British Pound

• Reports suggested that the G20 is considering USD 600bln lending programme for the IMF to help the Eurozone, however the news was later denied by the IMF and Japanese officials
• According to sources, the EU is discussing EUR 200bln loan to the IMF with EUR 150bln from the Eurozone, and the  Eurozone is negotiating lifting EUR 500bln cap on the EFSF and ESM lending
• Le Monde wrote, French banks need EUR 7bln of additional capital, however recapitalisation can be done without any state aid. Later, French ACP financial regulator declined to comment on the report
• The Bank of England kept its key benchmark interest rate and asset purchase target unchanged at 0.50% and GBP 275bln respectively

Some late-day covering as traders flattened out added a little lipstick to a pig-like day for European equities and sovereign credit as non-sovereign credit outperformed (but hides a few under-currents). Markets opened gap-up with credit notably ahead of equities - another ugly jump tighter in everything for all those option traders - but that was the best of the day as XOver (high-yield European corporate debt) and senior & subordinated financial credit tumbled all day. Main (investment grade credit in Europe) outperformed as investors sought the safety of this up-in-quality trade but most notably we suspect was the decompression trades in XOver-Main (i.e. traders positioning for a bearish spread widening between investment grade and high yield spreads). Financials ended wider, following their sovereign's very notable deterioration today, as the banks swung very notably from high to low. Liquidity measures improved but that seems very clearly driven by the Fed swap lines as opposed to improved conditions and we note that as Europe closed, ES managed to scramble back up to VWAP - and is trading a little ahead of broad risk assets.

More excellent independent research was released yesterday confirming gold's unique role as a diversifier and foundation asset in the portfolios of investors, especially at a time of heightened currency and investment risk. The independent research from highly respected New Frontier Advisors (NFA) confirms the importance of gold as a portfolio diversifier to investors in Europe and to investors exposed to the euro. During a period of extraordinarily serious economic uncertainty in the Eurozone, continued concerns about economic growth in the US heading into an election year, and the possibility of an economic slowdown in China, the World Gold Council (WGC) wanted to examine the relevance of gold as a strategic asset for euro-based investors to protect their portfolios and to mitigate the systemic risks being faced. The report, ‘Gold as a strategic asset for European investors’, commissioned by the World Gold Council, explores gold as a strategic asset across five sets of asset allocation studies, including four using historical data spanning 1986 to 2010, and one using the 1999 to 2010 time frame. The third party research builds on the now considerable research and academic literature showing that gold adds significant diversifying power due to its low or negative correlation with most other assets in an investment portfolio. Gold’s relevance as a strategic asset is continuing to grow. This will continue in a world facing the real risk of a global recession and even a Depression, poor investment returns, currency devaluations and wars and very high monetary and systemic risk. Put simply, when used as a foundation asset, gold has preserved wealth throughout history and again today. 

• According to the FT, last-minute negotiations have commenced to create a much bigger financial "bazooka" to present at this week's EU summit that could include running ESM and EFSF together as well as winning increased support for the IMF. However, the report was later denied by a senior German government official
• According to a senior German government official, he is more pessimistic than last week on overall summit deal. He also said that he can't foresee running EFSF and ESM simultaneously, and he is not sure if the summit will reach conclusion on using IMF funds in the Eurozone crisis
• ECB funding to Italian banks rose to EUR 153.2bln at the end of November from EUR 111.3bln at the end of October
• Bund futures received a boost following a strong Bobl auction from Germany
• ECB allotted USD 50.685bln in its 3-month USD operation vs. Exp. USD 10bln
• CHF moved lower after the SNB slashed its 7-day USD repo rate, and weakened further after a Swiss minister said that Switzerland is still looking at negative rate options

When yet another central bank, in this case the BOE, proactively uses the word "shock" in relation to funding deficiency (in this case the GBP) if even with the phrases "contingency" and "there is currently no shortage" a brief week after the global central bank cartel did the same to assure the world of USD funding availability, it may be time to wonder i) just how bad is the global FX crunch in any currency (EUR most certainly included - see near record ECB deposit facility usage), ii) just how broken is the shadow banking system - as a reminder with Lehman it was money markets (a major component of shadow liquidity), now it is repo (smaller, but still critical component of shadow banking) that is failing and iii) when will this crisis escalate to the next logical step?

Japan will reward investors who buy reconstruction bonds with half an ounce of gold, an added incentive that could boost the return by nearly six times according to Japanese Finance Minister Jun Azumi. Individual investors who purchase more than 10 million yen ($129,000) in the debt with a 0.05 percent return and keep it for three years will receive a gold commemorative coin weighing 15.6 grams (0.55 ounces), the Finance Ministry said in Tokyo today, worth about $948 based on current prices for the precious metal. The offer suggests the return could be boosted to 89,000 yen should gold prices remain at current levels, more than the approximate 15,000 yen one would receive from the bond. The coupon on conventional three-year retail government debt to be sold on Jan. 16 is 0.18 percent. 10 year debt remains near multi record lows of 1%. Silver coins weighing 31.1 grams issued as 1,000 yen currency will be distributed to those who own more than 1 million yen of the bonds, the government said. The coins will be offered for debt going on sale in March. All investors receive a thank-you note from the minister, who showed his to reporters in Tokyo today as proof of his purchase.  Chief Cabinet Secretary Osamu Fujimura also bought the bonds, Azumi said, without saying how much.  This is a sign that the Japanese government like governments internationally is very concerned that they will not be able to sell their government debt.

Gold and the dollar are Bank of America Merrill Lynch’s top currency trades for 2012. The second-biggest U.S. bank by assets after JPMorgan Chase & Co. said that investors should buy gold versus the euro as the ECB engages in quantitative easing to contain debt turmoil. David Woo, global head of rates and currencies in New York at the Bank of America Corp. unit, told clients in research note that “the ECB will be buying more government debt and doing QE, so buy gold against the euro.” “The second major theme is U.S. fiscal tightening is about to come and the U.S. economy will slow, and this will be very good for the U.S. dollar.” “The general theme for the year ahead is pretty negative for the risk environment,” Woo said.

Now, Gold is getting interesting...

Not many know that you can trade physical gold & precious metals OTC through your brokerage account, and take physical delivery on demand. This is the first of several interviews that explores this model.

The Bank of Korea’s continued diversification of its foreign exchange reserves is a bullish factor which may have led to the price gains today. The central bank of South Korea announced that it had purchased 15 metric tonnes of gold in November to raise its reserve of bullion in an effort to diversify its portfolio of its foreign reserve investment and reduce risks caused by market volatilities. According to the Bank of Korea (BOK), it made a purchase of 15 tons of gold last month to increase the nation’s gold reserves to 54.4 tons worth $2.17 billion as of the end of November. It boosted the size of its gold reserves by US$850mn in November, up a massive 39% from the previous month. Its total gold reserves are now worth US$2.17bn.

It was three short years ago that the small former British colony of Zimbabwe was spewing forth 100 trillion dollar bills. Since then, courtesy of a few trillion extra percent of inflationary RDA, the country had given up on its currency and replaced it with US Dollars. Now, the country's cult central banker Gideon Gono has made it clear he wishes to avoid another episode of transplant currency hyperinflation courtesy of his counterpart in the Marriner Eccles building and "has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis." Yet the screaming sarcasm is the following: "Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value. With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse." And the terminal slap in the face of all that is American: "As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy." Well, if recently hyperinflating Zimbabwe is complaining about the US as being on the same path as itself, and instead wants to become a Chinese FX vassal state, perhaps alarm bells should go off somewhere. So the next time Tim Geithner is up on stage somewhere, it may be prudent for a question to be be asked: how and why is it that the world's (formerly) de facto banana republic is complaining that the next up and coming B-Rep is about to replace it in the annals of idiotic monetary policy?

• Lower than expected manufacturing PMI data from China prompted concerns surrounding sustainability of the Chinese growth, and raised hopes for further monetary easing measures by the PBOC soon
• Successful bond auctions from Spain and France resulted in significant tightening of the Spanish/German and French/German 10-year government bond yield spreads with heavy buying from domestic accounts
• Market talk of the ECB buying in Italian and Spanish government debt via SMP
• Gilt futures dropped more than 50 ticks following a lackluster Gilt auction from the UK’s DMO

Gold ended November with a 1.9% gain in US dollar terms, the seventh month of the dollar falling against gold so far this year. The euro fell 5% against gold in November. The British pound fell nearly 4% against gold. The Aussie dollar fell nearly 6.5% and the South African rand by 5%. Thus, gold again protected investors and savers internationally from the global financial crisis. Gold is now more than 20% higher in dollars and 18% higher in euros and pounds in 2011. It is only 9% below the record nominal high of $1,920/oz reached in September and given the degree of systemic and monetary risk in the world this price level will likely again be reached by early 2012. Global ETF holdings of gold topped 70 million oz for a second day in a row, marking not only a new record high, but meaning that ETF holdings of gold are double those held by the Chinese central bank and are just a few metric tonnes behind those of France, the world's 5th largest official holder of bullion (2,435T).

Naturally, if there was one party that would be disappointed by today's action, it would be Goldman Sachs: on one hand because it is nowhere near enough to actually fix anything, and on the other because it delayed the moment when the 2-3 European banks which we have been saying for over a week would keel over and die leaving a power vacuum for Goldman to fill, has just been delayed. As a result, Goldman dissatisfied note makes more than enough sense: "Up, up, and away for stocks after the coordinated ease this morning. USD funding just got cheaper, which is of course a good thing. But the difference between OIS + 50 and OIS + 100 isn’t enough to save anyone or solve everything. It’s the symbolism of policy-makers again acting in concert that I find most encouraging." But, and there is always a but: "Although there is the obvious counter: why act now – is there something lurking around the corner? Those are worries for tomorrow though." Indeed, and when the worries resurface, as they will, especially following the resumption in European record yielding auctions, which incidentally the Fed's action does nothing to fix, following France and Spain bond auctions. And who knows what else. Oh yes, Goldman just cut its GDP forecast for Europe from +0.1% to -0.8%: hello, recession, the very same catalyst which S&P said a month ago will be sufficient for it to downgrade France. As usual, Egan-Jones was way ahead of the crowd.

Whether its non-confirming volumeless rallies in stocks, hard-to-find collateral, sovereign risk, counterparty risk, USD funding stress, GDP growth dislocations, EM credit dispersion, or equity market outperformance, Nomura's EEMEA FX and Fixed Income team has a little for everyone in today's '10 Things We Did Not Know'. Today's obvious risk-on knee-jerk-response rally is perhaps not so broadly supported even as Ben's promise trumps a totally failed Grand Plan.