Traders Own

Twelve months ago all the talk in the UK was about rising inflation and whether the next move in interest rates would be up.

An increase in the asset purchase scheme was the last thing on policymaker’s minds despite Adam Posen’s insistence that it was required. Inflation was still high, though below 4%, and the MPC was insisting that it would start to fall in 2011.

One year on and how quickly things change, though the MPC is still insisting that inflation will start to fall back. Eventually they will have to be right about that if they say it often enough.

In any case the pound has held up rather well despite the fact that growth has undershot expectations, inflation has carried on higher, and the Bank of England has embarked on a further £75bn worth of quantitative easing.

Despite the prospects of slowing growth the warning shot about the sustainability of the UK’s triple “A” rating by Moody’s doesn’t appear to have shaken the pound too much, even though there does appear to be plenty of evidence to suggest that the UK economy is starting to slow down on a combination of rising inflation and shrinking incomes, as well as concerns about fall-out from the situation in Europe.

The rebound in retail sales for December to the highest levels since May, as well as a better than expected consumer confidence number from Nationwide, has seen the pound hit its highest levels against a basket of currencies since March this year.

The latest Bank of England minutes has shown that the Bank, while mindful of concerns about growth, are in no hurry to pre-commit to further asset purchases in the short term, a point made recently by Spencer Dale the Bank’s chief economist.

Fears about the stickiness of inflation will see the Bank hold fire on committing any new money to help the economy until the bank has sight of the inflation numbers in January, which should see the effects of this year’s VAT hike drop out of the figures.

The admission that business surveys show broadly flat output in Q4 suggest that the last quarter of 2011 could well show no growth at all, and possibly negative growth at worst, but given Europe’s fundamentals it’s still better than the numbers from across the Channel.

Public finance data for November was expected to jump sharply to £16.6bn from October’s surprisingly low £3bn, however the numbers came in slightly below that at £15.2bn helped in no small part by the new bank levy and the rise in VAT receipts.

This suggests that the government remains on course to meet its full year borrowing target of £127bn set by the OBR, and this should be seen as a positive.

There is no doubt that the continued toxic tentacles of the problems in Europe will continue to permeate into the fabric of sentiment in the UK, however these problems have also helped the pound retain a fairly positive bias against a basket of currencies.

What 2012 holds for the UK will largely depend on how the situation in Europe plays out, and even if the UK loses its triple “A” rating it remains likely that the pound won’t suffer too much given that European triple “A”’s will already have lost theirs as well.

Moody's reiterated the importance of the government sticking to its fiscal plan; however this plan could come under pressure if consensus starts to fracture in the face of a faltering economy.

This is where the main fault lines will likely occur, in how the UK coalition government holds together in the face of pressure to deviate from its current monetary policy, in the event the economy threatens to double-dip.

GBPUSD – looks set to finish the year broadly unchanged against the US dollar, though we could see it lose ground in the first quarter when Q4 GDP numbers get released.



The move higher in the pound over the last 24 hours and the break above the 1.5580 level has seen the pound spill over to the recent highs at 1.5780.

The pound needs to close above the 55 day MA at 1.5740 to prompt a move towards the 1.5900 area. The longer term support from the 2010 lows at 1.4230 remains the key level and now comes in at 1.5425. A move below 1.5400 could well see further weakness and retarget the 1.5270 lows in October, and then 1.5190 61.8% retracement of the 1.4230/1.6745 up move.

EURGBP – could well post small gains on the year against the single currency and while the problems in Europe continue to take centre stage these gains could well be maintained.

The single currency continues to slide lower against the pound breaking below the recent lows at 0.8370 yesterday as it edges towards the 2011 lows at 0.8285 and ultimate target.

A break below 0.8285 would then target the 2010 lows at 0.8065.



The key resistance remains around the highs this week at 0.8425, and only a move beyond these highs would target a move back towards 0.8450, and even the 200 week MA at 0.8567.

When I looked at the banking sector twelve months ago in the wake of the rebound we had seen since the lows in March 2009 I struggled to see where any future upside would come from.

The major worries tempering my enthusiasm on the sector was the on-going concerns about the European banking system given that Ireland had only just been bailed out and Portugal was looking increasingly vulnerable with 10 year yields starting to edge up over the 7% level.

In the last quarter of 2010 Standard Chartered (STAN LN) stole a march on its competitors by raising capital to boost its capital ratios due to concerns over a funding crunch in 2011 and 2012.

This, as it turned out proved to be a smart move, even if the sector initially started 2011 on the front foot.

Concerns about European banks exposure to sovereign debt, as well as requirements to raise additional capital in line with Basel 3, has seen investors increasingly shun the banking sector over the past 12 months.

Discredited European Banking stress tests have done nothing to assuage investor concerns as the situation on Europe has continued to deteriorate in the face of a disjointed and in some cases incompetent European policy response.

In the second quarter of 2011 the sector broke below its 2010 lows at 4,300 and pushed sharply lower in response to rising concerns about the solvency of the banking sector in Europe and the subsequent bailout of Portugal.

A break below the 3,000 level and this year’s November lows could well trigger further losses in the sector.



In the UK the September’s ICB Vickers Report outlined further steps to ensure that UK banks would not place any new additional burdens on the public purse.

The idea is to ring-fence the retail operations from the investment banking divisions with some commentators arguing that it doesn’t go far enough.

The decision by the UK government to implement these measures in full this week has come under fire from some quarters with the claims that it will hit banks at the worst possible time when they are trying to rebuild their balance sheets, and also coming under pressure to lend more.

This argument is somewhat spurious however given that they will have until 2019 to implement these measures. In any case the outlook for banks across Europe is likely to remain uncertain while the politicians struggle to find a solution to the European sovereign debt crisis.

The reality is with the amount of toxic loans on European banks balance sheets at some point the likelihood of any significant upside in the sector is likely to remain constrained by higher capital requirements at a local and international level, as well as having to write down exposure to European sovereign debt.

The UK banking sector looks set to continue to remain split between the better performers like HSBC (HSBA LN) and Standard Chartered while on the other side of the coin we have the state owned banks RBS (RBS LN) and Lloyds (LLOY LN) with both banks paring down their balance sheet size, and finally Barclays (BARC LN) whose share price has also dived in recent months.`

Lloyds has undergone a torrid time in recent months with concerns about the health of its new CEO, and problems in trying to sell-off a number of its branches to comply with EU regulations



Since the share price bottomed out in January 2009 at 16p the share price recovered to 2010 peaks of 79p, however since then it’s been downhill all the way, with lows so far this year of 21.60p.

There is potential to go back to the lows of 2009 but unless conditions deteriorate any further that looks likely to be a base in the short term.

Barclays bank underwent the sharpest recovery from its 2009 lows of 47.30p outperforming all its highs rising as high as 394p, after getting a large Middle East cash injection to alleviate the likelihood of having to accept a government bailout.



It has fallen sharply from those 2010 highs, finding support throughout 2010 and the first half of 2011 at the 250p level before finally giving way in July this year to fall sharply lower.

The share price bottomed out around the 133.90p area, however given the banks’ exposure to Europe the bank could well be susceptible to further shocks, which could take it below its October lows. A move back above 220p, the October highs could well signal some stabilisation in the share price.

Royal Bank of Scotland is the one bank most affected by the Vickers Report after the Chancellor announced plans to shrink its investment banking division.

Plans are being considered for the bank to sell off or shut its stockbroking division. The bank has already shrunk its balance sheet by almost £1trn since new CEO Stephen Hester took over from Fred Goodwin in 2008.

How future changes will affect the share price is hard to quantify despite this year’s share price declines. It would seem the future size of the bank is likely to be of lesser importance than the outcome of events in Europe.

What does seem likely though is that the 10p lows seen in 2009 are unlikely to be revisited unless problems in Ireland, which RBS is heavily exposed to, start to resurface.



This year’s lows around 17p should act as support while a rebound over the 23.55p highs seen this month, could well show some signs of stabilisation.

Lloyds and RBS are the worst performers’ year to date, showing down 65% and 51% on the year to date, followed by Barclays which is down 37%.

Even HSBC, which while exposed to Europe and the UK’s problems, has a much wider Asia focus, is down 27% while Standard Chartered is down 23%.

One thing seems certain given the tight funding problems set to face sovereigns as well as banks in 2012, it remains likely that financials will continue to remain volatile, with prices remaining depressed, while Europe acts as a cloud, while a recovery in Asia is more likely to help HSBC and Standard Chartered than the others

This week, the gap between what the European Central Bank says and what it does became very noticeable indeed...

I know they're stolen, but I don't feel bad.
I take that money, buy you things you never had.
'Free Money', from the album 'Horses' by Patti Smith

THROUGHOUT THIS CRISIS, the European Central Bank has stuck to the mantra that its job is to ensure price stability above all else.

It has, for example, objected to suggestions that it might fund the European Financial Stability Facility, the Eurozone's 'temporary' bailout mechanism that now looks like it may hang around a bit longer than first anticipated (whether it will have much money to lend to troubled Eurozone governments is another matter).

There are signs, though, that its attitude may be changing. A considerable gap has opened up between the ECB's rhetoric and its action, with central bankers talking tough on inflation while pursuing ever looser policies. This disconnect was plain to see on Monday when ECB president Mario Draghi addressed the European Parliament in Brussels.

"The Governing Council of the ECB," said Draghi, "is determined to ensure that inflation expectations continue to be firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term."

So far, so anti-inflationary.

"The latest monetary data reflect the heightened uncertainty in financial markets. Looking beyond short-term volatility, the monetary analysis indicates that the underlying pace of monetary expansion remains moderate."

Draghi is not wrong. The chart below looks at money supply in the Eurozone, the UK and the US over the last two years. The vagaries of money supply data mean the comparisons are not exactly like-for-like. The US Federal Reserve, for example, stopped publishing its M3 broad money measure in 2006. The Bank of England meantime does publish an estimate of M3 for the UK, following the methodology used to calculate Eurozone M3, but by necessity it involves a degree of estimation.

Nonetheless, if we index each series we can see that Eurozone money supply (the blue line) has been more stable than that of both the US (green line) and Britain (red line):
 


US money supply appears to have merrily grown throughout the period, while the effects of the UK's first dabble with quantitative easing in March 2009 can be seen coming through nine months later (and, of course, though the effects are not known yet the Bank in October expanded its QE program, and may do so again if the latest Monetary Policy Committee minutes are anything to go by).

The problem for the ECB and its pursuit of price stability is that its "moderate" pace of monetary expansion may well be a key reason why the Eurozone has ended up as the epicenter of the global financial crisis. Because while the Fed and the Bank of England have gone to historic lengths to get funds to where they are desperately needed – the banking sector and (whisper it) government – the ECB has lagged behind.

There is a phrase we use here at BullionVault to sum up what we believe to be the most likely ways out of the ongoing crisis: Default or Devalue. In the absence of meaningful economic growth, existing debt burdens will either be defaulted on, or they will be repaid once their real values have been sufficiently eroded by inflation.

By standing in the way of the latter, the ECB has arguably made the former seem much more likely – hence the Eurozone debt crisis.

But things have changed. Now that Old Man Trichet has shuffled off into retirement, Super Mario can finally open the spigots and (he hopes) prevent liquidity-starved Europe from collapsing into a morass of sovereign defaults and bank failures. This would explain why, as well as restating the ECB's anti-inflation priorities, Draghi was keen to tell the European Parliament about "the latest non-standard measures" from the ECB.
 
These include a €40 billion covered bond purchase program, a reduction in the amount of cash banks are required to hold at the ECB and a "temporary expansion" of the list of collateral that banks can put up when borrowing from the ECB (banks, it would seem, are running low on decent assets – or else they just don't want to risk them. So the ECB will accept collateral of ever-more questionable value, including the very Eurozone government bonds that have caused it – and its balance sheet – such grief already).

And, on Wednesday, we had the Big One. The first of the ECB's three year Longer Term Refinancing Operations (LTROs) – whereby Europe's banks could borrow money for three years at interest rates of 1%, and against iffy collateral to boot.

"This is basically free money," one banker in Germany said before the result of the LTRO was announced.

"The conditions are unbeatable. Everybody who can will try to get a piece of this cake."
He was not wrong. A total of 523 institutions borrowed €489.191 billion – higher than most analysts had predicted (and more than the original lending capacity of the EFSF, which maybe tells you something about politicians' and technocrats' ability to appreciate the full scale of a crisis).

The announcement saw stock markets sell off – possibly because it is an indication of just how bad a state Europe's banking system is in. The Euro's recent rally against the Dollar also went into reverse, while gold prices – which have moved closely with the Euro in recent days – also fell from their week's high.

It seems very much as if Europe's central bankers are now looking to catch up with their Anglo-Saxon peers, choosing (whether consciously or otherwise) the Devalue option rather than run the risk of Default. But it will probably be a while until the rhetoric changes.

Earlier this week, Germany's Bundesbank grudgingly agreed to contribute an additional €41.5 billion to the International Monetary Fund, but only on condition that the money was not earmarked for Europe.

The Bundesbank is fooling no one. It must realize there's a very good chance that, some time in 2012, a phone will ring at the IMF's Washington headquarters:

"The Lagarde residence, the lady of the house speaking...Oh it's you Spain, how can I help...Hang on one moment, I've got Italy on the other line..."

Still, the central bankers get to say, with as straight a face as they can manage, that they are not directly financing government debt.

If it turns out that the world does become awash with fresh Euro liquidity then, unless gold decouples from the single currency, this could be a bearish development for the yellow metal.

Eventually, though, investors must surely realize that there is a world of difference between a tangible asset value for thousands of years and a political project that looks like it could come undone after little more than ten years.

The debt crisis shows little sign of coming to an end. And history shows us that when debt crises are eventually resolved, it tends not to be good news for the creditors.

Ben Traynor
BullionVault

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it

Equity markets have been in a much more buoyant mood across the board today, albeit against the backdrop of very light pre-holiday volumes. UK markets saw risker assets trade broadly higher with the financial and commodities sector topping the leader board.

Banks managed to pare back ground on yesterday as markets seemed to take a more upbeat view on the increased liquidity as a result of the European Central Bank LTRO operation. Lloyds (LLOY LN) and RBS (RBS LN) have been the standout performers today.

The airline sector has seen a much needed lift on the back of M&A activity today. British Airways parent company, International Consolidated Airlines Group (IAG LN) following the agreement to buy British Midland from Deutsche Lufthansa AG for GBP172.5m. The deal, which is set to increase IAG's slot portfolio by 56 at Heathrow is subject to approval by the European Commission. Virgin's Richard Branson has also been more than vocal regarding his objections to the potential BA monopoly.

U.S. Markets took their cues from Europe and also opened higher. Weekly Jobless claims in the U.S. helped underpin the bullish mood falling by 4,000 to 364,000 and surpassing expectations of an increase of 380,000. The figure, the lowest since April 2008 is good but with seasonal effects and some companies still trimming back on staff it may not necessarily mean that the U.S. is out of the woods just yet. The downward revision in growth to 1.8% from 2.0% for U.S. GDP for the third quarter was shrugged off as something to be consigned to the history books. With the recent raft of decent economic data from the U.S. it would appear that investors are reckoning on the Q4 GDP figures as compensation.

The best performing currencies have been the Canadian dollar and the Kiwi rebounding on the firmer commodity prices. Sterling has been fairly flat today in spite of an upward revision of Q3 GDP growth to 0.6% from 0.5%. The Euro has also found the going tough despite the passing of the Italian austerity budget through the Italian senate today.

Gold prices while momentarily breaking above the 200 day MA yesterday has failed to make any headway above $1621 as safe haven interest has waned.

Both Brent and WTI have climbed today. WTI has been capped by the psychological $100 a barrel as investors hover between confidence on U.S. data, and fears about further European austerity measures. Possible disruptions to global crude supplies have also underpinned prices as tensions rise with respect to the alleged nuclear ambitions of Iran.

Copper prices have moved up also but the 55 day MA resistance suggests that the upside is likely to remain fairly muted.

Despite the well documented vulnerability of the UK economy to the problems in Europe the pound continues to push higher, near to 10 month highs and eight successive up days in a row against a basket of currencies.

Yesterday’s Bank of England minutes showed that the MPC remain reluctant to pre-commit to further easing in the near term, and the latest public finance figures seem to suggest that the Chancellor is on track to meet his spending targets for this year. Today’s publication of the final Q3 GDP numbers are expected to confirm growth of 0.5% so shouldn’t provide too many surprises. Total business investment is also expected to remain under pressure, unchanged at -1.4%. The real concern remains with existing business investment and yesterday’s minutes seemed to indicate that output was broadly flat in Q4, suggesting that the last quarter of 2011 could well show no growth at all, and possibly negative growth at worst.
 
Yesterday’s version of QE by the back door by the ECB saw the single currency gain initially before the realisation set in that the high take-up of 523 banks suggested that the European Banking system had been on the verge of a financial aneurism as banks struggle to raise funds. While it may buy vulnerable banks some time, it is certainly no solution to the wider problem of slow or no growth. Furthermore the failure to deal with the failing banks also puts the good banks under pressure, as there is no discernible way to distinguish them. A point reinforced by yesterday’s Italian Q3 GDP numbers which showed Q3 GDP slip 0.2%.

Today sees the release of Italian retail sales for October with expectations of a decline of 0.2%, while markets await the outcome of a key confidence vote for new PM Mario Monti in the Italian Senate on the latest austerity budget.
 
Italian and Spanish bond yields also continued to rise despite the free money suggesting that the banks were resisting the temptation to implement the bond carry trade that the cheap finance presented it with. In further evidence of the tribulations in Europe Hungary found itself on the end of another downgrade by Standard and Poor’s, while the Greek PSI talks are on the verge of collapse as hedge fund Vega threatens to sue Greece for excessive haircut.
 
In the U.S. it is also final Q3 GDP day and no change is expected to the previous figure of 2%, with all measures set to remain unchanged. Weekly jobless claims are set jump back after last weeks surprise fall to 366k, with expectations of a figure of 378k. The main number is the final University of Michigan confidence number which is expected to increase from 67.7 to 68.00.
 
EURUSD – the single currency managed to break sharply higher above 1.3150, touching the 1.3200 level before dropping sharply back. The November lows at 1.3210/20 proved to be a rather difficult obstacle to overcome The failure to close above the 1.3150 level does keep the risk for further losses, but a break above 1.3220 could well signal a move to 1.3400. The January lows at 1.2870 remain the main barrier to a move towards the August 2010 lows at 1.2590. Given the sharpness of recent moves we could well continue to see choppy range trading unfold now between the recent lows at 1.2950 and the 1.3150 and even possibly 1.3220 levels.
 
GBPUSD – the pound did what it did best squeezing back to the recent range highs at 1.5780 yesterday, however it was once again unable to close beyond the 55 day MA at 1.5755. As such the downward momentum remains intact. Only beyond 1.5780 targets 1.5900. The old resistance around 1.5580 now becomes support. The longer term support from the 2010 lows at 1.4230 remains the key level and now comes in at 1.5425. A move below 1.5400 retargets the 1.5270 lows in October, and then 1.5190 61.8% retracement of the 1.4230/1.6745 up move.
 
EURGBP – yesterday’s low at 0.8308 saw the single currency almost reach its January lows at 0.8285.  The move yesterday did equal a 76.4% retracement of the entire up move from 0.8065 to 0.9085. A break below 0.8285 targets 0.8200. Pullbacks should find resistance around yesterday’s highs at 0.8370/80. The key resistance remains around the highs this week at 0.8425, and only a move beyond here would target a move back towards 0.8450 and even the 200 week MA at 0.8567.
 
USDJPY – no real change here except the U.S. dollar seems to forming a triangular consolidation with support at 77.45 and resistance at 78.10. The 55 day MA remains the key support at 77.30 as we look to see a move higher towards the trend line resistance at 78.40 from the 2007 highs at 124.15. The 200 day MA at 79.10 is the key long term resistance. Only below the 55 day MA would undermine this scenario, and risk a move lower that would see the next key support area around the 76.20/30 area, a break below of which opens up the lows at 75.30.

Another choppy day on the markets saw equities hit their highest levels in a week after the announcement of the ECB 3 year LTRO, with banks leading the gains initially, before markets slid back.

The amount of money borrowed came in at a hefty €489bn, at the higher end of expectations with 523 banks taking advantage of the facility. After this initial sugar pill had dissolved, realisation started to dawn that this heavy uptake may not be such a good thing, given that the number of banks tapping the facility highlights the serious problems inherent in the European banking sector.

Lloyds Bank (LLOY LN) has been the standout performer after being on the receiving end of a positive update from Paribas. Index new boy CRH (CRH LN) is also near the top of the index along with builders merchant Wolseley (WOS LN), after U.S. housing data for November beat expectations.

Amongst the bigger fallers was technology share ARM Holdings (ARM LN), after Oracle’s disappointing results overnight, as it gave back some of yesterday’s takeover chatter inspired move higher. Sector peer Sage Group (SGE LN) is also lower. Retailers also saw their share prices slide after chocolate maker Thorntons (THT LN) warned that profits may miss expectations. Marks and Spencer (MKS LN), Tesco (TSCO LN) and Sainsbury (SBRY LN) have all slid in sympathy, their declines compounded by another poor Gfk consumer confidence number.

U.S. markets opened lower this morning after European markets slid back after being higher initially. Stocks in focus include software giant Oracle after reporting earnings that missed expectations after the bell last night. This sent the technology sector tumbling sharply, with IBM and Hewlett Packard leading the fallers.

Blackberry owner Research in Motion is having a rather better day than has been usual after reports that it had been the subject of some takeover interest from Microsoft, while Amazon was reported to have had a bid rejected. Pharmaceutical store Walgreen’s also slid back after reporting a decline in Q1 earnings of 4%.  In economic data existing home sales for November came in above expectations, rising 4%, above consensus of 2.2%.

The U.S. dollar after initially being under pressure in early trade has bounced back strongly this afternoon. It had slipped back early on after the ECB LTRO came in well above expectations but soon recovered as markets took the view that the high take-up was not necessarily a positive for risk. As Italian and Spanish yields started to rise again it soon became apparent that if the intention of cheap money was to boost the bond market, as Sarkozy wanted, it was having the opposite effect. If anything the high take-up crystallises the distrust between banks in the interbank funding markets.

The biggest fallers today have been the Norwegian and Swedish krona, while the single currency has also slid back after economic data showed that the European economy continues to slide into recession. Italian Q3 GDP showed a contraction of 0.2%, while consumer confidence also slid back to -21.2.

Amongst the better performers is the Pound after public finance data for November came in slightly below expectations at £15.2bn helped in no small part by the new bank levy and the rise in VAT receipts. This suggests that the government remains on course to meet its full year borrowing target of £127bn set by the OBR, and this has been seen as a positive. The Canadian dollar is also higher after retail sales data blew away expectations for November coming in at 1%, double expectations of 0.5%.

Crude oil prices pushed higher this afternoon after a larger than expected shortfall of 10,570k barrels at Cushing against an expected shortfall of 2,125k. With concerns about economic growth tempering upside and worries about unrest in the Middle East tempering downside oil prices look set to remain in a range.

Gold prices shot sharply higher initially this morning pushing above its 200 day MA at $1,623 before sliding sharply back as the US dollar pulled back some ground.

Copper prices shot higher initially in the wake of the ECB LTRO, however prices soon fizzled out as the feel good factor fell flat.

U.S. Dollar gold bullion prices dropped to $1609 an ounce Wednesday lunchtime in London – 1.9% down from the high for the week so far, set less than three hours earlier.

Stocks and commodities also traded lower following an announcement by the European Central Bank about its latest liquidity operation.

"We don't see much fresh [gold] buying from investors as the year end nears," says Dick Poon, Hong Kong-based manager at precious metals group Heraeus.

Silver bullion fell to $29.29 per ounce – having briefly passing the $30 mark – as the Euro fell against the Dollar following news that European banks borrowed a total of €489 billion at the ECB's 3-Year Longer Term Refinancing Operation, which settled Wednesday morning.

The LTRO – through which the ECB offered to lend to banks for three years against collateral that includes distressed Eurozone government debt – saw 523 bidders.

The ECB offered the loans at a rate of 1%.

"It was obviously an offer the banks could not refuse," says Laurent Fransolet, head of fixed income strategy at Barclays Capital in London.

"It shows the ECB is not out of ammunition and it gives banks security on liquidity for a few years. On the other hand it means banks will rely on the ECB for longer."

"This is basically free money," said Jens-Oliver Niklasch, Stuttgart-based strategist at Landesbank Baden-Wuerttemberg, speaking before the ECB announced the LTRO results.

"The conditions are unbeatable. Everybody who can will try to get a piece of this cake."

"It remains to be seen [however]," warns ING economist Carsten Brzeski, "whether the money will filter through to the real economy as the ECB hopes. Many banks still have to increase their capital ratios."

"The cash could be used simply to shore up [banks'] balance sheets," agrees Kit Juckes, currency strategist at Societe Generale.

"Or some of it could go into assets, including but not exclusively higher-yielding peripheral debt."

Deutsche Bank has estimated that around half of the €442 billion borrowed by banks at a 1-year LTRO in 2009 was used to buy sovereign debt – the majority going into Greek and Spanish government bonds – the Financial Times reports.

The Euro fell 0.9% against the Dollar immediately following the ECB's announcement, breaking a rally that began early on Tuesday and continuing to fall throughout the rest of the morning.

European stock markets also fell, while Dollar gold bullion prices dropped more than 1% in an hour from $1640 per ounce, their high for the week so far.

In the same period, the gold price in Euros fell 0.6% to €39,847 per kilogram (€1239 per ounce), while the Sterling Price of gold bullion also dropped 0.6%, hitting £1033 per ounce.

Despite rallying for most of this week (until the ECB announcement), the Dollar price of gold bullion remains 5.6% down on the start of last week.

"Gold is not the asset of choice on a search for liquidity," says Dominic Schnider, head of commodity research at UBS Wealth Management.

"It gives you comfort against currency risks, inflation, sovereign debt problems, but not liquidity crunch...[however] holdings of gold ETFs are still holding up despite the recent sell-off, which is a good sign."

The volume of gold bullion held to back shares in the SPDR Gold Trust (ticker: GLD) – the world's largest gold ETF – fell by around 15 tonnes last week, but on Tuesday remained more than 40 tonnes above its 2011 average.

Here in Britain, minutes from the Bank of England's Monetary Policy Committee meeting earlier this month show all nine MPC members were unanimous in voting to keep the bank's main interest rate at 0.5% – where it has stayed since March 2009.

The MPC was also unanimous in maintaining the size of the Bank's quantitative easing program at £275 billion – to which it was increased in October.

"The Committee agreed that a decision to change policy was not warranted at this meeting," the minutes record.

"Some members [though] continued to note that the balance of risks to inflation...[means] that a further expansion of the asset purchase programme might well become warranted in due course."

Over in the US, the Federal Reserve Tuesday proposed new rules aimed at curbing US banks' risk-taking activities. The plan calls for banks to assess their liquidity needs at least once a month. It stops short, however, of mandating minimum levels of liquid capital, with the Fed saying it will wait to hear the recommendations of the Basel Committee on Banking Supervision.

Analysts meantime expect US banks to post worse results for the fourth quarter of 2011 than they did in Q3, newswire Bloomberg reports.

Ben Traynor
BullionVault

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it

The bulk of investor and speculator interest will be fixed firmly on the Eurozone today as the ECB offers banks the first of its unlimited 3 year loans. The LTRO operation was described as a 'bazooka' by Christian Noyer, Head of the Banque de France and is intended to loosen the credit squeeze, but mostly the crux of the idea is that banks will buy sovereign debt with the funds.

Nobody is able to predict how much of the funding will be utilised to buy up sovereign debt and there is a strong possibility that banks will for the most part take the cheap money as replacement for maturing existing funding. With expectations building that the take up will be extraordinary the range in the consensus is a gaping one. Many analysts expect a take up of approximately €300 billion and some are predicting as high as €600 billion.

We have already seen yields in Spanish and Italian bonds decline and the markets will no doubt continue their rally from yesterday. However, the main stickler is that the 'solution' is assuming a liquidity problem, while the real issue of solvency and the lack of growth remains unaddressed once again.

With that in mind Italian Q3 GDP is expected to show that the economy contracted by 0.2% a slide of 0.5% from the previous 0.3% as austerity measures start to bite.

In the UK, the balance between cutting public spending and delivering capital investment to spur growth continues to be daunting. The Public sector Net Borrowing figure is expected to show a disconcerting deficit of £15.5bn for November. With Moody's ratings agency issuing a stark warning that the British government needed to "stay on track" with its deep public spending cuts or risk a downgrade there may be worrying times ahead.

The Bank of England MPC minutes are also due and given that rates were unanimously kept on hold at the last rate review. The minutes are expected to show that the Bank, while mindful of concerns about growth, are in no hurry to pre-commit to further asset purchases in the short term, a point made recently by Spencer Dale the Bank’s chief economist.

Given these concerns about the deteriorating economy, not helped by the Eurozone crisis, investors will be looking for clues as to the timing of further QE.  Evidence suggests we won’t see any commitment about that until early in the Q1 of next year.

Over in the U.S,. hot on the heels of better than expected new housing starts data yesterday existing home sales are to have expected to risen 2.6%, up from 1.4% on October.

EURUSD – we saw the single currency break out to the upside yesterday, however it was unable to get beyond the 1.3150 area and as such the risk remains for further losses. The January lows at 1.2870 remain the main barrier to a move towards the August 2010 lows at 1.2590. Yesterday’s rather bullish daily candle seems to suggest limited downside in the near term and as such we could well see some range trading unfold now between the recent lows at 1.2950 and the 1.3150 and even possibly 1.3220.

GBPUSD – the break beyond the 1.5580/90 area was followed by a move towards the 1.5700 level, a break above which would target the 55 day MA at 1.5740 as well as this month’s high at 1.5780. A fall below 1.5580 and could target the longer term support of 1.5420 which is uptrend support from the 2010 lows at 1.4230. A move below 1.5390/1.5400 retargets the 1.5270 lows in October, and then 1.5190 the 61.8% retracement of the 1.4230/1.6745 up move

EURGBP – the single currency continues to slide lower against the pound breaking below the recent lows at 0.8370 yesterday as it edges towards the 2011 lows at 0.8285 and ultimate target. The key resistance remains around the highs this week at 0.8425, and only a move beyond here would target a move back towards 0.8450 and even the 200 week MA at 0.8567.

USDJPY – the U.S. dollar continues to hold above the 77.20/30 level and 55 day MA area and this keeps the likelihood of a rally towards trend line resistance at 78.50 from the 2007 highs at 124.15, on a break above the 78.30 level, intact. The 200 day MA at 79.10 is the key long term resistance. Only below the 55 day MA would undermine this scenario, and risk a move lower that would see the next key support area around the 76.20/30 area, a break below of which opens up the lows at 75.30.

European markets have drifted higher today with the FTSE lagging behind European markets, after a better than expected Spanish auction saw bond yields drop sharply, while a better than expected German IFO survey saw investors become more positive about a German recovery as we come to the end of Q4.

The DAX, CAC40 and FTSEMib are all up over 2%, while the FTSE has lagged a long way behind, with a rise at the time of writing, below 1%. This may have more to do with the fact that the other European indices have a much smaller component make-up than the FTSE which benchmarks 100 stocks.

With trading volumes remaining fairly light in pre-Christmas trade it remains hard to imagine that this is anything but a slow news day rally.

The best performers are technology stocks with ARM Holdings (ARM LN) once again the subject of takeover speculation. Temporary power provider Aggreko (AGK LN) is also higher after its positive trading statement yesterday, and after Citigroup raised its earnings forecasts by 12%. Industrials are also performing well with Weir Group (WEIR LN), IMI (IMI LN) and GKN (GKN LN) near the top of the leader board.

The worst performers have been in the pharmaceutical sector slipping back after AstraZenenca (AZN LN) and some of its sector peers reported product issues and an evaporating pipeline.

Banks were initially under pressure, especially Royal Bank of Scotland (RBS LN) in the wake of the Vickers report, but given that it is trading quite close to multi month lows it soon pared those losses. Retailers are also trading positively after retail sales figures from the CBI showed a surprise jump in December, to a seven month high, with Kingfisher (KGF LN) leading the sector higher.

U.S. markets opened significantly higher helped by the altogether more positive tone out of Europe and a sharp rise in November housing starts, as they jumped 9.3% well above expectations of a rise of 1.1%.

Building permits also beat expectations, coming in at 5.7%, well above an expectation of a 1.4% decline. Stocks in focus include AT&T after deep-sixed its bid for T-Mobile USA, thus incurring a $3bn break fee. Financials have led the Dow higher with JP Morgan leading the way while Bank of America has recovered back above the $5 mark. Earnings due out later include Nike with expectations of Q2 EPS of around $0.97c a share, up from last years $0.94c. Oracle is also expected to see Q2 earnings rise from $0.51c a share last year to $0.57c a share, also after the bell.

The U.S. dollar has dropped across the board today with the New Zealand and Australian dollar gaining the most after this morning’s RBA minutes showed that the central bank was slightly less dovish on rates than the market had expected them to be. Rising crude oil prices have dragged the Norwegian krone and the Canadian dollar higher.

The Pound has outperformed after consumer confidence numbers showed an improvement in November and retail sales from the CBI showed a rebound to their highest levels since May on the back of pre-Christmas discounting

The Euro has lagged behind despite a better than expected Spanish T-bill auction saw yields more than halve from their previous figure on the six month auction, down from 5.227% to 2.435%, though that is less likely to do with the fact that they are suddenly less risk, and more to do with the fact that the ECB’s new liquidity measures giving buyers of bonds a “carry trade” get out. Italian bond yields have also slid back.

Crude oil prices have rebounded on the back of the firmer tone in equity markets, while concern about sanctions on Iran continues to underpin any downside.

Gold prices have also pushed back above the $1,600 level on the back of a weaker US dollar looking to test its long term 200 day MA at $1,623.

Silver prices have also rebounded strongly, outperforming gold prices.

Copper prices have regained all of yesterday’s losses pushing higher on the back of a firmer Australian dollar and a weaker U.S. dollar