07-Dec (Barron’s) — Standard & Poor’s, which just can’t seem to satisfy its urge to downgrade things these days, warned Wednesday of possible downgrades to its ratings on some of the largest rated banking groups in the eurozone, adding that similar rating actions on other large banks in the eurozone will follow soon, and warned that it might downgrade its ratings on the European Union itself.

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PG View: This really ramps up the pressure on the EU to do something real and meaningful at the summit that begins tomorrow. And vague expectations that a new treaty will be agreed to by oh, say March…probably ain’t going to provide the reassurance that markets are looking for.

07-Dec (The Wall Street Jounal) — A day ahead of a crucial gathering of European Union leaders in Brussels, French President Nicolas Sarkozy and German Chancellor Angela Merkel outlined their detailed plan for solving the euro crisis through deeper fiscal integration.

In an open letter to European Council President Herman Van Rompuy, Mr. Sarkozy and Ms. Merkel issued an ultimatum to the 27 EU governments, saying they must decide whether they will accept greater central control over their national budgets.

Should some countries decide not to participate, the 17 countries in the euro zone will press ahead with a more integrated union by signing a new agreement outside EU treaties, they said.

“We are convinced that we need to act without delay,” the two leaders said in the letter. “We need to make a decision at our next European Council meeting in order to have the new treaty provisions ready by March 2012.”

…[senior official in the German government]: “I am more pessimistic than I was last week on the chances of total agreement,” the official said on condition of anonymity.

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06-Dec (Washington Post) — Senior U.S. officials are playing a behind-the-scenes role in efforts to contain the European debt crisis, cajoling the region’s leaders to take more steps to calm markets and trying to mediate among European governments with competing interests.

U.S. officials have served at times as a quiet intermediary between European political leaders and the powerful European Central Bank, which tries to stay out of the political fray. In particular, according to U.S. officials, Americans have passed along information about how much money European governments might be willing to contribute to a rescue fund, a crucial question for the central bank as it considers its actions.

Since the European crisis began last year, Treasury Secretary Timothy F. Geithner has urged reluctant countries to create a large rescue fund, U.S. officials said.

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07-Dec(Reuters) — Banks took more than $50 billion from the European Central Bank on Wednesday in its first offering since slashing the cost of borrowing dollars, a sign that some euro zone banks have problems finding dollar funding as the region’s debt crisis intensifies.

Top central banks last week acted to ensure banks outside the United States have easier access to dollars, which banks in Europe have more difficulty obtaining in the market as investor concerns about their exposure to the debt crisis have grown.

…The demand was well above the $10 billion median forecast in a Reuters poll of money market traders.

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PG View: The stress indicated by much greater than expected dollar demand and German rejection of a plan to combine the EFSF and the ESM have spurred renewed widening in eurozone yield spreads.

07-Dec (MarketWatch) — The German government opposes combining the euro-zone’s interim bailout fund, the 440 billion euro ($593.1 billion) European Financial Stability Facility, and the permanent 500 billion euro European Stability Mechanism, news reports said Wednesday. An unnamed German official told reporters in Berlin that it has already been decided that the ESM will take over from the EFSF at an appointed time, Bloomberg reported.

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07-Dec (Bloomberg) — The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.

Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

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06-Dec (World Gold Council) — 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, we 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 findings suggests that an optimal strategic allocation to gold for euro-based investors ranges from 2-3% for the most diversified and lowest risk portfolios, to between 4-9% for portfolios split 50/50 between equities and bonds and as high as 10%, for portfolios with the majority of assets in equities.

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05-Dec (Bloomberg) — Japanese Finance Minister Jun Azumi will be rewarding investors who buy more than 10 million yen ($129,000) in reconstruction bonds with gold in the government’s latest attempt to bolster demand for the debt.

Individual investors who hold the bonds for three years will be eligible for a gold commemorative coin valued at 10,000 yen, the Finance Ministry said in Tokyo today. At 15.6 grams, (0.55 ounces), it would be worth about $948 based on prices for the precious metal. Only a limited number of coins will be issued, the Finance Ministry said in a statement.

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PG View: Current yield on 3-year JGB is 0.17%… Why not just eschew that crummy yield (mispriced risk) and the 3-year lock-up and buy the golden enticement instead?

06-Dec (Der Spiegel) — Many Greeks are draining their savings accounts because they are out of work, face rising taxes or are afraid the country will be forced to leave the euro zone. By withdrawing money, they are forcing banks to scale back their lending — and are inadvertently making the recession even worse.

Georgios Provopoulos, the governor of the central bank of Greece, is a man of statistics, and they speak a clear language. “In September and October, savings and time deposits fell by a further 13 to 14 billion euros. In the first 10 days of November the decline continued on a large scale,” he recently told the economic affairs committee of the Greek parliament.

With disarming honesty, the central banker explained to the lawmakers why the Greek economy isn’t managing to recover from a recession that has gone on for three years now: “Our banking system lacks the scope to finance growth.”

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03-Dec (BullMarketThinking) — I had the great pleasure this week to speak with Mark Cutifani, CEO of $16B AngloGold Ashanti, and it was an incredibly fun interview to say the least. Mark has been in the commodities business for decades, and was COO at CVRD Inco., before it became “Vale”, now valued at $119B. Given Mark’s global commodities background & network depth, his insights into the commodities & precious metals markets are razor sharp, and quite telling of the global picture.

What I thought was the most fascinating of Mark’s comments during the interview, was his observations of major gold buyers emerging from the Middle East & Asia. “People are coming directly to us,” for large gold purchases he said. “People who want tonnes of physical gold, people with serious financial muscle…because they’re finding it’s very difficult to secure the volume of gold they want…That’s something we’ve noticed over the last 18 months, and it’s been increasing in the last 6 months. I think people are finding its hard to get physical gold.”

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02-Dec (Bloomberg) — Commodities may rally as central banks boost money supply further and cut interest rates to combat slowing economic growth, according to Renaissance Asset Managers, a unit of Moscow-based Renaissance Group.

“Money will continue to be plentiful and free, and that will continue to underwrite a commodity cycle,” said Chief Investment Officer Plamen Monovski, who oversees about $2.2 billion and formerly co-managed as much as $9 billion at BlackRock Inc. (BLK), the world’s biggest asset manager.

Central banks are undertaking the broadest reduction in borrowing costs since 2009 to avert a global slump stemming from Europe’s sovereign-debt turmoil. The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. While commodities have rallied this year, global equities have dropped.

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06-Dec (HousingWire) — House prices dipped 1.3% on a month-over-month basis, according to the CoreLogic (CLGX: 13.81 +0.51%) October home price index, the third consecutive monthly decline.

Prices declined 3.9% compared to year-ago figures that include distressed sales. Excluding distressed sales, year-over-year prices declined 0.5% in October. Distressed sales include short sales and real estate owned transactions.

“Home prices continue to decline in response to the weak demand for housing,” said Mark Fleming, chief economist for CoreLogic. “Looking forward, our forecasts indicate flat growth through 2013″

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01-Dec (Forbes) — The massive risk-asset rally generated by a global central bank liquidity-bailout on Wednesday pushed gold back onto center stage. The yellow metal just hit a two-week high after having suffered a massive correction from its early-September peak and will average $2,025 an ounce in 2012, according to HSBC’s head of precious metals research, Jim Steel.

…“Gold rallies when markets question where the government is going with its currency” explained Brooks. “As the value of the dollar is reduced, by headline inflation, nominal depreciation, or whatever, purchasing power falls, pushing investors to look for alternative hard assets,” said the economist.

…The bullish case for gold is a reflection of the global economic environment. Low real interest rates push investors out of safer Treasuries, forcing them on the hunt for return (year-to-date, gold is up 22.4%).

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PG View: This makes a nice companion piece to our recent special report entitled Saving Gold.

S&P Ups the Ante of EU Summit

06-Dec (USAGOLD) — Gold remains defensive, back below the midpoint of the broad 1920.50/1534.06 range. The yellow metal initially came under pressure yesterday on the seeming progress toward the next grand bargain to save Europe. German Chancellor Merkel and French President Sarkozy announced on Monday that they had completed a bilateral agreement premised on a new treaty. Now if they can just get the rest of Europe to agree to being hamstrung…

Ah, but any sort of progress on Europe — whether real or imagined — is cause for celebration these days and gold dutifully retreated on the perception that the need for a true safe-haven was on the wane. However, late on Monday S&P rained on the parade by announcing they had put 15 European nations on negative watch for downgrades. And that included France and Germany; citing “continuing disagreements” among policymakers. This is reminiscent of the reasoning behind S&P’s downgrade of the US this past summer, amid what they described as a weakening of the “effectiveness, stability, and predictability of American policymaking.”

When you consider the erosion in the effectiveness, stability and predictability of policymaking world-wide, it becomes rather obvious why everyone is looking at the central banks to do something. The “something” at the disposal of (most) central banks is their ability to create fiat money out of thin air and then use it to intervene in asset markets — most notably the bond markets.

S&P dealt Europe a follow-on blow by putting the EFSF bailout fund on negative watch for a downgrade. Of course it’s logical that if the sovereigns that underwrite the bailout fund are downgraded, the fund itself would have to be downgraded. All of this sort of re-spooked the market. The euro retraced Monday’s gains and the corresponding rebound in the dollar kept the yellow metal under pressure. However, by the same token, the downside in gold is thought to be limited by persistent systemic concerns and fresh worries that the EU summit at the end of the week wont provide the true solution to Europe’s woes that the markets are demanding.

In heaping on the negative watches and downgrade warnings, S&P has certainly amplified the significance of the EU summit. Now we’ll just have to see if eurozone policymakers can overcome their differences and put the EU on a sustainable path. If — like all the previous meetings and summits — we get more jawboning and half-measures, my guess is that the markets won’t be very forgiving this time around.

• Bank of Canada leaves policy rate unchanged at 1%, in-line with expectations; neutral policy stance maintained.
• Canada building permits +11.9% in Oct, well above market expectations of +1.3%, vs -4.1% in Sep.
• UK BRC Retail Sales slow to 0.7% y/y in Nov, vs 1.5% in Oct; same store weaker than expected at -1.6% y/y.
• UK Halifax House Prices (sa) weaker than expected at -0.9% m/m in Nov, vs 1.2% in Oct.
• Switzerland CPI -0.2% m/m in Nov, below market expectations, vs -0.1% in Oct; -0.5% y/y.
• Eurozone Q3 GDP – 2nd Release (sa) confirmed at 0.2% q/q; 1.4% y/y.
• Germany manufacturing orders (preliminary) +5.2% m/m in Oct, well above market expectations of +0.7%, vs negatively revised -4.6% in Sep; 5.4% y/y.
• RBA cuts official cash rate 25 bp to 4.25%, in-line with expectations.

06-Dec (Reuters) — Standard & Poor’s said on Tuesday it is considering downgrading the European Financial Stability Facility, the euro zone’s bailout fund that is financed by member governments, after saying it could downgrade the majority of euro zone nations on Monday.

The EFSF could be downgraded by one or two notches, and the lower rating would depend on whether the six triple-A rated nations in the euro zone are cut.

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05-Dec (Washington Post) — To get a sense of how vulnerable the U.S. economy could be if the euro currency union cracks apart, start with the volume of U.S. exports to the euro zone — $153 billion in the first six months of the year. Add several hundred billion dollars in investments by U.S. banks in the euro zone and several trillion dollars’ worth of other financial contracts between the two economies.

As European leaders meet later this week to try to resolve their spreading debt crisis and prevent the breakup of the 17-nation euro zone, U.S. politicians, corporate leaders and financial analysts are watching anxiously for a breakthrough.

The alternative could be staggering for the U.S. economy. American banks and other companies could find themselves battling with any country that leaves the euro union and reinstates its own currency.

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05-Dec (Standard & Poor’s) — Standard & Poor’s Ratings Services today placed its long-term sovereign ratings on 15 members of the European Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative
implications.

We have also maintained the CreditWatch negative status of our long-term rating on Cyprus and placed its short-term ratings on CreditWatch with negative implications. The ratings on Greece have not been placed on
CreditWatch. The ratings on the eurozone sovereigns are listed below.

Today’s CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.

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05-Dec (Financial Times) — Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc.

The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days.

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By Mohamed El-Erian
05-Dec (Reuters) — With the European crisis continuing to dominate the news, many people now realize that today’s global economy faces an unusually uncertain outlook. Indeed, Europe’s turmoil is but one of the multiple global re-alignments in play today. What may be less well recognized is the extent to which specific sectors are already changing in a consequential and permanent manner.

This is particularly true for global finance where volatility has increased, liquidity is evaporating, and the role of government is pronounced but inconsistent. This is a sector where the functioning of markets is changing, along with the outlook for institutions. The implications are relevant for both economic growth and jobs.

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05-Dec (Chicago Fed) — Four years ago the U.S. economy entered what developed into the deepest recession since the Great Depression. Two and a half years ago the recovery began. Yet, despite both accommodative monetary policy and fiscal stimulus, the pace of improvement has been agonizingly slow.

…To use an automotive analogy, employment and growth are stuck in neutral.

…The Fed is charged by Congress in the Federal Reserve Act to encourage conditions that foster both maximum employment and price stability. This is what you hear us refer to as the Fed’s “dual mandate.” Given the high unemployment rate and low job growth, I think it is clear that the Fed has fallen short in achieving its goal of maximum employment. I will return to this point shortly. As for the price stability component of our dual mandate, the majority of FOMC participants — including me — judge our objective for overall inflation to average 2 percent over the medium term. With my own view that inflation is likely to run below this rate over the next few years, I believe we run the risk of missing on our inflation objective as well.

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PG View: Chicago Fed’s Evans advocates for further monetary stimulus and above-”target” inflation.

Optimism Initially in Critical Week for Europe

05-Dec (USAGOLD) — Gold has retreated back into the range and the euro firmed on a goodly dose of “hopium,” early in what is widely perceived as a make-or-break week for Europe. Last week, the EU’s Olli Rehn said, “We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.” The 10-days to come up with a credible plan to save Europe — or at a minimum another kick of the can — concludes with the EU summit on Thursday and Friday.

French President Sarkozy and German Chancellor Merkel got a jump on setting the agenda for the summit, completing a bilateral agreement today that calls for a new treaty that would enshrine fiscal discipline and automatic sanctions. The truth is, the current treaty does require fiscal discipline with debt limited to 60% of GDP. The problem stems from the fact that the provisions within the current treaty were simply ignored for years…including by the French and Germans.

The market also derived some optimism from the announcement by Italy’s new PM Monti that €30bn worth of new austerity measures had been agreed to. The plan is highlighted by a VAT hike and an increase in the pension age. New austerity in Italy in conjunction with the Franco-German move toward a tighter fiscal union may be setting the stage for massive increase in ECB bond buying. European style quantitative easing with the figure reported to be around €1 trillion. Italian yields fell markedly today on these expectations.

The ECB is meeting this week and will announce policy on Thursday. While it would be premature to make any statement on asset purchases before the conclusion of the EU summit, the central bank had been widely expected to cut the refi rate by another 25 bps. However, if the ECB is indeed on the cusp of new quantitative measures, they may opt so save that rate cut bullet for another time.

There has been broad acknowledgement recently that there are no silver bullets for Europe as policymakers walk the fine line of providing some hope, while simultaneously not committing to anything they may regret later. Something that might cost them at the polls down the road. Ahhh, but there’s no way to avoid the pain, as the likes of Greece and perhaps now Italy can attest. Merkel and Sarkozy must realize that they are the ones most likely to foot the bill and therefore probably have the most to lose from the likely political backlash.

Of course, the only solutions that are really being posed involve more debt, moving around the existing debt and expansion of the monetary base. This is all understandably quite tempting because the US successfully forestalled economic calamity by implementation of such measures. All that’s been going on in Europe for the past couple years is the search for a way to do the same thing within the confines of the current treaties. A new treaty may solve that problem, but it ushers in a whole host of new issues that will have to be dealt with down the road. Perhaps Sarkozy’s proposal of monthly EU summits is his acknowledgement of that reality.

• US ISM services index fell to 52.0 in Nov, below market expectations of a rise to 53.5, vs 52.9 Oct.
• US factory goods orders -0.4% in Oct, below market expectations of -0.3%, vs -0.1% Sep.
• Eurozone Reuters Composite PMI (final) 47.0 in Nov, below 47.2 preliminary read. Services also lower at 47.5.
• German Reuters Services PMI (final) 50.3 in Nov, down from 51.4 preliminary read. France and Italy better than expected.
• Eurozone retail sales +0.4% in Oct, better than market expectations of +0.1%, vs positive revised -0.6% in Sep; -0.4% y/y, up from -1.4% y/y in Sep.
• Taiwan CPI eases to 1.0% in Nov, vs 1.3% in Oct.
• Singapore PMI falls to 48.7 in Nov, vs 49.5 in Oct.
• Australia TD-MI inflation gauge -0.1% in Nov.

05-Dec (Reuters) — The leaders of Germany and France met on Monday under intense pressure to agree a plan for imposing budget discipline across the euro zone, as markets rallied in the hope they can produce a sweeping solution to the debt crisis at last.

Markets want French President Nicolas Sarkozy and German Chancellor Angela Merkel to forge a comprehensive proposal in Paris for restoring faith in euro zone nations’ ability to repay their debts, before a European Union summit later this week.

But despite their single nickname of “Merkozy,” the Franco-German duo has yet to produce a single master plan for halting a slide which is threatening the currency union’s survival.

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05-Dec (Financial Times) — Risk assets are consolidating their recent stellar rally, though gains are tentative as traders remain wary of being disappointed this week by eurozone leaders’ response to the region’s debt crisis.

New-found optimism is also being held in check by some soft macroeconomic data, after Germany’s private sector in November registered its first contraction in more than two years and China’s service sector expanded at its slowest in three months.

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