By Greg Peel

The Dow closed down 419 points or 3.7% to 10,990 while the S&P fell 4.5% to 1140 and the Nasdaq dropped 5.2%.

If you wanted to put a finger on what really caused last night's sudden renewal of fear across global markets, I'd suggest you could sum it up in one word ? Lehman.

What was most notable about Wednesday night's trade in the northern hemisphere was that the response to the disappointing Merkozy announcements was pretty benign. The concept of a eurobond was quickly dismissed, the EFSF was deemed to be already sufficient, and the idea of a financial transaction tax was touted. Yet on a net basis the European markets didn't respond much, and Wall Street closed flat.

So why is it that media reports will suggest today that last night's big fall, which begun in Europe, was due to fears over a transaction tax and a lack of further injection of EFSF funds? Unless you think of the response as being akin to a small child who thinks very hard before finally bursting into tears, what any sell-off really needed was a more frightening trigger. And that came last night when an unnamed European bank "went to the window".

The expression means that a bank was forced to go to the ECB to ask for an emergency short-term loan ? in this case E500m -- and that signals a liquidity issue. The implication is that the bank was finding it difficult to raise overnight funds in global money markets. The rumour, totally unsubstantiated, is that a US bank had gone cold on accepting a European bank as a counterparty, given the current risks. And that's how it all started in 2008 ? first with Bear Stearns and then with Lehman Bros. No wonder there was panic.

European bank shares were again down double digit percentages, leading the UK, German and French stock indices all down 5-6%. The rout spilled into Wall Street from the open, and US banks ended the day down 5-10%.

If you want to take the Lehman analogy further, we can reflect on the fact the debt crisis of 2008 merely saw the problem pass from private to public hands, rather than actually being resolved. Back then, the issue was US investment banks owning "toxic" sub-prime debt which they belligerently continued to carry on their books at around 95c in the dollar when the market was bidding zero. Right now, the eurozone is refusing to mark down "toxic" peripheral sovereign debt to realistic levels as well. It all ended in tears in 2008. What might happen this time?

Perhaps the answer lies not in movements on global stock markets last night, but in movements on global bond markets. The bonds of the UK, Germany and France were all bought. The bonds of Spain and Italy were sold, but not by much at all. The yield on both ten years did not exceed 5% despite having been to 6% previously this month. The "safe haven" US bond was bought, but not by much. The ten-year yield fell only 10bps to 2.07% despite having hit an all-time record low 1.99% earlier in the session. The rise in US bond prices did not match the fall in US stocks.

Moreover, recently the ECB opened up its balance sheet to European banks for effectively unlimited six month loans. And the European banks haven't mucked around, having snapped up nearly E50bn to date. In other words, the European banks have been propping themselves up. By contrast, Lehman was allowed to go under.

There was nevertheless more to the story of weakness on wall Street last night.

The US July CPI rose a more than expected 0.5% on higher fuel prices, leaving the annual rate level with June at 3.6%. The core CPI rose 0.2%, increasing the annual rate to 1.8% from 1.6% in June. In theory, there will be no QE3 if US inflation is not falling.

US existing home sales fell an unexpected 3.5% in July to the lowest level since November. The Philadelphia Fed manufacturing index fell to minus 30.7 this month from plus 3.2 last month. Economists had expected a low but still positive number.

The compounding fear on Wall Street last night was, therefore, the old chestnut of double dip. And to top things off last week's new jobless claims in the US rose by 9,000 to be back above the critical 400,000 number once more.

Strangely, the Conference Board index of leading economic indicators for July went the other way, rising 0.5% after a 0.3% reading in June, and compared to a 0.2% forecast. However the rise reflected an increase in the money supply, which would be a result of the recent "flight to safety", so take that out and economists suggest indicators are showing flat to very low US growth ahead.

Just to add fuel to the fire, a couple of Wall Street firms decided it was time to lower their global GDP forecasts, picking a bad day to do so.

Morgan Stanley lowered its 2011 global GDP growth forecast to 3.9% from 4.2% and 2012 to 3.8% from 4.5%. For Europe MS sees only 0.5% growth in 2012, down from 1.2%, and in China 8.7%, down from 9.0%. Goldman Sachs also trimmed its forecasts, lowering global to 4.0% from 4.1% in 2011 and to 4.4% from 4.6% in 2012. Goldman's US forecast for 2011 is down to 1.7% from 1.8% and for 2012 down to 2.1% from 3.0%. Goldman nevertheless sees 1.4% growth in Europe in 2012.

It is worth noting that it wasn't until last week that Goldman Sachs decided to lower its end-2011 target for Australia's ASX 200 to 4450 from 5125, adding a bear case "recession scenario" target of 3600. FNArena has been suggesting since early this year that broker targets of up to 5500 for year-end were simply too high in comparison to falling corporate earnings forecasts, and it's taken this long for the equity strategists to join the party. Now Goldmans is giving us a year-end target range of 3600-4450.

Cheers.

The point here is that brokers are always behind these macro forecast curves and never in front of them, often revising only each quarter or more. Looking at the new forecasts above there are indeed some big cuts ? Morgan taking Europe 2012 to 0.5% from 1.2%, for example, and Goldmans taking US 2012 to 2.1% from 3.0%, but to see MS drop its 2011 global to 3.9% from 4.2% at this stage of the game, all one can really say, as is often the case, is "Thanks Scoop".

When the IMF finally lowers its global forecasts, the market will be a screaming buy.