Recent reports suggest that the Chinese are meeting with European officials to discuss the status of European debt markets. It is not quite clear what the goal of these meetings are, but we would not be surprised if the Chinese somehow decided to help Europe out of its misery by extending some loans to the ailing nations of the region. Such a course of action would suit China`s long-term political goals well, and would also serve to ease tensions in the markets, stability of which is paramount to the stability of China and the survival of the Communist Party.

By contributing to a European bailout, China would achieve a status similar to that enjoyed by the U.S. prior to the First World War. By bailing out the old powers, it would have them beholden to its will at some point in the future, would strengthen its international prestige, and boost its almost non-existent diplomatic power.

Stock markets attempted to stage a rally today, but the mountain gave birth to a rat, with final numbers coming slightly in the red. Risky assets continue to be battered, with news about a Lehman lawsuit against JP Morgan, and speculation about the Chinese cutting down their Euro allocations reinforcing the worries about Korea. The situation there is quite unprecedented, and although we suspect that eventually the U.S. And China cannot afford to suffer a conflagration there, the mere presence of a threat of armed conflict is enough to justify a sell off on much of East Asia. After all, nobody knows what Kim Jong Il really wants to do.

In the background, the EURUSD pair continues with its plunge, and it seems clear that the 1.20 level will be tested very soon. While it is highly likely that some kind of official reaction will follow the breach of this level, in the absence of some U.S. or Chinese intervention, we are extremely skeptical that the longer term donwtrend of the Euro can be halted. Even with such aid, we don`t believe that the Euro can survive in today`s form.But at least a halt to the present ceaseless plunge could be helpful to markets.

Note: Past performance is not indicative of future results.

Today`s hourly chart clearly shows the strong, volatile trend that has finally made a decisive move toward 1.2. In the absence any major development, this level will almost certainly be breached, and the initial downside leg may well prove to be quite violent. Nonetheless, the pair is heavily oversold, and we doubt that public officials will be able to remain calm for long under so much stress. Many of them don`t really understand why and how the markets function, and there appears to be an expectation that pricess will revert to the mean if nothing is done. That, of course, is a misguided expectation, and we suspect that it is just a matter of time before a panicky realization of the truth ensues followed by more splashing of cash everywhere.