Today`s highlights include confused news about a new property tax in China, some rather scary and unclear reports about a confrontation between the North Korea and South Korea and intervention talk by the central banks of Korea, Indonesia, the Philippines and India.

Rumors in the market suggest that Asian sovereigns, including China are selling to cap rallies in the EURUSD, and some commentators also speculate that the Swiss National Bank may also be a seller on a temporary basis, as it unloads its huge recent purchases transacted in an effort to put a floor under the EURCHF pair.

The various reports coming from Korea are especially disconcerting for the markets, as evinced by the severe plunge of the Won against the USD to a ten year low earlier today. By all reports, the revaluation of the Korean currency in December 2009, has harmed the internal cohesion of North Korean society more than any external decision, and the recent actions of the government appears to be restoring the domestic situation by an appeal to patriotism. Any possible conflagration here has the potential to cause mayhem, but given that both China and the U.S. are very anxious to avoid the worst case scenario, we expect the scare to subside soon.

The Washington Post reports that any "wrong move" by European politicians could have dramatic results, nipping the nascent U.S. recovery in the bud, and throwing the world back into a recession. Our commentary is that the wrong moves are already being made, with austerity packages that hit the lowest income strata hardest being initiated in country after country, in a manner that clearly resembles the brutal processes that used to plague developing nations during the 1980s and 1990s, leading to currency crises, and all sorts of other banes. The problem, on the other hand, is that nothing can be done about the problem without massively inflating the money supply, which has its own attending problems, and remains unfavorable with politicians, in spite of market perception to the contrary.

The dollar is rallying globally, and is even rising against the Chinese Yuan, clearly driven by macroeconomic issues that arise out of political, in addition to economic concerns. The only currency that outperforms against the USD is the Japanese Yen, hardly suprising given the composition of Japanese government debt, and the massive overseas assets of Japanese corporations, and private individuals.

In sum, although the stock market tries to hold its own in this environment of risk aversion and pessimism, the problems in the background does not allow a long term bull market. On the currency front, as the chart below shows, the recent attempt in the EURUSD pair to stage a corrective rally has failed, and the focus is now on the 1.20 level, a break of which will probably place 1.15 firmly in sight for Euro bears. We expect that officials will soon be responding to the slide with more panicky measures, but given that the basic assumptions behind their actions are wrong, their chances of success are slim.

Note: Past performance is not indicative of future results.