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Well, what a year it has been. If you have been out of the markets for past 12 months then you may think nothing had happened when you look at EURUSD, which is set to closer the year a mere 3% lower than where it opened. Likewise, the S&P 500 is set to close the year relatively flat, which is an extremely rare occurrence indeed.

These asset classes betray nothing of the drama that went on this year: the emergency summits in Brussels, the US debt downgrade and the wobble in the China growth story (which was reinforced today when the HSBC manufacturing PMI for December remained below the crucial 50 level at 48.7). However, you don't need to look far to see where these fears have been manifested: European equities and banks in particular have been hammered along with emerging markets FX, Italian bonds have been avoided like the plague - 10-year yields are 50% higher this year, gold is no longer a safe haven while there has been a massive outperformance of triple A government debt.

As we end the year, the gold price is close to bear market territory - if it falls below $1,535 then it will be 20% lower than its early September peak. Although gold is up about 11% this year in total, its decline since the autumn has sped up. Indeed until it gets back above $1,630 - its 200-day sma, I don't like the yellow metal at all. In fact, until the Eurozone deflationary threat has dissipated then gold is unlikely to do well. Central banks may be trying to reflate the economy with printed money - the UK and US are open about doing this, the ECB less so, but then look at the size of its balance sheet, which ends the year a whopping EUR 2.73bn, larger than the Federal Reserve's - however, the banks need cash and so aren't lending all of this liquidity. So the result is no inflation and no higher gold price, as we enter 2012 the transmission mechanism between the banks and the economy still remains deeply dysfunctional.

The euro had a fascinating end to the year. After dipping below key support yesterday at 1.2867, it is climbing steadily higher this afternoon and has reached as high as 1.2986. Could it break above 1.30 before the celebrations begin....we shall have to wait and. It's hard to know who will be active in the markets today, so I get the sense 1.30 will be a tough resistance level to break, above here 1.3035 could scupper the bulls. We remain a sell on rallies as we tend to think the Eurozone crisis will actually get worse before it gets better next year.

Spain announced that its budget deficit for 2011 will reach 8% of GDP, which is twice that of Italy's, yet Italian bond yields are getting pummelled more than Spain's... it's a strange world we live in. The new PM said IN Madrid today that next year's budget deficit should be 4.4% (yeah, right) and he also announced new austerity. This is the main concern for Europe next year - too much austerity that chokes growth and causes debt to rise not fall. This is why we need less of the status quo and way more radical thinking, closer fiscal unity and potentially a Eurobond by end of 2012 to ensure the survival of the currency bloc as we know it.

EURJPY is coming under much more pressure than EURUSD today and has proven that it is the real Eurozone break-up fear trade. It broke a fresh euro-era low today at 99.96 - and is currently hovering just above 100.00. This is being mirrored in USDJPY, which is testing its lows of the day at 77.14. In the current environment with the Eurozone debt crisis so fresh on the market's mind it is no wonder that the stability of the yen is proving a major attraction for investors and we expect it to continue to do so into next year.

Elsewhere, the S&P is floundering at 1,260 resistance - the 200-day sma. It didn't manage to break above here early in December and so a double-top bearish signal may be appearing.

Strange things are going on in Hungary today: the government passed a law to make the central bank less independent, although the ECB and IMF both complained. It looks like Hungary will need further financial support next year, so annoying its creditors right now may not have been the government's best move. Also, Turkey intervened again to prop up the Lira and USDTRY collapsed 3%, however it has since given back more than half of its losses as investors test the CBOT's resolve to stay the course to keep the Lira propped up.

Here's to 2011, 2012 is sure to be a tough year, but in harsh times creativity tends to explode - bring it on I say! From all at's research team a very Happy and Healthy New Year.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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