunds hit new session low at 159.45 on the taper announcement by ECB, but rapidly reverse decline after the ECB pledges to keep interest rates at record lows until at least the summer of 2019.
German curve steepens aggressively led by 5/30s; +2bps to 134bps
German 10y yield -3bps to 0.46%: Sept Bund futures +25 ticks to 160.32; Spain 10y -2bps to 1.39%; Italy 10y +1bp to 2.82%

Read full report
May 25, 2018
SGH Insight
We expect the June 22 OPEC/non-OPEC meeting to formally keep the 2016 oil output cuts in place, as Riyadh sees this hard-won Vienna framework as key to putting in a market floor by making future action on supply restraint more credible and quicker to decide and implement. There will be “flexibility” in the quotas by driving overall compliance down from the current 150% level closer to 100% with a lagged new output largely coming from Saudi Arabia and Russia, with additional barrels from Kuwait and the UAE, through the second half of this year.
Market Validation
(Business Insider 5/30/18)

Oil rallied more than 2% Wednesday after a report said that OPEC could extend supply cuts through the end of the year.

West Texas Intermediate rose 2.2% to $68.35 a barrel at 12:15 p.m. ET. Brent, the international benchmark, was up 2.72% to $77.45 a barrel. Prices had been sliding last week after OPEC signaled it could raise output amid supply disruptions in Venezuela.

But output increases might not happen until at least next year. A Gulf source familiar with the thinking of the Saudis, told Reuters that members of the cartel are "satisfied" with the current agreement deadline of December.
Read full report
May 22, 2018
SGH Insight
We would first caution that this base case consensus is a relatively fragile one. There remains an undertow of dovish doubt still pulling the Committee consensus towards caution on the pace of rate hikes, at least until data breaks more clearly. There are, for instance, fresh doubts over the scale of the fiscal stimulus, that it may “fizzle out” after 2019, and whether the Fed may need to “look past” the assumed price pressures it will bring. And while inflation is widely expected to modestly overshoot its twice-repeated symmetrical 2% target, there remains a concern it could still peak and then ebb again rather than persist.

Market Validation
(FT 5/23/18)
Treasury yields slip after ‘dovish’ Fed minutes

Investors bid up short-term US government debt after a detailed account of the last Federal Reserve meeting was judged as leaning towards the dovish end of the spectrum.

In recent trade, the yield on the policy-sensitive two-year Treasury note fell 5.6 basis points (0.056 percentage points) to 2.5363 per cent. The yield, which moves in the opposite direction of price, traded at the lows of the day roughly 30 minutes after the release of the minutes from the central bank’s May meeting.

Further down the maturity curve, the US 10-year yield was down 5.9 bps at 3.0063 per cent, but it had not knocked out the lows set earlier in the day.

Read full report
April 18, 2018
SGH Insight
Chinese officials believe the US Trade Representative is, indeed, likely to launch a new round of Section 301 investigations against China under the direction of the White House, targeting mainly the high-tech, especially Artificial Intelligence and cloud computing sectors. On the heels of measures against Chinese companies including Huawei and now ZTE, they are bracing for more salvos against China's high-tech companies with business in America, including, potentially, corporate giants such as Alibaba and Baidu

The US sales ban, officials note, will not only cause ZTE to miss shipments and lose orders on handsets and transmission equipment. It will also seriously harm ZTE's 5G and Artificial Intelligence development process. That ban comes just two weeks after ZTE succeeded in making a first phone call enabled by 5G technologies.

According to the State Council, Beijing's aim is to make China among the first countries to issue 5G licenses in the second half of 2019. And beyond that, the goal has been to commercialize 5G by 2020, and to become the world's largest 5G market by 2025 - all adding to China's extreme sensitivity to these actions.
Market Validation
(Bloomberg 4/20/18)
Apple Downgraded at OTR as Chinese Channels Seek Local Options By Kamaron Leach

Apple Inc. fell 3.5%, the most in two months, as OTR Global cut the iPhone developer to mixed from positive, citing a deteriorating China outlook as Asian vendors edge in on market share.
Notes that while iPhone order outlook is normal for more than one-half of AAPL sources, very large Chinese channels are reducing their 2Q18 order share and opting for local vendors AAPL was able to hold most of its share in a weak global market during 1Q18, but data indicates competition is intensifying
Read full report