European Stocks and Euro Extend Gains After Central Banks Cut Swap Rates - Here is the opening for today's important news story, reported by Bloomberg:

The euro gained versus the dollar and the yen after the Federal Reserve and five other central banks agreed to lower the cost of emergency dollar funding for European banks in response to the region's debt crisis.

"It caught the market by surprise," said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world's largest custodial bank. "It is a further measure being taken to help the liquidity problem that is due to continued crisis in Europe."

The dollar dropped against all of its 16 most-traded counterparts as investors sought higher-yielding assets after the move was announced. The 17-nation currency weakened earlier after euro-area finance ministers conceded efforts to expand their bailout fund missed the target and said they would seek a greater role for the International Monetary Fund.

The euro climbed 1.3 percent to $1.3488 at 8:57 a.m. in New York after touching $1.3501 earlier, the strongest level in a week. The yen dropped 0.7 percent to 104.44 per euro and rose 0.7 percent to 77.42 per dollar.

The central banks agreed to reduce the interest rate on dollar liquidity swap lines and extend their authorization through Feb. 1, 2013. The rate was cut to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement in Washington. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank are involved in the coordinated action, the Fed said.

'To Ease Strains'

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the statement said.

The cost for European banks to fund in dollars fell for the first time in six days, dropping from the most expensive level since the depth of the financial crisis. The three-month cross- currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 1.36 percentage points below the euro interbank offer rate. It touched 1.63 percentage points earlier, the most expensive on an intraday basis since October 2008.

The dollar and yen slid earlier as China cut the amount of cash that banks must set aside as reserves to spur growth, damping demand for safer assets. The People's Bank of China said reserve ratios will decline by 50 basis points effective Dec. 5, the first reduction since 2008.

My view - This unexpected announcement is important for a number of reasons:

1. For once, the markets get a positive surprise. No doubt some pundits will dismiss it as irrelevant or inflationary, which is to miss the point. The action is highly relevant psychologically, given all the global angst expressed recently. This decision by the central banks is certainly not deflationary; it might be inflationary, and most investors regard the prospect of some inflation as preferable to the protracted deflationary slump feared by many.

2. Today's announcement is also extremely important psychologically because it shows that central banks are cooperating. Until this announcement they were perceived as pursuing their own agendas, particularly the ECB, against the background of a growing crisis.

3. The move is also another form of monetary easing. Prior to today's announcement by the CBs there was a growing concern that bank lending would dry up as we last saw following the collapse of Lehman Brothers. CBs have signalled that they are aware of the risk, and taking appropriate action. Monetary easing remains a powerful tailwind for stock markets.

Following today's action, which are the winners and losers among markets?

Winners: Equities and commodities, as short covering occurs and some long-only buyers return.

Losers: Low yielding, long-dated government bonds and the USD, as 'safe haven' buying dissipates.

Email of the day (1) - On the Fed's bailouts in 2008:

"Secondary reading perhaps for FM readers. Christmas turkey equity rally underway.

"Economy here no complaints the West (Alberta/Saskatchewan) full steam ahead!

"Stay well both of you."

My comment - Thanks for a fascinating article, certain to be of interest to subscribers. It is posted in the Subscriber's Area along with my further comments.

"Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress"

Under the circumstances, I think the Fed's bailout decision was the 'lesser of evils' in terms of choices. However, while temporary secrecy may have been justifiable at the time, I think it was wrong to resist the eventual disclosure of this information. Well done Bloomberg and also the US Supreme Court. People need to know the full story, not least because measures need to be put in place to reduce the risk of a similar or even bigger crisis in future.

Email of the day (2) - More on the Fed's bailouts in 2008:

"Fascinating chart. Comments are even better."

My comment - Many thanks - the graphic helps us to appreciate the enormity of the decision and I agree that the analysis is good.


Email of the day (3) - On India:

"The opening of retail should improve sentiment. The appetite for cars is still strong and I see a lot of new ones on the road from recent entrants like bmw volkswagon fiat nissan. There appears to be enough liquidity to finance all this and car sales are a good indicator of economic activity.

"That is what i see on the ground."

My comment - Thanks for the insights.

In an economic slowdown, I do think that the RBI needs to reverse some of its economic tightening now, rather than wait for clear evidence of success in its battle against inflation, by which time the economy would also be weaker. I mentioned this during some interviews conducted by Thompson Reuters for several Asian TV Channels yesterday.

My personal portfolio: Gold futures stops raised; platinum and silver futures longs opened - Gold's (weekly & daily) upside follow through today enabled me to place slightly in-the-money stops on my positions which were increased on Monday. More importantly, market action provides further evidence that gold is nearing the end of its consolidation following the August acceleration and subsequent reaction. If correct, renewed demand for gold should also lead to a firmer tone for other precious metals which have lagged recently.

Having raised my gold stops, I reopened longs in platinum (weekly & daily) and silver (weekly & daily), paying $1559.9 and $32.505, for January and March contracts, respectively. These prices include spread-bet dealing costs.

The Weekly View: Germany Steering Europe Towards Fiscal Union - My thanks to Rod Smyth, Bill Ryder and Ken Liu for their astute letter, published by RiverFront Investment Group. Here is a brief sample from the opening:

The outlines of yet another Eurozone fiscal policy were disclosed to the media over the weekend. We think it is clear that Germany is using the current crisis environment to force budget deficit targets on Eurozone members. Unlike the 3% GDP targets agreed to at the founding of the Eurozone, these new targets are expected to be enforceable (somehow) by a centralized European authority.

My view - Now the ECB needs to step up, as I have been mentioning recently, including in this comment last Friday:

The ECB will either be remembered for its splendid Austrian orthodoxy in upholding a narrow mandate while presiding over the demise of the currency union for which it was created, or for doing what central banks are supposed to do in being the lender of last resort.

I also maintain that European markets are undervalued, although investors need to see a realistic prospect of stability following the current crisis, for more than a short covering rally to occur.


Mike Lenhoff: Equity markets are oversold and starved of good news flow - My thanks to the author for his latest interesting letter, published by Brewin Dolphin.

My comment - In addition to the analysis, don't miss the two graphics.

Additional commentary by Eoin Treacy

China Cuts Reserve-Requirement Ratio - This article by Yajun Zhang, Tom Orlik and Lingling Wei for the Wall Street Journal may be of interest to subscribers. Here is a section:

The move suggests the government's policy focus is shifting toward promoting economic growth from controlling inflation, said HSBC China economist Ma Xiaoping. China so far has been focused on fighting inflation, tightening constraints on the economy while still continuing to seek steady growth, a scenario economists call a soft landing.

But Beijing's ability to pull off a soft landing has been in doubt amid Europe's continued debt crisis and soft global economic growth. In early November, an initial reading for purchasing managers surveyed by HSBC showed output in the all-important manufacturing sector shrinking month-to-month. Exports have also slowed.

My view - When I returned from a trip to China's manufacturing heartland in October I reported on how local businesses were feeling squeezed by restricted access to credit, the stronger Yuan, weak export markets and higher labour and commodity costs. The prevailing opinion was that the government was not about to allow the manufacturing sector to disappear and they anticipated monetary and fiscal easing in the not too distant future. (Also see Comment of the Day on October 26th).

There is a strong likelihood that today's announcement represents a change to government monetary policy. Hiking bank reserve requirements have been among the primary tools of monetary tightening as the government attempted to squeeze excess liquidity out of the system, control profligate lending and prevent a bubble in the property market from inflating further. A change to this tightening bias can be viewed as positive for the stock market.

This announcement was made after the market shut in Shanghai following a weak close. The A-Share Index continues to hold above the October lows but will need to sustain a move above 2650 to break the progression of lower rally highs and suggest a return to medium-term demand dominance. The FTSE Xinhua A600 Banks Index has been ranging mostly above 8000 since August and a sustained move above 8700 would be required to indicate a return to medium-term demand dominance.

Glaxo Scientists 'Live or Die' With Project in Research Overhaul - This article by Albertina Torsoli for Bloomberg may be of interest to subscribers. Here is a section:

Glaxo is conducting one of the industry's boldest experiments, changing the way it looks for new medicines to emulate biotech companies and spur innovation. The U.K.'s largest drugmaker has broken up research into competitive teams and put scientists back at the center of the process. But freedom carries a price: researchers who don't adapt must go.

Talent was "buried in the ocean" under the old system, says Moncef Slaoui, Glaxo's head of research and development and one of the architects of the overhaul. Scientists now "live or die with their project."

This month, London-based Glaxo completed the first appraisal of its new model. The company is now deciding which teams deserve more funding and which ones don't. The conclusions will probably be made public in February when Glaxo reports full-year earnings, according to Janet Morgan, a spokeswoman.

The transformation, three years in the making, is Glaxo's response to the biggest challenge facing pharmaceutical companies: a lack of innovation, which has curbed growth and forced mergers such as Pfizer Inc.'s $68 billion purchase of rival Wyeth in 2009.

My view - GlaxoSmithKline has a relatively similar pattern to other well established pharmaceutical companies with solid cashflows and reliable dividends. The share yields 4.85% and has exhibited a saucering characteristic over the last 5 years. A sustained move below the August low near 1160p would be required to question medium-term scope for additional higher to lateral ranging.

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Email of the day (1) - on Irish government bond yields and saving chart settings:

"You added an 'inverse' option about a year ago to allow an investor to flip a chart on its head. It would be nice, if once done, one could save the chart to Favourites. This does not seem to be possible.

"Also, your Irish 10 yr bond graph stopped updating mid October.....

Thank you."

My comment - Thank you for raising these issues which are likely to be of interest to subscribers. As mentioned previously, the Irish government has not issued new 10-year debt for at least a year. Therefore 10-year maturities are now 9-year maturities. The Irish 9-year bond yield chart can be found in the Chart Library.

To create an inverse chart, select the instrument you are interested in from the menus or using the search. I will use L'Oreal for the purposes of this example.

Once you have the chart, click on Charting, located in the charcoal bar above the chart area. Tick the Inverse (1/data) box and hit Apply.

To save your settings to your custom defined list, located in the Chart dropdown menu in the toolbar at the top of the Chart Library page, click on Charting again. Next click on Save located in the aquamarine bar at the top of the popup window. Give your template a name and hit OK. Then click on Apply. Refresh the page. Your new template will now have been added to the Chart dropdown and can be applied to any instrument you wish.

Email of the day (2) - on View All Charts in the International Equity Library:

"In the favorites section there is an option for "view all". This makes it easy to view a whole series of charts. In the "international equity" section there are lists of very useful charts such as all the charts of the Dow Industrials or the Hang Seng. I am however not able to find the "view all" button. Viewing a whole predefined list is easier than clicking through charts one at a time. Can you please tell me if there is a view all button?"

My comment - Thank you for this question which others may also find of interest. At present the View All Charts option is available in all our menus except the International Equity Library. This is because the equity library resides on a separate database which we share with Investors Intelligence and Stockcube Research. Our IT people tell us that creating a "View All Charts" option for this database is a non-trivial enhancement. However, I have added your request to our list of future developments.

Email of the day (3) - on a yearly period option for charts:

"Is it possible to add a "Yearly" option to the "Sample" drop down menu under the "Chart Settings" dialogue box? Thanks."

My comment - Thank you for this suggestion. At present the longest period available in the Chart Library is quarterly. The Chart Library's maximum data span is just over 50 years. At some point we would like to extend this and will include a yearly period option when we do.

The Chart Seminar 2012 - 2011 has been a very successful year for The Chart Seminar with a sell-out tour to Singapore and Australia, as well as our ever popular London events. I am greatly looking forward to a number of venues in 2012.

We are currently taking bookings for our San Francisco and New York dates in April as well as London seminars in May and November. Anyone interested in securing a place at any of our events should contact Sarah Barnes at sbarnes@fullermoney.com.

The date and venues for my seminars so far in 2012 are:

San Francisco - April 16th &17th 2012 Nikko Hotel

New York - April 23rd & 24th 2012 at The Manhattan Club at 800 7th Avenue

London - May 25th & 25th 2012 at the Radisson Edwardian Hampshire

London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire

The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

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