By Greg Peel

The Dow closed down 126 points, or 0.8% to 14,995, the S&P fell 0.8% to 1612 and the Nasdaq lost 1.1%.

When Fed chairman Ben Bernanke first hinted at a possible tapering of bond purchases back in May, sparking off a month of Fedspeak pro and con arguments, it was suggested at the time perhaps the idea was to test the waters, gauge just what reaction could be expected from financial markets from an eventual QE exit, and at the same time take a bit of heat out of overblown asset prices. Perhaps now we are seeing some results.

On one extreme there are those calling a collapse of markets once the Fed withdraws and on the other extreme there are those suggesting a Fed withdrawal is positive as it implies a sufficiently strong US economy. In between are uncertainty, fear and contradiction. It had nevertheless become more certain to most that the US stock market had run too far on momentum and was due a pullback. The further it ran before correcting, the bigger the correction would likely be. Yet every time stock prices began to fall, the buyers would quickly re-enter, heading off any real correction possibility. Until now.

Last night Wall Street opened higher, for no particular reason, to the tune of 119 Dow points. With Fed tapering talk dominating the mindset, the US stock market has now become beholden to the US bond market, to the point where the tail is somewhat wagging the dog. US bonds have been sold off since Bernanke's first hints, and usually when bonds are sold it implies stocks are being bought. But not in the upside-down world of QE-driven markets. Higher bond yields imply greater expectation of tapering, and tapering is not supportive of stocks. The big rally from late last year was all about chasing yield because yield was not available in the bond market. If yields are now rising in the bond market, riskier stock yields look less attractive as a "nowhere else to go" trade.

The US bond market has become unusually volatile this week, and bounced around again last night. The Treasury auctioned ten-years and found a weak response from domestic buyers scared of tapering, leaving foreign central banks to snap up the bulk of the offer. Yields first fell, then rose to close at 2.23%, up 4 basis points. The stock market played to the same script, rising from the open and then falling steadily to close down as much as it had risen. The Dow has closed below the psychological level of 15,000 and the more closely watched S&P 500, at 1612, is in danger of breaking significant support at 1600.

In the background of the US stock-bond dynamic is the yen and Japanese stocks. Big moves up in the yen have also been matched by falls in US stocks, with concerns that the BoJ is not doing enough in its own QE program sparking the panic and affecting a solid correction in the Nikkei. Yesterday the Nikkei was steady, and last night the yen rose slightly to send the US dollar index down 0.2% to 80.95.

The Australian stock market has also been spooked by Japan, but not before Fed taper talk set US bond yields rising and foreign investors quickly exiting their riskier offshore yield plays as a falling Aussie threatened to further undermine profits. Initially we saw a simple equation of Aussie falls, stocks are sold, but now the pattern has broken somewhat. Despite the fact the Australian stock market has corrected well ahead of a Wall Street correction, falls on Wall Street are still pushing the Australian market lower. Witness the SPI Overnight, which is down 36 points or 0.8%, matching the S&P 500, despite the Aussie rising half a cent over 24 hours to US$0.9486.

Indeed, the Aussie has risen sharply since Tuesday night when it bottomed out near 93, and last night saw a spike up to over 95.5 on talk on a Japanese bid for the coal assets Rio Tinto ((RIO)) is looking to sell. The currency then fell back to under 95.

We may now ask the question as to why the Australian stock market is falling on Wall Street's correction, having already staged a correction? Unless Wall Street is setting up for a very big fall, presumably the Australian market must soon find value support. Of course it doesn't help when the likes of Goldman Sachs downgrades its FY14 GDP growth expectations for Australia to a struggling 1.9%, from a previous 2.7%. At the moment, it appears investors best stay on the sidelines until the dust settles.

A lower greenback allowed gold to rally US$10.80 to US$1389.20/oz last night. On the last day of China's holiday break, base metals closed mixed, ranging from copper up 1% to nickel down 1.5%. The oils are simply bouncing backward and forward at the moment, going nowhere. Brent is up US53c to US$103.49/bbl and West Texas is up US45c to US$95.83/bbl.

China is back today so iron ore is still sitting at US$110.90/t.

As noted, the SPI Overnight is down 0.8%.

Next Wednesday the Fed will hold a policy meeting and Ben Bernanke will conduct one of his quarterly press conferences. Wall Street is hoping, praying, that the chairman can end the speculation and provide some specific QE guidance, whatever the case maybe.

Australia's May jobs numbers are out today.

Rudi will not make his usual Lunch Money appearance on Sky Business today due to other commitments.