By Greg Peel

The Dow closed down 109 points or 0.8% while the S&P lost 0.8% to 1366 and the Nasdaq fell 1.0%.

Just when it might have seemed safe to go back into the water following the IMF's success in drawing emergency fund offerings out the BRICs over the weekend, euro-fear has flared up once again ? this time on a different front. The problems this time are not centred on the basket cases of southern Europe and their rising borrowing costs but on the large economies of northern Europe and their important role in eurozone stability.

And although it pains me to say it, once again it's all about politics.

The shock news out of Europe last night was the resignation of Dutch Prime Minister Rutte and his cabinet following the collapse of austerity talks with coalition members on the weekend with regard to Rutte's budget plans. Rutte wants to run with the eurozone theme of bringing budget deficits back under the 3% of GDP limit through strict austerity measures, but on the weekend a key political ally declared such slavish adherence to European rules would only serve to harm the Dutch economy. Rutte's position thus became untenable and he offered his resignation to the Queen. He will remain as caretaker prime minister until elections are held in a few months time.

The sudden demise of the government of the AAA-rated Netherlands brings back into focus the rift between the industrious north and the indulgent south which has existed ever since Greece set the European crisis in train. German chancellor Angela Merkel has risked political suicide at home in her determination to hold the eurozone together and has won grudging support from her northern counterparts. Meanwhile northern populations have become increasingly bitter over their tax dollars being used to bail out profligate southern states and their livelihoods being curtailed by imposed euro-wide austerity.

Which brings us to France. Merkel would not have been able to get this far were it not for the support ? albeit often also grudging ? of ally Nicholas Sarkozy. French election results over the weekend indicate Sarkozy is at risk of losing his presidency to socialist contender Francois Hollande, who is anti-austerity and wants to see the promotion of French economic growth. To that end he advocates a widening of the ECB mandate to include responsibility for GDP growth control as well as inflation control (as is the case for the Fed and RBA, for example) and in such a suggestion he is finding a similar theme from the Dutch opposition.

It has always been a risk. Merkel is yet to face her trial by population when the next German general election comes due. The people of France are now finding their democratic voice and the Dutch have not needed to wait for an election. A new mandate for the ECB would mean more monetary stimulus, more funny money, and decades of debt for all of Europe. Bit like the US really.

Or it could well mean the ultimate collapse of the eurozone and common currency, brought about not by some recalcitrant black sheep such as Greece, but by the zone's original founders. While this might seem like a good idea in the longer term, the short term pain of unwinding the mess would be devastating.

And just to add insult to injury for Europe last night, an estimate of eurozone PMIs showed the German manufacturing PMI for April plunging to 46.3 ? its lowest level since 2009 ? from 48.4 in March when economists were expecting a gain to 49.0. The European crisis is hitting Germany's export industry hard, and that's not going to escape the attention of the euro-sceptics amongst the German population.

Mind you, were the eurozone to fracture the German mark would be so strong the German export industry would still be in trouble (See: Australia). And that fact is very much on Merkel's mind.

On the subject of PMIs, HSBC released its flash estimate of China's April manufacturing PMI yesterday and it came in at 49.1, up from 48.3 in March. If the result is confirmed it will be the sixth straight month of contraction in China's manufacturing sector (sub-50 result) but also the strongest number in four months, implying the pace of contraction has slowed.

This implies Beijing's earlier monetary policy easing measures have begun to work, suggests HSBC, and the sub-50 result should lead to more easing. HSBC believes Chinese economic growth bottomed in the first quarter, and a common theme among economists is for the second half of 2012 to see a Chinese recovery. Once again the "hard landing" argument is losing its support.

Wall Street will still call 49.1 a bad result nevertheless, and this only added to the opening pain as the Dow dropped 184 points from the bell. There was greater panic in Europe where ultimately the French and German stock markets fell 3% and the London market 2%. Yet the low point was seen at the open in New York and the rest of session featured a slow graft back up, at least to the point the Dow closed only 109 points down.

Dutch bond yields have, of course, become the latest to spike up and French yields are also ticking north. The flipside thus is more money flowing into US Treasuries and last night the US ten-year closed at 1.93%. Yet still the VIX volatility index on the S&P 500 remains under 20, although this undoubtedly reflects more a lack of volume than a total lack of fear.

The US dollar index understandably rose 0.3% to 79.34 as the euro took a hit and the Aussie ? which will be at the mercy of today's CPI result ? is down half a cent to US$1.0321. Gold is in limbo at present.

Base metals are not in limbo, they just run madly back and forth. Last night they were down 1-2% while oil mostly shrugged, with Brent little changed at US$118.71/bbl and West Texas down US79c to US$103.09/bbl.

The SPI Overnight was down 21 points or 0.5%.

The March quarter CPI result for Australia will be released today and assuming no unforeseen spike in inflation we will have a rate cut from the RBA in May. As to what the banks then do well...that's another matter. We'll also see production reports today from Newcrest ((NCM)) and Oil Search ((OSH)) among others and Wesfarmers ((WES)) will reveal March quarter retail sales for Coles and other group franchises.

There is a raft of US economic data out tonight and for the earnings season it's the biggie ? Apple. Apple shares have been sold off in recent sessions over fears iPhone sales have eased but I'm sure we'll hear all about it tonight.

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