Today is another difficult day for bulls, but for reasons that are not entirely justified by news flow. At least the Irish were bailed out, and the commitment of the E.U. to maintain its credibility against economic adversities was reaffirmed. But markets are nervous, and not without reason, with Moody's reported to be planning to cut Ireland's rating by several notches while keeping it in investment grade category nonetheless. The bond market has barely budged, with Portugal coming under pressure during the day.

For us, the Irish episode is the first stage of a long story that will stretch over years in a string of events akin to the late 60s and 70s, where speculators emboldened by their analysis of an untenable economic situation chased governments and economies from one corner to another, filling their pockets with only limited risk. The thoughts that the recent Irish crisis will be repeated in the case of Greece Portugal, Spain, and perhaps even Italy is a reflection of this understanding. In particular, we observe the area of interest widening for Eurozone bears, as the spread between 10yr yields of Italy and Spain continue to widen in spite of the bailout, signifying, as Divyang Shah of IFR explains, a desire to move Spain right into the middle of the "culling zone" from the peripheral core where it was thought to be until recently .

Stocks are quite weak today, with activity somewhat dampened by some Monday lethargy, on top of the ongoing worries that the Chinese may kill the commodity boom (which we don't think they will), and the previously mentioned concerns about the periphery. The latter were further intensified by some run-of-the-mill German comments, this time from the mouth of Herr Weber, who repeated the necessity of introducing a credible rescue mechanism for future crises entailing private participation as well as government action. The tone of CDS market sentiment seems to indicate large losses for current holders of subordinate debt of troubled Irish banks, with some speculating that the Germans may choose to test market reaction by imposing heavy haircuts on this segment during the course of the bailout. Against this background, once again we see the Euro perform badly in synch with oil, while gold manages to appreciate by about half a percent against the dollar, in testimony to the strength of the uptrend.

China and Japan prepare for further confrontation over island and natural resources

During the weekend the Japanese were reported to be moving some naval forces towards the sea region surrounding the Diaoyu/Senkaku islands, indicating further turmoil in East Asia. The Japanese, under the rule of their spineless government, are probably the least problematic of all the adversaries that the PRC would need to confront in the region, demonstrated (as if evidence were lacking) by the resignation of the Justice Minister during the weekend over some comments on the government's relation with the public and the press. The Japanese public is reported to be unusually angry over the coverups surrounding the Chinese fishermen incident close to the Senkaku/Diaoyu island in question, and the impression we get is that the Justice Minister has been made a scapegoat in order to mitigate the public's furore over the androgynous policy that the DPJ administration has adopted during its term towards China.

Very few would expect a serious conflict to erupt between the two major powers, because the Chinese are too wise to go too far with their threats and bullying, and the Japanese simply lack any kind of conviction, power or prestige to force a change of course in their conduct of bilateral relations. The U.S. is probably happier on every occasion that China becomes involved in a controversy with its neighbors, as such events create opportunities for further encroachment into the region's domestic affairs, solidifying American diplomatic power and alliances. By contrast, if the Chinese were to adopt a peaceful, moderate, and restrained course in bilateral relations, in about 20-30 years they would become the dominant power without having to go through significant tests of their leadership position, since it is clear that there doesn't exist a single nation capable of challenging Chinese supremacy in the area one on one. By bullying its way through issues and crises, however, the Chinese government is forcing its partners and competitors into the arms of the Americans, and for us it is impossibly to imagine a case where this leads to an advantageous outcome for the emergence of China on the world stage.

Among today's comments and economic developments, we note statements by Li Daokui, a vocal advisor to the PBOC, urging steady appreciation of the Renminbi in order to contain supply-side inflationary pressures created by rising commodity prices. Also, as we reported here last week, today rouble has become another of a number of currencies now being traded against the yuan in the domestic Chinese interbank market, as part of the government's long-term plan to rid itself from dependency on the USD's reserve status. After allowing the Euro, HKD, JPY, GBP, and the ringgit to trade in the FX market at home, and signing bilateral trade settlement agreements with nations inlucing Turkey and Brazil, China has now moved to include its northern neighbor in the network, although the move seems to be driven by political concerns more than economic plans in this case. Traders and people with knowledge of the situation state that the volume of trade in many of these markets remains minuscule or even non-existent, as companies prefer the USD on risk assessment concerns. Reflecting this lightweight status of the rouble in China's international trade, the currency will be allowed to move as much as 5% per day, while the USDCNY is limited to a meager 0.5% in daily trading band.

Still, the move confirms that this is a long-term project for the Chinese, and may eventually bring success if only by diminishing the dollar-accumulation rate of the SAFE over time. Wen JiaBao, of course, is in Russia today, on visit that will last until Wednesday.

The PBOC fixed the central parity rate vs. the USD at 6.6389 vs. 6.6408 on Friday. In order to combat the local unit's rise, Taiwan has further relaxed limits on domestic companies' recycling of earnings into the mainland, while BoK Governor Kim Choong-soo was quoted on the need for further action in order to contain the won's gains.

Ireland takes a large loan, but Greens quit government, and markets remain unfazed

After the Eur110 billion announced in May for Greece, Ireland is officially the second nation to be bailed out by an arrangement of sovereign creditors including Sweden and U.K. in addition to the IMF. The size of the bailout is around Eur80billion, details are sketchy, with the PM Brian Cowen stating earlier in the day that negotiations may take weeks to be concluded.

Later in the day the Euro suffered further in the aftermath of some comments by Irish Mps that they will be reluctant to support the budget in its present shape. In any case the government will be tested in an election on Thursday, so we will not need wait too long before some clarity on the survivability of the government in established.

In all, a fast start to the week, and a lot seems to be in store for traders as we move further towards the end of the year.