By Greg Peel

The Dow fell 130 points or 1.0% while the S&P fell 1.2% to 1317 and the Nasdaq fell 1.6%.

Grimsvotn. At least it's a lot easier to pronounce – however one does pronounce it – than Eyjafjallajokull. But it's deja vu as another Icelandic volcano erupts, forcing the cancellation of flights in and out of Scotland and northern England and evoking memories of the widespread European airport shut-downs a bit over a year ago under the same circumstances.

Aviation authorities suggest that last year's shut-downs were an overreaction, that they now understand more about the effects of ash on planes, and that there is now better communication and coordination across European airports. But that hasn't stopped BA and KLM cancelling flights, or President Obama cutting short a visit to Ireland.

Deja vu? More like Groundhog year. Friday night's trading brought more fears over Greek debt, political unrest in Spain and fears of contagion, and weakness on Wall Street as a result. Yesterday the ASX 200 tanked, assisted by news of the HSBC May Chinese “flash” manufacturing PMI – a preliminary estimation – which showed a fall from 51.8 in April to the lowest level in 10 months at 51.1. The sector is still expanding, and economists suggest it is consistent with a GDP growth rate of 9%, but that hasn't stopped markets worrying about a Chinese hard landing just as they were last year.

This time last year, we were beginning to talk about a double-dip in the US economy. That was all put to rest later in the year by QE2, but with QE2 set to expire in just over a month a clear weakening of recent US economic data is beginning to stir concerns once more. Last night the Chicago Fed said its national activity index fell to minus 0.12 in April from plus 0.08 in March, registering the first negative month since last December. Economists blame the Japanese earthquake and the sudden lack of imported parts for manufacture, but that hasn't stopped markets worrying about the US economy.

Over the weekend the Spanish regional elections delivered a harsh rebuke to the ruling Socialist Party, which picked up only 28% of the average vote compared to the opposition Popular Party's 37%. A national election is not due until next year, but with rising unrest amongst the populace over austerity measures an early election may need to be called. It is a common theme across the peripheral eurozone: the workers are the one's suffering the most from budget cutbacks which were brought about by the indulgence of the banks and large corporations, at least as far as the workers are concerned.

Then to top it off, Standard & Poor's put Italy on negative credit watch, citing political gridlock over the government's plans to balance its budget by 2014 – again meaning austerity measures. Italy has been relatively immune from European debt fears to date, but it is the whale to the minnows of Greece, Portugal and Ireland. Economists fear the EU-IMF does not have the funds to bail out Spain. Italy comes under the heading of “too big to fail” but thus “too big to bail”.

This all adds up to more euro weakness. Having hit US$1.50 early this month on ECB rate rise expectations, the euro last night traded under US$1.40. At present, Wall Street is simply tracking the euro. And European stock markets threw in the towel last night, with London, Germany and France all registering 2% falls. Inspired by the HSBC flash number, Asian markets all fell 2% yesterday as well.

With all of the euro, pound and Swiss franc thus weak, the US dollar index shot up 0.7% last night to 76.16. This was a red rag to commodity prices. Brent fell US$2.29 to US$110.10/bbl, West Texas fell US$2.62 to US$97.48/bbl, aluminium fell 1%, lead and zinc fell 2%, copper fell 3% and nickel and tin fell 5%.

Caught between the strong greenback and a safe haven against European debt, gold rose US$3.50 to US$1517.00/oz. Silver was again almost unmoved at US$35.05/oz. That's a remarkable three sessions in a row in which silver has not shifted.

For US stocks, the relationship to the weaker euro is that the subsequent stronger dollar undermines export receipts and demand, meaning lower earnings for companies with offshore revenues. That's why the Nasdaq underperformed last night. Yet if there is one difference between now and this time last year, it is that Wall Street is still failing to actually panic.

In May last year the VIX volatility index on the S&P 500 leapt to 45 rapidly from 15, meaning from complacency to panic. It then quietly drifted back toward 15 in the anticipation of, and then the implementation of, QE2. Last night the VIX jumped to 20 on the open, but settled back to 18 by the close following a slight rebound in the euro. Indeed, Wall Street opened last night about as low as it closed. The Dow was down 180 at one point but the session represented basically a step-jump to lower valuations and not panic selling.

Perhaps Wall Street is beginning to think that despite Fed statements, QE3 is inevitable. Or at least some form of continuing, sufficient QE.

Once again if there was any positive for Australia out of last night's action, it was that the Aussie has lost one and a half cents since Friday night to US$1.0507.

The SPI Overnight was down 29 points or 0.6%.

Rudi will be appearing today on Sky Business instead of the usual Thursday, on Lunch Money at noon.

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