By Greg Peel

The Dow fell 391 points or 3.5% while the S&P lost 3.2% to 1129 and the Nasdaq dropped 3.3%. In Europe the FTSE lost 4.6%, the DAX 5.0% and the CAC 5.3%.

"You're on your own," said Ben Bernanke in the Fed's policy statement on Wednesday. Or at least that's the way Wall Street heard it. The initial sharp sell-off post Wednesday night's release was followed last night with a risk-off trade of no hesitation after Wall Street had had a chance to sleep on it.

What traders can't shake is a feeling of creeping dread brought about by the fact Bernanke declared "significant" downside risk to the US economy and then did not follow it up with what might be considered "significant" monetary stimulus. Operation Twist looks like little more than accounting adjustment rather than any "shock and awe" policy response. And if the idea is to place the ball back in the Congressional court, God help us. On Wednesday the Republican majority Congress voted down a temporary six-week supply bill after objecting to US$3.3bn funding for the FEMA ? the Federal Emergency Management Agency charged with the task of responding to disasters. It seems clear the Republican agenda is to stamp on the Administration any way possible and it appears as if financial market turmoil plays into Republican hands.

If that's the case, this will be the state of play until November 2012.

This weekend brings a meeting of officials from the World Bank and the IMF and there is hope some sort of rescue will be announced. It's a vague hope ? the responsibility of saving the world is not in the hands of these two organisations. Last night a report quoted a French official as declaring that the sixteen European banks which only scraped over the stress tests applied by the ECB mid-year will need to raise fresh capital immediately. Therein lies the crux of the matter and the clue to the solution.

For who in the private sector will provide the capital? French banking giant BNP Paribas last night pulled the old "everything's fine" routine while executives were visiting Qatar. Such a visit is another echo of 2008 when US banks sought capital injections from Middle Eastern sovereign wealth funds.

The positives to come out of last night's rout might be (a) the Dow bounced from being 527 points down to close 391 points down, and the S&P 500 recovered from a brief flirtation below the August low of 1119, amidst talk among the contrarians of preparing for a spectacular buying opportunity, and (b) a complete Lehman-style collapse may be the only thing that will spur European officials into decisive action.

The negatives include the response in commodity markets, which made stock markets appear to have a quiet day. Aluminium and zinc were down 4%, lead 7%, copper 9%, tin 11% and nickel an astonishing 17%. Volumes on the LME were near record-breaking as commodity funds hit the dump button and stop-loss orders were triggered in a cascade. "Real" commodity traders stood aside.

Brent crude dropped US$4.87 or 4% to US$105.49/bbl and West Texas fell US$5.41 or 6% to US$80.41/bbl.

Not helping commodity markets was yesterday's "flash" Chinese manufacturing PMI estimate from HSBC which marked a tick down to 49.4 from the actual reading in August of 49.9. Under any other circumstances for any other number, one might consider a move to 49.4 from 49.9 as hardly worth noting. But this is China ? the only economic power with the capacity to save the global economy through growth. The August PMI has rebounded slightly from the July PMI suggesting China's forced slowdown had bottomed out. This tick down was very unwelcome from a confidence perspective.

It was certainly enough to help the ASX 200 to a new 2011 low, breaking through the 3986 closing low after the US downgrade in August. The good news is China has plenty of stimulatory capacity left and can take its foot off the brakes of its economy any time. And the RBA is one of few central banks in the developed world with plenty of scope to lower rates.

The latter may have already been priced into the Aussie over the last 24 hours given its three cent fall to US$0.9740. The US dollar index jumped 0.8% last night to 78.45. Gold did not play safe haven, rather it played source of cash for margin calls elsewhere as it fell US$45.80 to US$1736.20/oz. US bonds did play safe haven as the benchmark ten-year yield fell 16 basis points to 1.71%.

The VIX volatility index jumped 11% to 41 which, under the circumstances, seems light on. In the desperate days post Lehman the VIX hit 90.

The SPI Overnight fell 76 points or 1.9%.

Amidst all the mayhem, the Conference Board announced its leading US economic index rose 0.3% in August following rises of 0.6% in July and 0.3% in June. Given August was a very weak month for equities, and stock prices feature as part of the leading index, this was quite a result. The Board did, however, warn that a dip into recession was likely if a lack of confidence is sustained.

Which brings us back, once more, to that word "confidence". The US economy would most likely being bungling along in low positive growth mode were it not for Europe. Europe is China's biggest export market. Europe's answer to its woes is to forcibly slow growth through austerity measures and to prop up bankrupt states lest the whole common currency concept be seen to be a failure. In the meantime European officials are risking a run on the banks. Who is Lehman?

When will Europe finally respond sensibly?

I'll be on Sky Business today at 2pm.