By Greg Peel

The Dow fell 156 points or 1.2% while the S&P lost 1.5% to 1304 and the Nasdaq dropped 2.1%.

Last night Spain sold E2.5bn of a range of roughly three-year bonds and the good news is the auction was three times overbid. The bad news is that the yield paid on the April 2016s, to pick one maturity, was 5.11%, up from 3.37% paid only two months ago. In the meantime, Germany's benchmark ten-year yield last night fell to 1.4%.

Wednesday revealed that Spain's GDP contracted by 0.3% in the March quarter, and Italy's fell 0.8%. France, in which the people elected a new president with a growth-over-austerity agenda, saw a 0% result. The Netherlands in which the government resigned after failing to push through austerity legislation, saw 0.2% contraction. Were it not for a surprisingly strong performance from Germany, which posted 0.5% growth, the eurozone net GDP would have fallen 0.25%. Rather, the net result was 0%.

In the meantime, last night Japan revealed its March quarter GDP grew by 1% to mark a 4.1% annualised growth rate, ahead of the 3.5% forecast. The "beat" has been attributed to growth in domestic consumption. The Bank of Japan has been very busy printing yen.

Is this a message to Angela Merkel? Look at Japan, the pro-growth Europeans might say ? it's recovering from natural disaster and macro weakness with a stimulus agenda. Germany might be doing okay, but everyone else is dying.

The week's run of positive US data came to an end last night after this month's Philadelphia Fed manufacturing index fell to minus 5.8 from plus 8.5 in April to mark the first contraction in the result since September. What's worse is economists had forecast a rise to plus 10. New jobless claims were flat last week, which is not bad, but not positive either. Economists are writing the Philly Fed result off as representing not unusual volatility.

Whether or not we will thus see a Philly bounce-back in June is currently by the by. Since the French and Greek elections, Wall Street has fallen 7% on the broad index, but the fall has been tempered by persistent by-the-dip intraday rallies. How long could the buyers keep this up in the face of lower closes? Perhaps the Philly result was enough last night, or perhaps it would have happened anyway. On a day in which volumes were a bit heavier than they have been of late, Wall Street began a steady decline featuring no intraday up-swings of any note.

The US dollar index ticked higher for the fourteenth straight day, but only by a tad to 81.49. Money continues to flow out of stocks and into bonds, with the US ten-year closing at an all-time low yield of 1.70%. But as has been the case so often in the recent past, the acceleration of "risk-off" has finally seen the liquidation of gold for cash cease and the purchase of gold for a safe haven return. Last night gold jumped US$35.20 to US$1574.20/oz.

Not helping Wall Street on the domestic front is the ongoing fallout from the JP Morgan hedge-gone-wrong disaster. CEO Jamie Dimon has now been called to explain himself to Congress. The issue here is not one of a US$2bn or more loss, which realistically is small beans in terms of JP Morgan's overall turnover. The issue is one of the management being apparently unaware or unappreciative of the risk being created by one CDS position. It could not have come at a worse time for the US investment banking industry. Congress is keen to push through legislation that would see the commercial and investment banking operations of a single institution separated into two institutions, thus shielding deposits from excessive derivative trading risk. Wall Street's bankers have been fighting against the legislation and none has been as vocal as one Jamie Dimon. One presumes that a forthright Dimon will now become rather a meek Dimon, which will not help the bankers' cause.

Meanwhile, ratings agency Fitch declared last night that the 29 global banks deemed too big to fail by regulators will need to raise a net USD half a trillion in fresh capital in order to satisfy the stricter Basel III capital ratio requirements that will come into force in 2019. That's 23% of existing common equity. Assuming Fitch's numbers are right, where might that come from?

The only distraction for Wall Street last night was the final pricing for the IPO of some social networking company ? FaceSpace or something ? which will issue at US$38ps and open God knows where when it hits the boards. That's 100 times last year's earnings, and grossing up the free-float price for all shares means the new listing will be bigger than McDonalds and Citigroup.

Just to prove that base metals have been responding only to currency movements lately, last night's relatively unchanged US dollar meant little movement in LME prices as well. Oil, however, continued its slide, with Brent down US$2.14 to US$107.01/bbl and West Texas down US27c to US$92.54/bbl.

Gold may yet stumble again, but more likely has set an interim low, and the VIX is now continuing to move higher, up 10% last night to 24.5. We are now truly in "risk off" mode.

Strap yourself in: the SPI Overnight is down 76 points or 1.8%.

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