By Greg Peel

The Dow closed down 54 points or 0.4% while the S&P lost 0.5% to 1746 and the Nasdaq fell 0.6%.

Bridge Street began in familiar fashion yesterday, rising confidently from the bell on a reasonable lead from a Fed-pumped Wall Street. But at around 11am, the ASX 200 had a look at 5400, and decided enough was enough.

First up we had the release of the local September quarter CPI, which on a quarter on quarter headline basis came in 1.2% growth, much higher than the 0.8% consensus forecast. The immediate response in the Aussie was another 0.5% spike up to 97.5, driven by the assumption that not only does a higher inflation read rule out any further RBA rate cuts this year, it may even signal the end of the easing cycle such that the next move would have to be up.

The quarter on quarter read nevertheless belied the fact the headline year on year rate actually fell to 2.2%, down from 2.4% in the June quarter and 2.5% in March. Why the contradiction? The numbers are adjusting from the one-off carbon tax spike in inflation which has now rolled out of the yearly comparables. In other words, Australian inflation remains benign. The benchmark RBA core rate of inflation is 2.3%, which is at the lower end of the central bank's 2-3% comfort zone.

Perhaps the only real takeaway from the quarterly headline spike was the apparent impact on imported goods of the lower Aussie over the quarter (although we have since seen a bounce back). Be careful what you wish for.

Whether the big figure of 5400 was reason enough, or the CPI result and subsequent Aussie spike caused concern, Bridge Street decided it was time to lock in some profits. Then came news that China's biggest banks had decided to write off US$3.65bn of uncollectable loans. The ASX 200 turned tail to finish down on the session, as Bridge Street watched the Shanghai index fall 1.25%.

The US$3.65bn, or RMB22.1bn, represents write-offs from China's five major banks for the first six months of the year. Last year those banks wrote off only RMB7.65bn. The suggestion is the write-offs were made as a clean-up in preparation for a fresh wave of loan defaults ahead as China's slowdown manifests itself in corporate collapses.

The write-offs themselves are no reason to panic. China's big banks have still posted huge profits, and are carrying equally huge provisions against non-performing loans. In the past, Beijing has made it difficult for Chinese banks to write off loans, preferring rather to just leave them on the non-performing books in what was likely a face-saving measure. Bankruptcies were previously also very difficult to force. But as Beijing moves to reform its domestic financial markets, bankruptcy and write-off rules have been eased to bring China's banking system more in line to that of the West. The write-offs were not the only driver behind the big fall in the Shanghai index.

Reports also emerged from Chinese media that Beijing was again looking to tighten liquidity in order to address inflation risks. Beijing last tightened liquidity earlier in the year in its efforts to smash shadow banking, in a move that was clumsy and ill-conceived. The resultant spike in China's Shibor short-term cash rate sent shockwaves through the global financial system. Yesterday Shibor jumped 57 basis points to 4.02%.

If that wasn't enough for one day, the ECB also chose last night to announce it would conduct another round of stress tests on 130 eurozone banks in November. The tests are intended as a necessary step as the eurozone attempts to move towards a banking union. Given the European economy has improved in general over the past year, and the eurozone banks have passed previous stress tests, a new round should not be seen as too much of a threat. But markets were surprised when the ECB suggested the banks will need an 8% capital buffer against bad loan and other balance sheet losses. The figure is higher than previously assumed.

If Bridge Street has cause to take money off the table after pushing through fresh five-year highs, Wall Street has even more incentive at fresh all-time highs. It was not exactly panic stations nevertheless, with the US indices opening lower from the bell on the China/Europe news and thereafter bungling along in a tight range to the closing bell. Corporate earnings results in the session were mixed, with Caterpillar (Dow) disappointing and falling 6%, while Boeing (Dow) upgraded its full-year guidance and rose 5%.

The result season to date has brought net earnings results which analysts see as consistent with modest economic growth. A 4% increase in revenues has been pleasing, given revenues have failed to grow since the GFC, except that when the numbers are broken down, that 4% net gain is almost entirely attributable to a 20% increase in revenues for the consumer discretionary sector. The numbers for the likes of the big material, energy and utility sectors remain weak.

The US dollar index stabilised last night at 79.28. But the developed world proxy for China ? the Aussie dollar ? took a bath. The Aussie is down 0.9% to US$0.9627 over 24 hours and down around 1.25 cents from yesterday's post-CPI peak. We want the Aussie to fall because the greenback rallies, not because of problems in China.

The "China proxy" effect is manifested in commodity prices. If China sneezes, commodity markets catch pneumonia. Base metals all tanked by around 2% in London last night, while Brent crude fell US$2.48 to US$107.52/bb and West Texas dropped US$1.49 to US$98.81/bbl. Not helping oil was the usual "surprise" from the US weekly inventory numbers, which last week showed a bigger than expected jump.

Spot iron ore fell US10c to US$133.20/t.

After its recent QE infinity-related surge, the gold price fell back US$7.60 to US$1334.60/oz.

Was yesterday's 17 point fall in the ASX 200 enough to account for developments over the last 24 hours, including last night's commodity price falls? The SPI Overnight closed up 4 points.

Get out your raincoats, it's flash day today. HSBC will release its flash estimate of China's October manufacturing PMI today, to a suddenly fragile market, and the eurozone and US will see their own estimates tonight.

It's a very busy day today on the Australian corporate front. First up, there will be another extensive round of AGMs, with today's round featuring Amcor ((AMC)), Newcrest ((NCM)), Suncorp ((SUN)) and Toll ((TOL)) among many others. Then there's another bout of resource sector quarterly production reports, with BC Iron ((BCI)), Drillsearch ((DLS)) and Sandfire ((SFR)) stepping up to the plate.

We will also see a full-year result release from Australian Pharma ((API)), while Wesfarmers ((WES)) will reveal its September quarter retail sales numbers.

Rudi will appear on Sky Business today at noon.