Apart from the Asian shock of the two Korea's shelling each other, reverberations of the coming collapse of the Irish government, and statements by the Chinese on the necessity of strong and decisive action against inflation, have set the tone of today's trading around the world.The most dramatic events were reported from Korea, where the two nations which remain technically at war with each other since the end of the broader Korean War have exchanged about a total of 300 rounds of artillery fire near a tiny island on the western coast of the Korean Peninsula with reported fatalities among South Korean Marines stationed there, and a large number of wounded among civilians. Nobody knows with any degree of certainty what the North Korean leadership is planning. Rumors are aplenty, with claims about the demise of the Dear Leader, new nuclear facilities, North Korea's demands, and leadership struggles among the higher ranks circulating online and offline without producing any consequence. The North remains as inscrutable as ever, but most would prefer to dismiss their threats and violence as empty shows of defiance, since a very small probability is attached to the opposite case, not least because it poses very limited options for the Allies. South Korea has been forced, for instance, to digest the insult, sorrow and humiliation it suffered after the North sank the Cheonan in March, but it has not been able to do much beyond protesting and condemning because it has a lot more at stake, and, indeed, benefits far more from the status quo. In contrast, as we and others have remarked repeatedly, the North's economy has been battered after the financial crisis, and the subsequent botched attempt of revaluation of the local currency. It doesn't seem to regard the current state of affairs as tolerable.

Korea remains a tinderbox, with risk of conflict rising in spite of the West's desire to dismiss the tensions as the North's posturing. With so little to lose, however, one can at least make case where a potential all-out confrontation and a high-risk strategy can appear more logical and desirable from the point of view of the regime's survivability, even if in terms human cost, and in the context of a wider point of view, such a course can only be termed suicidal.

The Chinese fixed the central parity rate of USDCNY at 6.6469 today, vs. 6.6389 on Monday. Asian stocks markets were almost all lower, with Kospi down 0.8%, but news of Nkorean sheling was released after market close, so more selling may be in order tomorrow. In comments, Russia is "concerned about capital outflows", Thailand does not "see the need for change in the floating currency system."

Chaos in the CDS, bond markets, as Ireland heads to elections, Greece is denied loans

Today Eurozone manufacturing PMIs were released, with outstanding results for the core, even as the periphery was battered once again on the back of Irish news, and global risk sentiment. Germanys's manufacturing PMI was released at at an outstanding 58.9 vs. market expectations of 56.8, and prior 56.6 in October. France is showing strength in a similar manner, with the PMI at its highest level since 2000 at 57.5 this month vs. 55.2 in October.

The Euro was not at all boosted by these great releases, however. With the German finance minister, Wolfgang Schaeuble, commenting that the "fate of the common currency is at stake", and his Chancellor, Angela Merkel, concurring that "we are in an exceptionally serious situation regarding the Euro", it is no surprise that the Euro was on a weak tone throughout the day. The Chancellor, in spite of her alarm, appeared to be insisting on her resolve to force private creditors share the cost of bailouts even today, and she repeated that the private sector would have to share the burden from 2013 on. The Dutch Minister of Finance was even more sanguine, going so far as to say that bond holders in Irish banks will have to "bleed" as the nation sorts out its problems. Markets naturally interpret these statements to mean that the market for peripheral paper has a meaningful lifespan of only about two years(probably not even that much) from this point on, which cannot be what the Eurozone needs most at the moment.

5yr Greek CDS is reported to have breached the 1000 bps mark today as the market speculates on the possibility that the Greek government may have to shut down as soon as next week following the delaying of its bailout funding after the controversies with the Germans and Austrians last week. Portugal is widely regarded as the next domino to fall, and its CDS spreads were being reported wider today in a turbulent session. Spain's 5yr spreads on bunds reached the highest ever at 235 bps, and CDS breached the 300 bps mark after rising all day. Ireland is of course on its way to a general election soon, with the electorate reported to be especially wrathful after the recent surrender to the IMF and the EU.

So far, the interbank market is doing well, with 3-month Euribor coming further down to 1.035% from 1.039% yesterday. Similarly, USD Libor is almost completely unimpacted by Korean and Eurozone chaos, perhaps signifying that the Fed's easing policy is not entirely misplaced in this current tense environment.

The USD was up against almost everything else today, with the JPY alone managing to stay afloat in spite of the chaotic news flow (Japan was on holiday today, however.) Gold was boosted by risk aversion scenario which is strange, since it tends to suffer when USD appreciates against other assets, but apparently traders are not prepared to deleverage their positions yet. It looks like we'll remain stuck with the present outlook on sentiment till the end of the year, but even beyond then the Euro is very unlikely to maintain its integrity unless the ECB adopts a posture similar to the Fed in all aspects. That, to be sure, looks very far-fetched at the moment.