Across Asia, regional markets are all lower following the plunge on Wall St, with Japan's exporters hurt by a rising yen as risk appetite evaporated overnight. The Nikkei 225 is the biggest decliner, down 2.2% while the Shanghai Composite, Kospi and Hang Seng are all weaker between 0.6% and 1.1%.

In Australia, the ASX 200 rallied late in the session to only finish 1% lower at 4301.5, having earlier touched an intra-day low of 4249. Losses for the day were broad based and the product of a multitude of uncertainties surrounding European bank funding, Chinese growth trajectory, the US economic recovery and the outlook for Australia's RSPT. Throw some end of financial year tax loss selling into the equation and you have a fearful market with investors happy to save their investing for another day.

The re-emergence of European bank funding issues and Chinese growth concerns suggests the 'residual rot' from the GFC may run a bit deeper than most people had thought. Also, it may be further evidence that 'band aid' solutions, when used for major injuries, always come unstuck.

The stimulus packages which drove the bounce in sentiment and markets over the second half of last year did very little to address the underlying problems - the housing market is still stuffed, unemployment is stubbornly high and the US government has a burgeoning deficit to show for it.

The action overnight showed investors running for the door ahead of a data packed end to the week and Monday's public holiday in the US. People's worst fears are starting to materialize - there simply isn't enough growth around to create jobs. Jobs creation is still the one thing this recovery has lacked in the US.

Turning our attention to the individual sectors and it was the materials (-1.5%) space that led the market lower, although it did rally significantly from its lows on rumours the Government were close to announcing a revised RSPT. Fortescue Metals Group was the biggest faller, down 4.4% while Rio Tinto, Alumina, BHP Billiton and Bluescope Steel were all lower between 1.2% and 2.9% following horrible overnight leads.

Interestingly, in a broker note from Deutsche Bank, it upgraded some Australian miners after reviewing its outlook for commodity prices. The broker expects commodity price weakness to continue into the third quarter but upgrades forecasts for 2011 and 2012, leading to earnings upgrades. Macarthur Coal, Extract Resources and Western Areas were all upgraded to buy from hold. Minara Resources was raised to hold from sell while Centennial Coal was downgraded to hold from buy. Iluka was kept at hold.

The industrials sector came under selling pressure yet again. It fell 1.6%, with troubled engineering services firm Downer EDI down another 3.7% despite announcing the sale of a 49% stake in MB Century Drilling. Elsewhere, Asciano, Brambles, Boral and Leighton Holdings were all down between 1.8% and 3%.

Financial names couldn't escape the selling, losing 1.1% for the session, although they did outperform their US counterparts. Macquarie Group was the biggest detractor, down 2.5% while the big four banks were weaker between 0.1% and 1.5%, with Commonwealth the largest faller.

In a report from a major Australian fund manager, it said just when it seemed the world was enjoying an uninterrupted V-shaped global economic recovery, Australia's debt market looks set for a very interesting 2H, with bank funding costs set to stay elevated. The fund manager notes that Australian banks are not insulated from events elsewhere, so investors are going to ask banks to pay up for their money, as seen in Westpac's 5-year issue at swap +135 bps. The manager believes there's not a lot of motivation for Australian investors to pile into new deals unless they are really getting paid to take the exposure. Australian investors will benchmark returns available on Australian banks vs offshore names. The fund manager continued, saying there is a strong correlation between bond, credit and equity markets; it's a nervous time at the moment.

Among consumer discretionary names, the likes of Fairfax, JB HiFi and Myers were the worst performers, losing between 1.9% and 2%. Billabong managed to buck the trend, rising 1.2% after a positive report from Citigroup. The broker upgraded Billabong to 'buy' from 'hold', and said the stock's 23% fall in the past three months "more than reflect concerns about earnings growth in the Americas and Europe. Citi reckons Billabong shares are likely to remain volatile in the coming months as further news flow comes out about economic conditions in Europe and the US. However, the broker believes the company has managed volatile trading conditions well by retaining its market position and protecting its brand price premium. Citi said these are crucial to sustainable margins and our positive view on the stock.

Energy names unsurprisingly came under pressure, losing 0.7% after Crude Oil futures fell more than 2.5% overnight. Centennial Coal and Woodside Petroleum were the worst performers, losing 2.4% and 1.7% respectively.

On the upside, the only sector to finish in positive territory was the utilities, adding 1.2%.

Ben Potter Research Analyst

IG Markets - CFD trading