The Bank of China has stopped doing business with a large North Korean bank, falling into line with a US-led sanctions push to restrict funding for Pyongyang’s nuclear programme.

The decision to close the bank account follows an increase in tensions on the Korean peninsula and may be a sign that Beijing is willing to place more pressure on Pyongyang.

The US Treasury hit the Foreign Trade Bank, North Korea’s main foreign exchange bank, with sanctions in March, saying it was “a key financial node” in North Korea’s nuclear and missile proliferation activities. The bank had not been named among the institutions targeted for asset freezes by expanded UN Security Council sanctions introduced in January and March.

Other countries such as Japan and Australia have since joined the US in applying sanctions against Foreign Trade Bank, but co-operation from banks in China, North Korea’s closest economic partner, is essential in the efforts to choke off cash flows. >> Read More

Nasdaq OMX is preparing to pay a fine of up to $10m for its handling of the botched Facebook initial public offering to US regulators in what would amount to the largest penalty ever paid by a US exchange operator.

The transatlantic exchange group disclosed the potential fine as it said net profits halved to $42m in its latest quarter, partly driven by poor results from its US cash equities business. Adjusted earnings of 64 cents a share were 3 cents better than the same quarter last year and slightly ahead of analysts’ forecasts.

 News of the possible payment comes as the exchange is set to pay up to $62m to aggrieved brokers, who have claimed large losses due to system failures on Nasdaq during the Facebook IPO last May.

A fine of $10m would mark the biggest financial penalty levied by the Securities and Exchange Commission on a US exchange as the regulator has intensified its scrutiny of for-profit exchanges. >> Read More

• Taro Aso (Japan’s finance minister) was reported as saying no-one opposed Japan’s policies at G20 meeting, and that  Lagarde (head of the IMF) ‘applauded Japan’s monetary policy’ ; the ‘no-one opposed Japan’s policies’ comment saw USD/JPY move above 98.50 from 98.25.
• Three hours earlier the US Treasury issued a statement after Lew – Aso talks reaffirming US, Japan commitments and that they both confirmed Japan’s monetary policy was for domestic purposes
• The BOJ was bidding today for 300bn yen in debt longer than 10 years and 500bn yen in 5-10 year debt (they are going to be doing a lot more of this)
• MNI China Business Flash Indicator for April 59.3 (prior was 58.2)
• March Conference Board Leading Economic Index for China 258.3 (The prior result, for February, was revised to 258.4 from 257.5)
• Bloomberg carried an article saying that UBS analysts said China may widen yuan trading band within 72 hours
• Reuters broke the news that George Soros was, in fact, alive, after mistakenly publishing a draft copy of his obituary
• Magnitude 7 earthquake hit northern Japan, no tsunami warning issued

A quiet start to the day developed a little momentum as it progressed. EUR quietly edged higher, but put on 25 points in quick time as USD/JPY jumped (more on this coming). >> Read More

First domestic fiscal policy, and now global monetary policy has become an utter circus:

• G7 OFFICIAL SAYS G7 STATEMENT WAS MISINTERPRETED, STATEMENT SIGNALED CONCERN ABOUT EXCESS MOVES IN JAPANESE YEN
• G-7 OFFICIAL: G-7 CONCERNED ABOUT UNILATERAL GUIDANCE ON YEN
• G7 OFFICIAL SAYS G7 IS CONCERNED ABOUT UNILATERAL GUIDANCE ON THE YEN, JAPAN WILL BE IN SPOTLIGHT AT G20 MEETING IN MOSCOW

We already mocked the G-7′s original stupidity… and now they say it was not what they meant. Because what the G-7 clarification really means it that while the G-7 will supposedly “allow the market to set rates”, the G-7 was not happy with how the market set rates following the G-7 statement. And… #Ref!

This also means that the US Treasury which officially was prodding the Yen weaker yesterday has split off from the rest of the group, or call it G-6, which it appears is quite concerned about the Yen weakness, although technically since Japan is in there too, it is more like G-5, not to be confused with the private jet that is carting all the world leaders to Moscow. In such a perfect storm of sheer communication chaos, it is only a question of time before we move into outright protectionism, aka trade wars.

The USDJPY plunges first, asks questions later:

Just as Byron Wien publishes his ten surprises for the upcoming year, Morgan Stanley has created a heady list of seventeen macro surprises across all countries they cover that depictplausible possible outcomes that would represent a meaningful surprise to the prevailing consensus. From the return of inflation to ‘Brixit’ and from the BoJ buying Euro-are bonds to a US housing recovery stall out – these seventeen succinctly written paragraphs provide much food for thought as we enter 2013.

 Via Morgan Stanley:

Just When You Thought it Was Dead, Inflation Returns (Joachim Fels/Charles Goodhart)
A strong economic rebound in China and the US, adverse supply shocks in agriculture and worries about swelling central bank balance sheets lead to a sharp rise in actual and expected global inflation. Central banks don’t dare to respond, given high debt levels and financial fragilities, and either continue to ignore or abandon their inflation targets. Rising wheat prices lead to bread riots. In the UK, Chancellor Osborne advises the British to eat oatcakes instead.

Debt Cancellation (Spyros Andreopoulos)
The US Treasury, Japan’s Ministry of Finance and Her Majesty’s Treasury jointly announce that the Treasury debt held by the Federal Reserve, Bank of Japan and Bank of England respectively as a consequence of QE purchases are cancelled, and that these central banks will operate with negative equity until further notice. As a consequence, government debt/GDP ratios are brought down by 11pp, 18pp and 25pp, respectively. Ratings agencies love it, as does the bond market – until it realizes that large-scale debt monetization has just taken place, and sells off sharply.

US Over the Cliff and Likes it (Vincent Reinhart)
The US goes over the fiscal cliff and likes it. A deal delayed to early 2013 in which politicians compromise because of concerns about financial markets would resolve uncertainty more assuredly than the baseline of stop-gap legislation followed by a plan later in the year. As a consequence, confidence gets a boost, pent-up business investment kicks in and the labour market improves more rapidly.

US Housing Stalls Out (David Greenlaw)
The burgeoning housing recovery in the US begins to stall due to credit tightening. There is still no private mortgage market at this point and financial problems are brewing at the FHA which could lead to a dramatic reduction in credit availability for first-time homebuyers. Meanwhile, putback risk continues to cause originators to increase scrutiny for conforming loans. >> Read More

Barrons came out with their 2013 Outlook today and I was not surprised to see that all of the forecasts are positive.  There isn’t a single forecaster who expected the S&P 500 to fall this year.  There is only one forecaster who expects the 10 year bond yield to fall from its current level of 1.7% and he only sees a 10 bps decline to 1.6%.  Here’s the round-up:

Stephen Auth, Federated Investors

S&P Year-end Target: 1660

2013 GDP Growth: 1.4%

2013 End 10 Year US Treasury Yield: 2%

Barry Knapp, Barclays

S&P Year-end Target: 1525

2013 GDP Growth: 2.1%

2013 10 Year US Treasury Yield: 1.6% >> Read More

• Late NY saw the release of the US Treasury’s semi-annual currency report to Congress – itdid not name China as a currency manipulator
• Sth Korean October Current Account Surplus $4.42B (SA) (vs. 3.75B -revised – for Sept.)
• Chicago Fed head Evans (non-voter on FOMC in 2012, votes again in 2013) gave a speech and answered question in Toronto Tuesday evening. He continued his dovish stance: Wants to see low rates until jobless rates hits 6.5% as long as inflation stays below 2.5%. More.
• Australia’s Bureau of Resources and Energy Economics reported Higher $ mining investment, on fewer projects , cost blowouts accounting for some of the increase in expense
• Australian construction data for Q3 showed an improved, but generally lower than expected result at +1.7% (vs. +0.2% for Q2). More details here.
• Press reports in Japan of a government announcement of a further package of stimulus, amounting to Y880B, to be made on Friday
• Stronger than projected GDP growth in The Philippines, GDP YoY growth at +7.1% vs 5 to 6 % projected
• China’s Commerce Minister was reported as saying China is certain to achieve GDP of 7.5% or above in 2012 & sees world trade growth in 2012 at 2.5%; also that China is to open more areas to foreign investment

The Yen crosses the movers in Asia today as more Yen strength was seen, from 82.21 USD/JPY down to 81.79 before finding support. AUD, EUR and GBP all lost ground as the Yen strenghened, but the moves were limited.

AUDUSD fell only as low as 1.0433,there are bids at 1.0425/30 in the pair which held it. Topside, though is limited by sells above 1.0455.

EUR/USD held above its late NY lows at 1.2925, only back higher to just above 1.0442.

Cable generally the weakest, down to 1.6009. It did get back to 1.6022 but didn’t sustain there and fell back to its lows over the Tokyo lunch period.

• pains Rajoy has no ruled out seeking international aid, but sees no rush due to progress in deficit cutting – Govt source
• SNB reporting a consolidated profit of CHF 16.9 billion for the first three quarters of 2012
• German September retail sales +1.5% m/m, -3.1% y/y compared to Reuter’s median forecasts of +0.3% m/m, -1.2% y/y
• Italy September adj jobless rate rises to 10.8% from 10.6% in August, as expected
• Euro zone October unemployment 11.6% versus 11.5% in August
• French September consumer spending +0.1% m/m, -0.3% y/y
• ECB’s Couere: Price stability risks in the eurozone are balanced
• Italy Treasury Minister: Believe will see Italy return to growth from Q2 2013
• Greek coalition faces new test – ekathimerini
• Francois Hollande pushes for 160pc rise in beer taxes -The Telegraph

European stocks, oil, gold, US treasury yields all up this morning.  Nothing huge, but up all the same. 

Against this backdrop euro has seen across the board gains, EUR/USD up at 1.3010 from early 1.2960,  EUR/JPY up at 103.85 from around 103.15.

The euro gains come despite much market talk of  negative month end EUR/USD flows. Maybe they’ll come later in the day around the 4.00 London fix.

USD/JPY up marginally at 79.80 from early 79.55.  Talk of sell orders clustered from 79.90 to 80.10, buy stops above there.

Cable up marginally at 1.6115 from early 1.6085. EUR/GBP up at .8070 from early .8055 amid talk of the usual month-end Bundesbank cross buying.

AUD/USD up at 1.0385 from early 1.0315, having been as high as 1.0399.  Talk of 1.0400 barrier option interest in place.