By Greg Peel

The Dow closed down 76 points or 0.6% while the S&P lost 0.4% to 1363 and the Nasdaq dropped 0.4%.

Having held its ground in Monday's session despite developments in Europe, Wall Street plunged from the open last night to send the Dow down almost 200 points. If it were not bad enough that France has now become "socialist", the latest developments in Greece have the country shifting to the "far left".

Except that no one actually expects that to happen. With no clear majority for any party emerging from the weekend's Greek election, vote leader and former junior coalition party New Democracy attempted to form a government and failed. The responsibility then came down to second party in the poll, which happens to be the far left party. It is currently trying to cobble together a government, but given its policies include abandoning austerity measures and nationalising the banks there is little expectation of success.

It is thus assumed Greece will have to go back to the polls next month. It is also assumed the country has moved another step closer to either leaving or being escorted out of the eurozone. It is difficult to envisage what might change in a fresh election that would ensure adherence to the troika's bail-out requirements. And the troika has indicated it will not budge.

So the question for world markets is as to whether or not a Greek exit is actually a bad thing, which somewhat brings us back to where we were yesterday. There will be further near-term volatility no doubt, but perhaps less uncertainty thereafter. Whatever the perception, Wall Street managed to rally back over the session to finish with the Dow down 76. Traders are nevertheless concerned that the blue chip average has broken its 13k psychological support level and, more importantly, the S&P has broken below technical support at 1372.

The scenes were more ugly on European bourses, with France down 2.8%, Germany down 1.9% and London, which was closed on Monday, down 1.8%. Uncertainty is clearly once again the driver given the moves came despite Germany posting a surprisingly good industrial production number.

German industrial production rose 2.8% in March following a 0.3% fall in February to take production levels back to those of mid-2011, before we last played the euro-fear game. A big jump in construction was cited, reflecting a bounce-back after the snows of a heavy European winter, albeit manufacturing also posted a solid result.

Back in the US, the relief rallies of the past two sessions also indicate the expectation that QE3 is ready when needed. Goldman Sachs had already booked in QE3 ahead of this latest round of euro-fear. US economic data are now suggesting a slowing in the recovery rate, providing the Fed with sufficient excuse. The question this time, however, is as to whether the Fed will play the game differently in 2012.

In both 2010 and 2011, previous QE programs ended mid-year on encouraging signs of modest US growth (remember "green shoots"?). But then the data turned sour just as Europe was threatening to implode in both cases. There followed periods of extreme volatility, extenuated last year by the Congressional budget stand-off and US credit downgrade. In both years the Fed was forced to play cavalry once more, injecting more stimulus toward year-end. So having been twice bitten, will the Fed decide to "close the gap" this time and simply introduce the next round of monetary stimulus ? QE3 or some other form ? on the expiry of the current program (QE2.5, or "Operation Twist")?

Similar assumptions are being made with regard to the ECB, with the more accommodative Mario Draghi at the helm. If the new French president succeeds in drawing austerity concessions from Germany, implications of more central bank support must be expected. Then there's the matter of shoring up the European financial system ready for Greece's potential departure into the wilderness.

It should all be enough to send investors back into gold, but as is always the case when fear sets in and cash needs to be quickly generated, gold was sold off last night by US$32.90 to US$1605.80/oz, aided by a 0.3% rise in the US dollar index to 79.83. The Aussie is 0.8% lower at US$1.0121 with Swan's budget largely irrelevant at this point.

Base metals were closed in London on Monday, and posted across the board falls of 1% last night. The oils lost further ground, with Brent down US43c to US$112.73/bbl and West Texas down US49c to US$97.45/bbl.

Movements in sovereign bonds yields have been less pronounced than stock market movements this week. The US ten-year fell 4bps to 1.84% last night while the German equivalent remained relatively steady at 1.54%. The French bond added 4bps to 2.7% but the yields on the "dangerous" Spanish and Italian bonds have not shot up dramatically these past couple of days, sitting around 5.8% and 5.4% respectively. And the VIX volatility index in the US remain below 20.

The SPI Overnight fell 20 points or 0.5%.

The situation remains fragile, with the most likely next headline being "Greece to go back to the polls". Meanwhile at week's end we will be hearing from that other major global influence ? China ? as Beijing delivers the latest round of monthly economic data.

All