By Greg Peel

The Dow closed down 54 points or 0.4% while the S&P lost 0.7% to 1308 and the Nasdaq plunged 1.2%.

Shocked into action by this week's major escalation of the European crisis which has brought Italy into the frame, the well-respected Italian finance minister has since rallied the troops, brought forward emergency discussions, and last night the Italian parliament passed an austerity package aimed at budget cuts and, more specifically, appeasing global markets.

Not only was the vote on the bill brought right forward from the end of August, the size of the package was double that originally flagged. The government then went out and successfully auctioned E1.25bn of five-year bonds at a yield of 4.93%. The cost is about 1% higher than the last equivalent auction in June, but the market bought them nevertheless, further easing fears that Europe's third largest economy is next.

It was enough to afford Wall Street a more positive mood at last night's open, and enthusiasm grew as major US bank JP Morgan Chase (Dow) posted a well received earnings report. JPM brought back provisions, increased revenues with some actual commercial lending, and over the quarter bought back US$3.5bn of stock to boost shareholder value. The bank's shares finished up 1.8%.

It was enough to have the Dow up 90 points by 10.30am, but then Uncle Ben had to go and open his mouth.

I don't know about you, by I interpreted Fed chairman Ben Bernanke's comments to Congress on Wednesday night as suggesting that QE3 stands ready to be implemented were the US recovery to continue to be slow and were deflation to threaten once more. Other words, it ain't going to happen tomorrow but if things don't improve down the track, well, we'll just have to do what we have to do.

Apparently Wall Street didn't quite see it that way though, assuming, for some reason, that QE3 would be fired up some time next week. So when Bernanke qualified his earlier statement last night, in his ongoing testimony, Wall Street turned and fled. The chairman had pointed out that the Fed still anticipated improvement in the second half, and were inflation expectations to increase then QE3 would be kept in its box.

As I said yesterday, we're now back in this tedious "bad is good and good is bad" mode. From here on, Wall Street will almost be willing the jobs numbers to be weak.

JP Morgan remained the star of the session, easing the fall in the Dow, while the rest of the financial sector and market slid away. Citigroup reports tonight, but analysts are concerned the good result from JPM might have indicated an increase in market share, rather than sector-wide improvement of note. Meanwhile, the tech-laden Nasdaq underperformed as weak commentary from chip makers resonated, and ahead of the after-market release of Google's result.

To add to the weakness, Moody's stuck its head up (seems to love the publicity at the moment) and suggested the US might lose its AAA rating if it couldn't resolve the debt ceiling issue. Well duh. Moody's had already said this once before anyway. But just after lunch, it was announced that the two parties had suddenly reached an agreement on US$1.5 trillion of spending cuts, despite having been seemingly locked in a stalemate on Wednesday.

Wall Street bounced, sending the Dow back up to the flatline from around 50 points down, but then it drifted away again to the close.

The debt ceiling news at least sparked a bit of a sell-off in bonds, with the ten-year yield gaining 7bps to 2.96%. The earlier auction of US$13bn of thirty-year bonds was very popular, albeit foreign central banks bought 38% compared to a 40% running average.

The US dollar had begun the day weaker as the euro rallied on the positive news from Rome and on expectations of QE3. But Bernanke's comments and the supposed breakthrough on the debt ceiling had the US dollar turning around to be up 0.2% at 75.21. Gold thus took a little bit of a breather in rising only US$4.40 to US$1587.00/oz.

Silver was flat, base metals were mixed on small moves, and Brent crude fell US46c to US$118.32/bbl. Disappointment over no immediate QE3 had West Texas tumbling US$2.02 to US$96.03//bl, widening the spread once more to around US$22.

The Aussie was steady at US$1.0722 and the SPI Overnight lost 9 points or 0.2%.

Then after the bell, Google reported. In short, the result completely blew Wall Street analysts off their chairs. Google shares are up a whopping 12% in the after-market which is a substantial move for a company of Google's size. One presumes, ceteris paribus, that this result will give the Nasdaq in particular and all the indices in general a chance at a good start tonight.