By Greg Peel

The Dow fell 225 points or 1.5% while the S&P lost 1.4% to 1661 and the Nasdaq dropped 1.7%.

One could feel it coming, although the buy-on-the-dip brigade has been doing its best on Wall Street up to now. In the summer-thin market, those not on a beach have decided the Fed will definitely start tapering QE next month. The evidence and the rhetoric suggest otherwise, but why wait to find out?

Bridge Street was doing its best yesterday to ignore Wall Street, and to ignore the pantomime known as an election campaign. The market has pencilled in a Coalition victory, and while history suggests stock market performance is politically ambivalent in the long run, the prospect of a couple of resource sector taxes being scrapped is helping to support the beaten down Materials sector as much as a surging iron ore price and better looking base metal prices. Yesterday's 0.5% gain for Materials was best on market, providing a flattish finish against big falls in the defensives of Healthcare, Utilities and Consumer Staples.

As to whether Bridge Street proves resilient again today ? a Friday ? is another matter. There were a lot of economic data releases in the US last night, and a couple of big earnings reports, which did little more than cloud the monetary policy picture.

Foremost, perhaps, was the weekly new jobless claims release. Weekly numbers should really be ignored given inherent volatility but unemployment is the Fed's primary benchmark right now and so Wall Street simply must respond. Last week's showed a 15,000 fall to 320,000, and to top things off the housing market sentiment index rose to an eight-year high of 59.

There's your tapering argument right there. Except that:

Industrial production was flat in July and up 1.4% year on year, some 11 percentage points lower than the 2007 average. The Empire State manufacturing index fell to a worse than expected 8.5 from 9.2. The Philly Fed equivalent plunged to 9.3 from a lofty 19.8. Wal-Mart (Dow), America's biggest employer, reported quarterly profits and reduced its 2013 sales revenue and earnings guidance. Cisco's (Dow) also reported, and provided a weaker than expected revenue outlook. The CPI rose 0.2% on both the headline and the core, after the headline rose 0.5% in June and the core 0.2%. Core inflation is up 1.7% year on year.

Which is lower than the Fed's 2.0% target. A number above 2% would justify tapering but a number below suggests "not just yet". The key to Wall Street's performance right now, in the context of having made fresh all-time highs in past months, is whether reduced QE is a nod to a stronger economy, or to inflation concerns, or to Ben Bernanke's imminent departure, or to the simple matter of ever growing public debt. If it is the economy, then that's okay. If not, then Wall Street is worried. Worried enough at least to send the indices down well over 1% last night. And then there's the fiscal side of the equation.

If you think our own politicians are a bunch a self-serving useless morons ? and let's face it, who doesn't? ? then you ain't seen nothing till you've been to Capitol Hill. Next month sees the debt ceiling debate back on the agenda, and after two years the two camps are no closer to any compromise. The RBA has had to cut Australian interest rates to historical lows simply because the idiots in Canberra think "surplus" is a word the great unwashed of the swinging mortgage belt seats can actually understand, sort of. In essence the same is true in Washington, suggesting the Fed may feel it will have to maintain the rage after all.

Whatever the case, the US stock market gave way to building selling pressure last night. But the stock market was on its own. If the Fed is going to taper next month, then the US dollar should go up. It fell 0.7% to 81.19 on its index. If the Fed is going to taper next month then gold should collapse. It rose US$29.90 to US$1365.70/oz. If the Fed is going to taper next month, US bond yields should soar. They were up, but only by 4bps on the ten-year to 2.75%.

Arthur, meet Martha.

Base metals were mixed on small moves. Oil keeps grinding higher on geopolitical issues, with Egypt erupting once more. Brent was up US91c to US$111.11/bbl and West Texas was up US34c to US$107.19.

Spot iron ore finally fell, by US$1.60 to US$141.20/t. The Aussie is up a tad to US$0.9144.

The SPI Overnight fell 36 points or 0.7%.

Wesfarmers reported yesterday. Yay. Today, hopefully, we'll see reports from a whole load of companies including Santos ((STO)). And ANZ Bank ((ANZ)) will provide a quarterly update. And it only gets busier next week.

TGIF.

NOTE FROM THE EDITOR

Economic data have started to surprise on the upside, including recent PMI surveys and Chinese indicators. This has prompted suggestions from the more optimistic forecasters that global growth is looking in much better shape for the second half of the calendar year. If correct then the recent switch into resources stocks will have further to run.