By Greg Peel

The Dow fell 178 points or 1.5% while the S&P lost 1.7% to 1265 and the Nasdaq dropped 1.8%.

They say we're young and we don't know, won't find out unti-i-il we grow...

If you understand this reference, you'll know what I'm talking about. It was actually May last year when, more than once, Wall Street traders panicked over vision on their televisions of riots in the streets of Athens. News of indecision and bickering in Europe may unnerve markets outside Europe, but pretty soon those markets get bored. Put scenes of protesters clashing violently with police on the screen and it's a different story.

It was around 11.30am on Wall Street when the images appeared. At that point the Dow was down around 75 points ? sitting right on the 12,000 mark. Economists had expected the Empire State (New York Fed) manufacturing index to rise to 13.3 this month from 11.9 in May but instead it fell to minus 7.8. This zero-neutral measure hasn't been negative since November. Back in November, the year-on-year headline CPI in the US was 1.1% but following a 0.2% increase in May it is now 3.6%, reflecting the rise in energy and other commodity prices.

We did see a big pullback in commodity prices in May, and indeed the core CPI (ex food & energy) rose 0.3% to mark 2.4% year-on-year. Economists had expected a 0.2% increase, and no increase in the headline. The Fed's core inflation target is 2%, which suggests a rate rise should be coming. But Bernanke has told us there won't be one for a long time while unemployment remains high.

Either way, Wall Street was weaker by late morning and adding to the cause was weakness in the euro. At around 11.30am, the euro tanked and Wall Street plunged to be down over 200 Dow points.

Should we really be worried about a couple of hundred Greek workers clashing with police? No. It was just another planned strike over fresh austerity measures which includes things like actually having to work and actually having to pay taxes. What is more concerning is what happened before the planned strike ? when the euro was weak but had not yet completely plunged by the 2% it ultimately did to US$1.4162 ? the sharpest drop since March 2009.

As New York slept Germany remained insistent that its tax payers should not have to keep on funding an ever-growing Greek bail-out. Lenders to Greece should bear some of the pain, Angela Merkel maintained, through a debt restructure. Given the bulk of Greek sovereign debt is held by French banks, France disagrees. The ECB also vehemently rejects a restructure because under its rules, a restructure is the same as a default. The central bank cannot hold defaulted debt as collateral. Merkel is no doubt convinced that another German taxpayer funded hand-out would be political suicide. Recent state election results suggest she would not survive a federal election.

In the meantime, Greece has to get new austerity measures through parliament to even be eligible for the next tranche of the bail-out funds already committed. Last night two cabinet ministers defected. Prime Minister Papandreou announced he will reshuffle his cabinet tonight and put the bill up once again. In a last act of desperation, he appealed to all parties to form a single unity government (a la a war cabinet) at this time of crisis to do what simply has to be done, and he offered his resignation as leader of the government were the offer to be accepted and were that the wish of the parties. While this was going on, the eurozone authorities decided to postpone the decision on Greece's next bail-out by three weeks. And there just happened to be a strike planned in Greece.

There was a lot of panic on Wall Street last night, highlighted by the fact that volumes, for once, were suddenly heavier and the fact the VIX jumped 16% to 21 ? out of the under-20 complacency range for the first time since March. There was also a lot of shoulder shrugging, most of which was centred around the reality that we've been here before. And take a look at this graph:

While it definitely feels like Groundhog year, the "sell in May" correction this year has not been nearly as pronounced as that of last year. The correction has been lengthy but slow, the S&P 500 is only down 6% from its early May high, and at 1265 it is still above the 1257 level at which it began 2011. That 1257 level is very significant because not only does it represent the previous March low, it represents the Lehman break-down point. So Wall Street is watching that level carefully, and even the bulls feel "sell in May" still needs to run its course through July.

July, of course, is June quarter reporting season in the US, and there is growing expectation that before then, and then, we will see corporate earnings downgrades reflecting the quarter's economic slowdown. At 20% growth, the current S&P 500 earnings average forecast just seems too high.

The flight to safety was on again in earnest last night. It did, however, include gold as a safe haven trade which is somewhat encouraging given in times of real panic gold is sold along with everything else. Gold was up US$7.50 to US$1531.20/oz which doesn't seem like much, but this was against a stiff headwind of a US dollar index up 1.6% to 75.61.

Silver actually rallied as well, by 1% to US$35.80/oz, meaning it did not have its industrial metal hat on last night. Base metals were carted in London, all down 2-3% except copper which managed only a 1% fall.

Oil copped the brunt ? big time. With Europe the centre of attention, Brent collapsed US$4.82 to US$113.86/bbl. Yesterday it was at 120, but we also had the futures rollover last night to the August delivery front-month and that means a couple of extra dollars down the curve. West Texas rolls over next week, and July delivery fell US$4.16 to US$95.21/bbl. For those who understand such things, Brent is in backwardation while WTI is in contango (reflecting storage tightness) and as such by next week the Brent-WTI spread will naturally reduce further.

The US ten-year bond had bounced up 11 basis points on Tuesday night, but last night it fell back 14 points to 2.96% as investors rushed back in.

The Aussie had been stronger in the local session yesterday as Glenn Stevens gave us the bad news and the bad news in his scheduled speech. The bad news is that Chinese growth and the mining boom will still mean rates need to go up at some point and the bad news is that the two-speed economy will only get more two-speed. But with the US dollar rally last night, the Aussie is down a cent over 24 hours to US$1.0578.

The SPI Overnight fell 53 points or 1.2%.

Rudi will be on Sky Business today at noon.