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 10, 2020
SGH Insight
China’s Vice-Premier Liu He and US Trade Representative Robert Lighthizer are scheduled to review the implementation of the Phase One trade agreement between the US and China by videoconference this coming Saturday, August 15.

** On the heels of the recent escalation in tensions between Washington and Beijing, highly placed sources in Beijing suggested over the weekend that a “temporary cancellation or postponement” of the high-level virtual meeting “cannot be completely ruled out.”

** Such a decision, which would mean the trade deal is being pulled, even if gently, into broader bilateral disputes, would be highly disruptive to markets who to date have operated on the assumption that Phase One, for both sides, is on an independent track from all other disputes. But, warn sources who are vested in continued economic dialogue with the United States, if the administration of President Donald Trump were to “continue” to provoke China over these next few days, the talks will have to be temporarily canceled or postponed.
Market Validation
Policy Validation

(Bloomberg 8/14/20)

U.S.- China Six-Month Trade Agreement Review Delayed: Reuters

The six-month review of the trade agreement
between U.S. and China slated for Saturday has been delayed due
to scheduling issues, Reuters reports, citing sources familiar
with the plans.
* A new date has not been agreed to: Reuters
* NOTE: U.S. Trade Rep. Robert Lighthizer, Treasury Sec. Steven
Mnuchin and Chinese Vice Premier Liu He had been expected to
meet via videoconference on Aug. 15, the six-month anniversary
of the agreement entering into force
Read full report
July 21, 2020
SGH Insight
The leaders also agreed that the Commission borrowing, unprecedented in size, will be repaid by 2058, and assigned new revenue streams to the EU to raise money for eventual repayment, but with much still to be determined.

Beginning next year, EU countries will levy a 0.8 euro per kilogram tax on un-recycled plastic, and those funds will be passed on to the EU. More controversially, starting in 2023, the EU will introduce a tax on goods imported into the bloc from countries that have lower emissions standards than the EU (see also SGH 6/19/2020, “EU: A Slipping Negotiating Box”).
Market Validation
Policy Validation

(Reuters 9/17/20)

European Parliament votes for new taxes in EU to repay recovery borrowing

The European Parliament voted on Wednesday in favour of assigning new tax revenues to the European Union to repay the bloc’s intended joint borrowing of 750 billion euros ($888 billion) for economic recovery after the COVID-19 pandemic.
Lawmakers voted 455 votes in favour and 146 against, with 88 abstentions, to introduce new sources of revenue - so called “own resources” - to the EU budget that should at least cover the costs related to the recovery plan.
They could include a tax on unrecycled plastic and on goods imported into the EU from countries with less ambitious climate-change fighting standards. Also under consideration is taxing digital giants and extending an EU CO2 emissions trading scheme into the maritime and aviation sectors.
Read full report
July 20, 2020
SGH Insight
The Senate Banking Committee will almost certainly vote tomorrow along a 13-12 party line to recommend that President Trump’s nominations of Judy Shelton and Chris Waller go forward to the Senate floor for confirmation to serve on the Federal Reserve Board of Governors.

** If both are confirmed in a Senate floor vote that now seems likely, both Waller, currently the head of research at the Federal Reserve Bank of St. Louis, and Shelton, a more controversial economic advisor to President Trump who served as the US representative to the European Bank for Reconstruction and Development, will begin their terms on the Fed’s Board of Governors later this summer, with their first meeting as voting Governors of the Federal Open Market Committee coming in September.
Market Validation
(Bloomberg 7/21/20)

Policy Validation

Judy Shelton, President Donald Trump’s contentious pick for the Federal Reserve’s Board of Governors, cleared a key hurdle to confirmation by winning the approval of a majority on the Senate Banking Committee.
She was backed in a party-line vote Tuesday, 13-12. The committee also voted in favor of Fed nominee Christopher Waller, currently director of research at the St. Louis Fed. His nomination passed 18-7.
Read full report
July 10, 2020
SGH Insight
*** But the challenges in coming to an agreement by then were already clear after a June 19 summit produced little progress in EU negotiations with the “Frugal Four” holdouts of the Netherlands, Sweden, Denmark, and Austria. More importantly, it appears there is still broad support from all sides to show concrete progress at the upcoming meeting to keep negotiations on track for a final agreement, perhaps even as widely hoped for by the end of July.

Market Validation
(Bloomberg 7/20/20)

The euro climbed to a four-month high, European bond spreads narrowed and stocks rose as leaders made progress in negotiating a historic stimulus package. U.S. equity futures were mixed with the S&P 500 coming off a three-week rally.
Italy’s 10-year bond yield spread over Germany, a key gauge of risk in the region, fell to the lowest level since March.
In Europe, leaders appeared close to reaching an agreement on a rescue package. The four governments that have been holding up negotiations are ready to agree on a key plank of the deal, two officials said. The Netherlands, Austria, Denmark and Sweden are satisfied with 390 billion euros ($450 billion) of the fund being made available as grants with the rest coming as low-interest loans, the officials said, asking not be named discussing private conversations.
Read full report
July 01, 2020
SGH Insight
*** Despite the relatively high expectations the FOMC may soon adopt some form of yield curve control, we have no sense of any movement towards a Committee consensus that would put a decision on yield curve caps on the table at the July meeting or even by September. The Minutes later today are instead likely to show how preliminary these discussions are, and while YCC may become part of the monetary policy toolkit at some point, we don’t think a clear Committee majority will turn to YCC unless or until there are clearer signs of sustained economic recovery, which is likely to push their consideration into next year. ***
Market Validation
(Bloomberg 7/6/20)

Short-End of Yield Curve Climbing
Yields are heading higher at the front end of the Treasury curve on
hints of skepticism about the usefulness of yield curve control. The two-year is at a session high of 0.16%.

Policy Validation

(Bloomberg 7/1/20)

Fed Officials Were Unconvinced on Need for Yield-Curve Control
By Christopher Condon

Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.

“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.

U.S. central bankers left interest rates near zero at the session, which was conducted via video conference. They also agreed to keep purchasing Treasury and mortgage-backed bonds at a pace of about $120 billion a month.

In a press conference that followed, Fed Chair Jerome Powell said officials were “not even thinking about thinking about raising rates.”
Read full report
June 24, 2020
SGH Insight
** As the matter remains, from a jurisdictional perspective, a strictly German affair, ECB Governing Council member Jens Weidmann will present a set of documents to Berlin in his capacity as President of the Deutsche Bundesbank. It will demonstrate that the ECB structured and balanced its Public Sector Purchase Program in a manner that fully satisfies the question of “proportionality” that was raised by the GCC in its early May ruling.

** From what we understand, Weidmann’s explanation will be discussed in the late afternoon session of the ECB Governing Council’s non-monetary policy meeting today and is very likely to be “approved.” But with great sensitivity over jurisdictional boundaries and precedent – the ECB reports to the European Parliament and legally answers solely to the Court of Justice of the European Union (CJEU) – a formal ECB decision on any aspect of the GCC challenge is unlikely to ever be taken or published.

** With full cooperation nevertheless of the ECB, Weidmann will present a set of documents to the German Bundestag that will comprise preparatory papers for ECB council meetings, and that may even include older documents dating to the period before January 2015 when the ECB began the practice of publicly releasing its meeting accounts.
Market Validation
Policy Validation

(Reuters 6/24/20)

The European Central Bank agreed to give vital documents to German authorities to prove the proportionality of ECB policies, two sources said, in a step to defuse a challenge threatening to undermine its powers to keep the euro zone together.

In a compromise deal, the ECB agreed on Wednesday to give unpublished documents underpinning its policy decisions to Bundesbank chief Jens Weidmann, who can then present them to the German parliament and government, as demanded by the court ruling.

The sources added that while the documents are unpublished, many were already provided to the European Court of Justice when it discussed and cleared the disputed asset purchase programme, the sources said.
Read full report
June 08, 2020
SGH Insight
The market rally will put renewed pressure on the Fed to bring forward its transition from the current “market function” credit and liquidity policies to a newly prescribed accommodative monetary policy and, in particular, to provide a greater guidance on its intentions with balance sheet policy. A sequencing in monetary policy to eventual yield curve caps may be on the agenda this week, but a consensus is still some way down the road. Indeed, we still think it will be September at the earliest before the FOMC will have enough of a sense of the underlying economic trends and for any formal roll-out of the revised monetary policy playbook at the Zero Lower Bound.

That said, we would put better than even odds on either or both the statement and Chairman Powell’s remarks to the press mapping out a middle path of flexibility to scale up on the “as needed” pace of treasury purchases to ensure “market function” that is more broadly defined as deterring a premature steepening of the curve. We still doubt the Committee will want to put a number on that yet, as we think the Committee will want to protect maximum policy space for later in the year when the new playbook is formally unveiled. A steady state of $80 billion a month, keyed off Friday’s nudge down in the daily purchases to $4 billion, would be the likely figure if they do go that route now.

Ironically, for what it is worth, the guidance craved by the market, at least on rates, is likely to come through the backdoor of the quarterly Summary of Economic Projections and the rate dot plot. For all the previous hand wringing over the rate dots – and Powell will again stress to take them with a huge grain of salt due to the inevitably huge confidence bands – this meeting’s rate dot plot will almost certainly be flatlined across the three year forecasting horizon, even if there is a likely smattering of rate increases showing up in the full ranges for 2022. The estimates for the longer run neutral may also drop, further accenting an implicit lower for longer rate guidance.
Market Validation
(Bloomberg 6/10/20)

Treasuries Surge Led by Belly as Fed Puts Floor Under Bond Buys

Treasuries ended sharply higher after receiving a boost during U.S. afternoon from FOMC decision to maintain the pace of asset purchases at “at least at the current pace” of around $80 billion a month and projection that interest rates will remain near zero through 2022. Intermediate sector led the post-FOMC advance, richening the 2s10s30s fly. Long end lagged, however yields across the curve finished the U.S. session near daily lows.
Yields ended richer by 3bp to 9bp across the curve, pivoting around the 7- to 10-year sector; 10-year yields shed ~8bp to 0.744%, flattening 2s10s by more than 5bp; long-end yields fell 5bp-6bp on the day, leaving 5s30s steeper by 1.6bp after erasing 2.6bp of flattening that occurred before the FOMC actions

Policy Validation

(Bloomberg 6/10/20)

The Federal Reserve put a floor under its large-scale asset purchases and projected interest rates will remain near zero through at least 2022 as policy makers seek to speed the economy’s recovery from the coronavirus recession.
“To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” the Federal Open Market Committee said in a statement Wednesday following two-day policy meeting.
A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.
The Fed’s quarterly projections -- updated for the first time since December, after officials skipped their March release amid the burgeoning pandemic -- showed all policy makers expect the federal funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.

Read full report
June 01, 2020
SGH Insight
[T]he central bank could decide to wait until its July meeting before hiking the PEPP in order to more fully assess the impact of the existing stimulus injections, the exact need for additional bond purchases, and the damage to the Eurozone economy.

It could, but it won’t…

With no inflation in sight, a risk/reward consensus that favors doing more, and not less, and monetary and fiscal authorities around the world still pledged to do “everything it takes” to fight the COVID-19 recession, a pause now against expectations would unnecessarily shock and jeopardize the hard-won stability and compression in rates the ECB has already achieved across the Euro-system.

So while there is always the option to wait, ECB officials have continued to communicate they are ready to deliver on the additional stimulus that is obvious to all will be needed to counteract the deepest contraction ever in the Eurozone economy, and sooner, rather than later.
Market Validation
(Bloomberg 6/4/20)

Europe’s Stoxx 600 turns slightly positive, paring a drop of as much as 0.8% after ECB boosts its stimulus program.
Banks almost wipe out drop of as much as 2.2%
ECB adds EU600b to its pandemic purchase program and extends it to at least June 2021, says will reinvest PEPP holdings until at least end of 2022

(Bloomberg) -- Italian bonds and the euro reversed losses after the European Central Bank boosted its emergency bond-buying program by more than expected.
The yield on Italy’s 10-year bonds fell 16 basis points to 1.39% and the euro extended its rally to the longest since 2011 after the ECB topped up its pandemic stimulus by 600 billion euros ($674 billion), beating estimates by 100 billion euros.

*Euro Rises to $1.1243 After ECB Decision From $1.1203 Beforehand
Read full report
May 29, 2020
SGH Insight
** But whether all today, in one shot, or over time, we believe President Trump is likely to pull the trigger on measures against China that will include sanctions, visa restrictions, including on students, restrictions perhaps on certain financial transactions, and even the possible freezing of assets of targeted individuals and institutions in China.

** We also believe there is a very high likelihood that the special treatment afforded to Hong Kong including its separate customs treaty status will be either partially or fully revoked – meaning the region would fall under the same tariff regime that is being applied by the US to mainland China. Despite hints and warnings from Washington, taking this tougher economic response seems not yet to be fully anticipated by markets.
Market Validation
Policy Validation

(Bloomberg 5/29/20)

China “unilaterally imposed control over Hong Kong’s security,” President Trump says at White House news conference.

Trump says he’s directed his administration to eliminate policies that give Hong Kong special treatment, incl. extradition treaties, export controls

Trump says investment firms should not expose clients to China risk

U.S. to sanction Chinese officials involved in smothering Hong Kong autonomy, Trump says

Says he’s establishing working group to study Chinese companies listed in the U.S.
Read full report
May 21, 2020
SGH Insight
** Rumors in the Hong Kong press this morning that the mainland could take matters into its own hands had already unnerved local markets. But the decision to draft new legislation in Beijing that would be inserted into the city’s legislation through an “Annex III” provision of Hong Kong’s Basic Law was the most hardline among the various options at Beijing’s disposal.

** On May 6, U.S. Secretary of State Mike Pompeo announced a delay in the annual certification now required by Congress of whether Hong Kong still enjoys a level of autonomy from Beijing that can “justify continued special treatment by the U.S. for bilateral agreements and programs.” The reason for the delay was, precisely, “to account for any additional actions that Beijing may be contemplating [at] the May 22 National People’s Congress that would further undermine the people of Hong Kong’s autonomy” (see SGH 5/15/20, “China: This is Not 2019”).

** Today’s actions will make that certification tough, if not near impossible politically, which could result in the removal by Congress of some special business and trading privileges granted to the Hong Kong Special Administrative Region. But an equally plausible, and perhaps more targeted, response from the Trump administration and Congress would be sanctions or actions aimed at individuals in Beijing, the Communist Party of China, or at the People’s Republic of China itself.

Market Validation
(Dow Jones 5/22/20)

Investors' concerns over escalating U.S.-Chinese tensions that re-emerged Thursday -- are spilling over into the Friday trading session as the three-day Memorial Day weekend approaches.
Dow Jones Industrial Average futures are off 0.4%, S&P 500 futures have fallen 0.3% and futures on the Nasdaq Composite declined 0.5%.
Overseas stocks are lower as well, led by a drop of 5.6% in Hong Kong, where stocks plunged in response to a Chinese plan to impose new national-security laws. The U.K.'s FTSE 100 Index is off 1%, while Japan's Nikkei 225 Index fell 0.8%.
Oil is also down in early Friday trading, ending a 6-day hot streak with a thud. Benchmark crude-oil futures are down almost 7%.

(Policy Validation - Dow Jones 5/22/20)

WASHINGTON -- U.S. senators are introducing a bipartisan bill that would sanction Chinese party officials and entities who enforce the new national-security laws in Hong Kong, and the legislation also would penalize banks that do business with the entities.
Sen. Chris Van Hollen (D., Md.) and Sen. Pat Toomey (R., Pa) said they had been working on the bill already but Thursday's developments made the legislation more urgent. They said they will urge Senate leaders to take up the matter quickly.
Earlier Thursday, China signaled it will impose new national-security laws on Hong Kong, dealing a blow to the territory's autonomy as Beijing moves to stop widespread pro-democracy protests that have challenged leader Xi Jinping.
"We would impose penalties on individuals who are complicit in China's illegal crackdown in Hong Kong," Mr. Van Hollen said. He called the move by Beijing "a gross violation" of China's agreement with the U.K. to preserve more freedom and autonomy in the territory.
Mr. Toomey called the move by China "very, very deeply disturbing."
Last year, President Trump signed a bill designed to show solidarity with pro-democracy protesters in Hong Kong, despite expressing concerns it could complicate U.S.-China trade talks.
Read full report
May 19, 2020
SGH Insight
*** Second, it feels unlikely to us the Federal Open Market Committee will be unveiling its revised Monetary Policy Framework Review at the June meeting as previously intended. They still could, and the FOMC had largely reached agreement on an aggressive “lower for longer” forward guidance, framed by thresholds on employment and inflation, before the “monkey wrench” of the COVID-19 crisis. But, on balance, we do not have a sense of a Committee consensus yet on the balance sheet policy when rates are likely to be pressed for so long at the ZLB and, which we suspect, is moving towards an eventual embrace of some form of yield curve management. ***

*** Third, we suspect Fed officials are debating whether an “intermediate phase” may be necessary before a new framework can be mapped out. That may entail an extended “steady state” period of, say, $5 billion a day in treasury purchases to ensure market function, but which could be flexibly adjusted up or down if US Treasury debt issuance excessively steepens the curve. In that sense, the slowing pace in treasury purchases to a “mere” $6 billion a day is a cautious probing to find the right balance, drawing on the lessons from last year when the reduction in reserve balances overshot an optimal equilibrium level. ***
Market Validation
Minutes of the Federal Open Market Committee
April 28–29, 2020
While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions. Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit. For example, the Committee could adopt outcome-based forward guidance that would specify macroeconomic outcomes—such as a certain level of the unemployment rate or of the inflation rate—that must be achieved before the Committee would consider raising the target range for the federal funds rate. The Committee could also consider date-based forward guidance that would indicate that the target range could be raised only after a specified amount of time had elapsed. These participants noted that such explicit forms of forward guidance could help ensure that the public's expectations regarding the future conduct of monetary policy continued to reflect the Committee's intentions. Several participants observed that the completion, most likely later this year, of the monetary policy framework review, together with the announcement of the conclusions arising from the review, would help further clarify the Committee's intentions with respect to its future monetary policy actions. Several participants also remarked that the Committee may need to provide further clarity regarding its intentions for purchases of Treasury securities and agency MBS; these participants noted that, without further communication on this matter, uncertainty about the evolution of the Federal Reserve's asset purchases could increase over time. Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee's forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time.
Read full report
May 15, 2020
SGH Insight
Markets like to superimpose the framework of yesterday to handicap the uncertainties of tomorrow. When it comes to trading the reemergence of tensions between the Trump administration and Beijing, they should take note of two major shifts underway this year:

First, as opposed to the halcyon days of 2018 and 2019 when the pressure on China was largely focused on tariffs and technology, there are now well over a dozen measures in the pipeline between the executive branch and the U.S. Congress aimed at China.
Many of these were extensively laid out and handicapped in SGH 5/5/20, “China: U.S. Preparing Retaliatory Measures”, and two of them have already since come to pass, and roiled markets in the process — a forced “delay” engineered by the White House of the federal government pension Thrift Savings Plan equity allocation to China investments in the MSCI All World Index, and the roll-out by U.S. Senator Lindsey Graham of a “COVID-19 Accountability Act” against China.

Second, the market’s assumed correlation in 2018 and 2019 between a strong economy and tariff pressure on China, where President Trump, even in his own words, would use “house money” as it came available to pressure China, no longer exists; if anything, that relationship could now even be reversed.

The White House is, of course, single-mindedly focused on bringing the shattered U.S. economy back to its feet. But the recognition now even by the President himself that the economy may not have its “strong rebound” until the fourth quarter of this year at best is of enormous significance: the lower the odds of riding the economy through the November elections to win a second term, the higher the odds that Trump will press on his “America First” calling card that has been a consistent policy theme since becoming president.
Market Validation
(Politico 5/20/20)

In another sign of worsening relations, the Senate on Wednesday passed a bill that threatens to delist Chinese companies from American stock exchanges unless they submit to U.S. auditing requirements. Some of the biggest Chinese companies have refused to conform to those requirements with little consequence.

"It says to all the companies out there in the world, including, but not limited to China: You want to list on an American exchange, you have to submit an audit, and the SEC has the right to look at that audit, and audit the audit," said Sen. John Kennedy (R-La.) in a floor speech describing the legislation, which he co-sponsored with Sen. Chris Van Hollen (D-Md.).

Only the latest China cut: The bill was the second piece of bipartisan legislation targeting China the Senate passed in two weeks. Last Thursday, the upper chamber passed the Uyghur Human Rights Policy Act of 2020, which would sanction Chinese officials who played a role in the mass detention of Muslims and other minority groups in China’s Xinjiang province.

Read full report
May 08, 2020
SGH Insight
To further blunt any unintended policy signal that negative rates are indeed a near term policy option, we expect Fed officials, either Chairman Powell himself or perhaps Federal Reserve Bank of New York President John Williams, to soon issue a statement or find a virtual forum to reaffirm the Fed’s low priority on negative rates among the policy tools it is reviewing for when it transits from the current liquidity crisis management measures to ensure market function to a revamped monetary policy strategy at the Zero Lower Bound.
Market Validation
(ITC Capital Markets 5/8/20)

Summary: US Front End Rates: Negative Interest Rate hype fades:report downplays; Powell Wed 9am ET

-We saw another surge in front-end futures Friday as the negative rate ‘hysteria’ continued through the early part of the session

-Front-end came “off the boil” in the afternoon with some focus on a consultancy piece (SGH Macro) that poured cold water on the potential for NIRP, speculating Fed leadership (including potentially Powell) may be out next week to actively signal they have no intention of pursuing negative rates

(Bloomberg 5/12/20)
Fed Funds Futures Continue to Price Out Odds of Negative Rates

Traders continue pricing out the chances of negative policy rates as Federal Reserve officials pushed back on deploying them.
July 2021 contract pricing a negative implied rate as of May 11; negative rates were priced as early as the March 2021 contract on May 8
Fed Presidents Evans, Bostic, Harker, Barkin and Bullard have said they don’t see negative rates being used in the U.S.
Wrightson ICAP expects Chairman Powell will “try to tamp down speculation that the Fed will take its policy rate below zero” during Wednesday’s webcast

Read full report
May 05, 2020
SGH Insight
*** Over the weekend, senior sources in China conveyed that they believe the Trump administration will, indeed, move forward with threats to impose sanctions on China. And right on cue, U.S. Senator Lindsey Graham has prepared legislation to put forth this week, most likely Thursday, that will propose sanctions on China in retaliation for that government’s role in hiding, and thus fueling, the COVID-19 pandemic. ***

*** The potential U.S. retaliatory policies being weighed include these sanctions that we believe will target identified individuals or institutions, rather than broad economic tariffs, although its potential timing is being complicated by the scheduled implementation of the “Phase 1” trade agreement, even as President Trump seeks to keep the threat of renewed tariffs also on the table.
Market Validation
(Bloomberg 5/13/20)
Treasuries Extend Gain, Stocks Slide; China Sanctions Introduced
Treasuries extend advance spurred by strong demand for 10-year auction after GOP senators introduced China sanctions legislation, leaving yields richer by 1bp to 545bp across the curve.
Long end leads the move higher, pushing 2s10s, 5s30s to flattest levels of the session
S&P 500 lower by 0.6% after paring gains
Treasuries were already headed higher after 10-year auction stopped 1.2bp through the WI level despite record $32 billion size and lowest-ever auction yield
Read full report
May 05, 2020
SGH Insight
...there is also advancing political movement, most likely again through executive order, to preclude the U.S. government pension fund, the Thrift Savings Plan, from investing about $50 billion in an MSCI Index that includes Chinese shares.
Market Validation
(Bloomberg 5/12/20)
Trade Friction Over Virus Blame Saps Risk Appetite
Risk sentiment suffers a setback following President Trump’s decision to pull federal money out of Chinese equities and Beijing’s move to suspend meat imports from four Australian abattoirs. S&P futures fall as much as 1% and Asian indexes retreat; Hang Seng drops 1.8% and ASX 200 loses 1.3%; Kospi 0.8% lower. Shanghai Composite slips 0.6%, H shares 1.7% weaker. 10-year Treasuries hover near 0.69%; JGB futures edge higher on strong bond auction and Kuroda’s pledge to ease more if needed. The dollar strengthens against all G-10 majors except yen; Aussie underperforms. WTI July futures hold near $25.20; gold returns above $1,700/oz.
Read full report
March 22, 2020
SGH Insight
For those who will remember, the OMT facility was established in 2012 as an emergency facility where credit could be extended to sovereigns but only with stiff conditionality attached, under either a Precautionary Conditioned Credit Line (PCCL), or Enhanced Conditions Credit Line (ECCL), modeled after the IMF.

A new, less stringent line can, however, be established we understand either in revising the existing ECCL standards, or by coming up with a new dedicated instrument created solely for the COVID -19 crisis response.

The creation of an entirely new instrument, if proposed by the Commission, can be done through a vote of the ESM’s Board of Governors, meaning the Eurozone finance ministers. Some ministers/governors would need to then obtain national parliamentary approval – which under normal circumstances might be an issue in for example Germany, the Netherlands, and Finland. But these are far from normal times.

The ESM epidemic-focused tool, and its trigger mechanism, is being designed in a way where al Eurozone members would be eligible to tap the line. With the understanding that budget surplus countries Germany and the Netherlands, for example, would likely never need to tap such a line, its availability to everyone would be intended as a signal to remove stigma akin to the US Federal Reserve’s pressure on all US banks to tap the Fed’s Discount Window lines.

The borrowing the ESM would do on the open market if the need were to arise may be called “Corona-bonds,” but they will likely fall along similar fiscal rules as the current ESM and fall short of some hopes that they might represent a first step to full capital markets union “mutualization” of debt.
Market Validation
(Bloomberg 3/23/20)

Germany Ready to Back a Rescue Plan to Help Italy Weather Virus
Berlin sees ESM credit line for Italy with minimal conditions
Finance ministry not ready to move on joint coronavirus bonds
By Birgit Jennen and Viktoria Dendrinou

German officials are ready to help Italy get through the coronavirus pandemic and are prepared to support an emergency loan from the euro area’s bailout fund.

The preferred option in Berlin would see Italy granted an enhanced credit line by the European Stability Mechanism with minimal conditionality, according to a German official with knowledge of the government’s thinking. While Chancellor Angela Merkel has said she’s happy to discuss Italy’s request for jointly issued coronavirus bonds to shore up euro members’ finances, the official said Germany isn’t ready to move forward with that idea.

BTPs Extend Gains; Germany to Help Italy Combat Virus Crisis
By James Hirai

BTPs rise, extending outperformance over peripheral peers, after Germany says it is prepared to help Italy weather the impact of the coronavirus.
Italy’s 10-year yield falls as much as 7bps to 1.56%, paring its underperformance over bunds to 2bps at 197bps

Read full report
March 19, 2020
SGH Insight
** Our sense of the Fed’s current crisis management thinking – and we can only imagine what hours are being put in — is that the Fed is not thinking of YCC as a liquidity tool to currently put to use, but are instead still extremely focused on moving forward with additional alphabet facilities to target a smoothing of market functioning.

** We understand many Fed officials have been frustrated with the dealer/banks and that the massive repo operations have not been reaching to where the liquidity is needed. But, on the other hand, there looks to be an accumulative calming across most of the markets in the wake of the QE purchases, the flood of repo, and the string of new targeted facilities and swap lines. So we still expect more of what could be best described a market functioning targeted vehicles, among them:

** The one at the top of the Fed menu, we believe, is a reworked version of the 2008 Term Asset-Backed Securities Loan Facility (TALF), in which the Fed purchased newly originated asset-backed securities. There is no way of knowing with certainty, but we believe its likely reincarnation will entail a fine tuning to reach a targeted small to medium sized business sector, and with perhaps looser credit ratings than just AAA paper. Whatever its final form, a TALF or a similar vehicle will require Treasury authorization and a credit backstop, either from Treasury through its Exchange Stabilization Fund or from Congress in one of the huge fiscal stimulus bills storming across Capitol Hill (the original TALF was funded through TARP money).
Market Validation
(FT 3/24/20)

Global stock markets swung higher on Tuesday, buoyed by the latest efforts by the US Federal Reserve to support the economy, as the turbulence that has taken hold over the past few weeks showed little sign of abating. European bourses jumped in morning trading, with the continent’s Stoxx 600 index rallying 4 per cent. London’s FTSE 100 rose more than 3 per cent, while Frankfurt’s Dax advanced 5.3 per cent. The rally in Europe followed on from significant rises in Asia in response to the Fed’s pledge to buy an unlimited amount of bonds. “This is the Fed’s ‘whatever it takes’ moment,” wrote analysts at Invesco, referring to then-European Central Bank governor Mario Draghi’s 2012 pledge to save the euro. That was, they noted, “one of the most aggressive monetary easing programmes in the history of central banking”.

Federal Reserve announces extensive new measures to support the economy


Read full report
March 09, 2020
SGH Insight
Tim Duy's Fed Watch:

The Fed may have to act again before the next meeting, like Monday morning. Although last week some Fed officials like St. Louis Federal Reserve President James Bullard floated the idea that the Fed simply moved up the March rate hike, such comments shouldn’t be taken too seriously (the blackout period couldn’t come soon enough).
There is just too much uncertainty for the Fed to try to hold off on further easing and a strong argument for delivering more easing sooner than later. Given low inflation low and market expectation that it falls further, the low-risk, high-reward policy position argues in favor of additional easing.
Realistically, the Fed should be discussing just taking rates to zero and getting very far out ahead of the data but they tend not to react that quickly. Bond markets are telling them to do it. I don’t have a strong argument for gradualism in this environment. If you take rates to zero, you maximize the odds of getting ahead of the weakness. If you can’t get ahead of the weakness, you are going to zero anyways. In either case, once you get back to the zero bound, then you need to look at QE, yield curve control, forward guidance, liquidity provisions, etc.
Market Validation
(FT 3/15/20)

The Federal Reserve cut US interest rates to zero before financial markets opened on Sunday and joined forces with other central banks in a bid to prevent a severe economic downturn caused by the coronavirus pandemic. After three weeks of chaotic drops in global stock markets and alarming signs of dysfunction in the US government bond market, the Fed stepped in with tools it has not used since the financial crisis. The sweeping measures underscore the severity of the damage that the coronavirus has already caused to economic growth, and the threat the outbreak poses to financial stability. The Fed dropped its policy rate by a full percentage point to a range of 0-0.25 per cent, a level not seen since 2015. It also announced wide-ranging actions to support financial markets, including an additional $700bn in asset purchases, expanded repurchase operations, dollar swap lines with foreign banks and a credit facility for commercial banks to ease household and business lending.
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February 14, 2020
SGH Insight
Global attention on the newly dubbed “Covid-19” virus has been focused on ground zero of the epidemic in China, and on monitoring pockets of super-spreaders such as in Singapore.

But the virus has proven an enormous source of concern also in Japan, given its proximity to China, and the strong interrelationship between the number two and number three economies of the world.

** The first source of concern in Tokyo is over the potential for the spread of the Covid-19 virus itself: out of the 32 million visitors to Japan in 2019, a whopping 30% are estimated to have come from China. **

** And from an economic perspective, the virus fallout is coming on the heels of a severe downturn already at the end of the year in activity, as evidenced in declining industry production levels, a buildup in inventories, and a downturn in private consumption. **

** But cynically speaking, the virus may provide political cover for Japan’s Prime Minster Shinzo Abe in distancing what is an increasingly sharp slowdown from the impact, primarily, of the government’s well telegraphed, but still controversial, VAT tax hike last October 1 from 8% to 10%. **

That respite for Abe, however, may prove short-lived, as local economists increasingly eye the possibility that Japan may enter a recession in the not too distant future.

Market Validation
(Bloomberg 2/17/20)

Treasury Futures Dip, BOJ Rate-Cut Pricing Firms After GDP Miss

Treasury futures are a touch lower. Long-end JGBs gain, while BOJ rate-cut pricing gently firms after the nation’s Q4 GDP miss estimates.

Japan’s gross domestic product shrank at an annualized pace of 6.3% from the previous quarter in the three months through December, the biggest slide since a previous tax increase in 2014, according to a preliminary estimate by the Cabinet Office Monday.

Economists surveyed had predicted a fall of 3.8%, flagging the adverse impact of the tax hike, weak global demand and typhoon disruption. The far worse-than-expected outcome showed that some of the government confidence in measures to cushion the blow of the tax hike was misplaced.

The result also raises the possibility that with the virus outbreak still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth, little more than two months after his most recent stimulus package.

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February 03, 2020
SGH Insight
** Saudi Arabia is unlikely to press for large-scale near term output cuts of up to 1 million barrels per day when the OPEC Joint Ministerial Monitoring Committee meets this week, but it will support a more cautious collective cut in the OPEC+ output of around 500,000 barrels per day as the most prudent response to the impact of the Chinese coronavirus outbreak on crude oil demand.

** And as of today, Saudi officials are also likely to seek a delay on a decision whether to bring forward to February the scheduled March OPEC+ Ministerial meeting until there are at least some clearer indications of how sustained the drop in crude demand will prove to be, and if others are indeed willing to take action, however small, as the new Saudi Energy Minister has repeatedly advised that everyone was in this together.

** There is a concern also in signaling a panic – a fear voiced by Russian oil officials – and which might elevate expectations for the deeper output cuts Saudi oil officials are for now very reluctant to commit to when it is still unclear how sustained the drop in crude demand will be.
Market Validation
(Bloomberg 2/6/20)

Oil pared gains as an OPEC+ committee agreed on a required level of output cuts, but didn’t reach a decision on an emergency meeting as Russia resisted. The panel recommended a production cut of 600,000 b/d to offset the demand impact from the coronavirus outbreak. Following three days of discussions in Vienna, there was no agreement on if ministers from OPEC and its allies should meet this month to ratify the JTC’s suggestion. Russian Energy Minister Alexander Novak reiterated on Thursday that his country needs more time to assess the impact of the outbreak.
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