By Greg Peel

The Dow fell 265 points or 2.5% while the S&P fell 2.8% to 1089 (back through its 200-day moving average) and the Nasdaq tanked 3%.

When one sees the Dow down 250 points in a session, the immediate thought is “omigod – carnage”. Indeed, while we have witnessed just as many significant up-days as down-days of this magnitude over the past few months, the trend has been low volume on rallies and strong volume on falls – a factor which has kept many a trader bearish on the bigger picture.

But last night was, in fact, anything but carnage. The Dow opened down 250 points and there it stayed all day. Volume was minimal. Commentators were expecting a possible late rally, which has oft been the case recently, but there wasn't one. Where are the buyers? They're on the beach. Wall Street is being whipped around at the moment because no one is there to play, and confusion and uncertainty is enough to make holidays look enticing.

Wall Street is struggling at present with the conflicting reality of seemingly strong corporate earnings and weakening economic data. Investors are wondering why Beijing seems so determined to crash land its economy at such a time. Europe seems to be having a post-Greece honeymoon, but one can only assume austerity measures will shortly show up in the data. And the world's most deflated major economy – Japan – is trying to come to terms with a currency at a 15-year high to the US dollar.

Wall Street had clearly been confused on Tuesday by the Fed's announcement. In reality the market either wanted to hear the Fed say that the economy is bad so we're going to take decisive action, or that we don't see the need to take decisive action because the economy is really not that bad. What the Fed announced, however, is that the economy is bad but we're only going to provide a fairly tepid response.

With a night to sleep on it, Wall Street decided this was possibly the worst case scenario. But it didn't need to agonise because yesterday's round of Chinese data showed production is slowing rapidly, and retail sales are dropping off, yet inflation is rising. Beijing cannot justify easing monetary policy to prevent a hard landing when inflation is rising. The cavalry is stumbling.

Not everyone is overly concerned about Chinese inflation, however. July's data showed inflation had risen to 3.3% in July from 2.9% in June despite retail sales growth falling and lending levels also pulling back. The PBoC, like many central banks, has a top-end comfort level of 3% for the CPI. That has now been exceeded, implying Beijing may need to increase interest rates again. Second quarter GDP slowed to 10.3% and Beijing had a target of 8%, so in theory there is still scope.

Unlike other central banks, however, the PBoC looks at headline inflation and not some “core” or underlying measure. This means the volatile items of food and energy are included, and right now food prices are spiking upward. The Russian drought is a major factor, but so too is massive flooding in China's own agricultural region. Many observers are thus dismissing the Chinese inflation spike as temporary.

But there was no denying a big drop in the growth of imports into China, announced on Tuesday. And last night the US trade balance for June was announced, and economists were shocked. While they had expected the trade deficit to widen, they did not assume anything like the 18.8% move to the widest gap since October 2008. Perversely, imports grew 3.3% and exports fell 2.2%.

America is placing a great deal of faith in revitalising its export economy, so this is not good news. While rising imports might suggest the US consumer is in better shape than thought, at this point the goods have only just entered the country – they haven't been sold. The fear is that orders were placed ahead of June when the US economy appeared far more buoyant, and were taken off the boat in June to find a lack of demand.

Indeed, inventories are now causing great concern in the US. The problem with first estimations of GDP numbers (second quarter 2.4%) is that they are simply extrapolations of the first month of activity. They are later revised for the second month and then finally the third and final month. Economists believe the 2.4% result greatly overstates inventory build, and later monthly figures are supporting that theory. Some analysts are now expecting the first revision of second quarter GDP to wipe off as much as 1%, down to 1.4%. Next step? Double dip.

Not helping the US export cause was last night's movement in the US dollar, which jumped a startling 2% on its index to 82.47. The US economy is faltering and the Fed is maintaining its stimulus but the dollar is rising. Why? Because the risk trade is once again being unwound, meaning selling out of offshore investments and returning dollars borrowed at historically low rates. The “risk indicator” currency (Aussie) fell two cents over 24 hours to US$0.8941.

But the US dollar is not rising against the yen, because the yen has for a decade been the carry trade currency of choice given near zero interest rates. Now that the US also has near zero interest rates, why borrow yen and take a currency risk when you can just borrow dollars to play with? The yen is thus now at a 15-year high and causing all sorts of concern in Tokyo. The Japanese government announced last night it would conduct a survey of 200 top exporting companies to gauge just how extensive the impact of a strong yen has become on sales.

Over in the UK, the Bank of England last night downgraded its twelve-month GDP growth forecast from 3.5% to 3.0% and suggested the recovery had become choppy. The central bank was nevertheless not concerned about a double dip, suggesting the austerity measures which have been put in place will prevent such. But those measures are leading to inflation (VAT increased from 17.5% to 20% for example) and the BoE is finding itself between a rock and a hard place.

Last night the Bank of Ireland (not a central bank) announced a first half loss in 2010 which was double that of the first half 2009. The loss was blamed on the significant provisions the bank was forced to put away against bad debts.

Everywhere you look in the world, there is trouble. Even Russia will soon be announcing downgrades to GDP given its devastating drought. Maybe Latin America is the last bastion of growth, while Australia can only look on as a passive observer.

Last night the US Treasury auctioned US$24bn of ten-year notes and was swamped. It was swamped because the world now knows the Fed will be buying tens, but also because the risk trade is simply back off again. It is also the smallest auction amount in the tens since early 2009, meaning less supply. The other on again, off again trade across the globe of the past couple of years has been a sovereign desire to reduce exposure to US debt in favour of other currencies, such as the euro, yen or gold. Well last night foreign central banks bought 45.8% of the issue compared to a running average of 42.5%. The ten-year yield fell 7 basis points to 2.69% - its lowest level since April 2009. The two-year yield is now at 0.5% - its lowest level in history.

Gold, however, was undecided. On the one hand, the US dollar was up 2% and the Fed did not announce increased QE, but on the other hand the euro is again under pressure (falling 2% last night) and the Fed has stabilised QE and may yet need to take more drastic action. Gold fell US$5.90 to US$1197.90/oz and really could go either way from here.

Commodities nevertheless had no trouble being decisive. The global economy is stalling, so oil fell 2.8% or US$2.23 to US$78.02/bbl and all base metals fell 1.5-3%.

The VIX volatility index on the S&P 500 has been playing it cool lately, holding on to low levels around 22 as traders shirk protection. But 20 is the point at which complacency is called, so we weren't far off. Last night the VIX jumped 13.5% to 25.

Returning to my original observation – everything that transpired in markets last night did so in a vacuum. Wall Street made one adjustment at 9.31am and then went home. It is the height of summer in the northern hemisphere, and offices are all but empty. Just think Australia in January.

Having sold from the bell and found no buyers, Wall Street simply stopped dead. While August might typically be a write-off as a market indicator, we will soon be entering the dreaded September-October period. What will happen when all the suntanned investors return to a global economy clearly in strife?

The SPI Overnight lost 80 points, or 1.8%, to add to yesterday's accelerating sell-off in the physical market.

Yesterday was also marked by a disturbing result from Commonwealth Bank ((CBA)). Well strap yourselves in. Today sees results from Austereo ((AEO)), Coca-Cola Amatil ((CCL)), James Hardie ((JHX)), Qantas ((QAN)), Transurban ((TCL)) and Telstra ((TLS)), among others, and a quarterly sales result from Myer ((MYR)). And we have the July unemployment numbers.

And just to add insult to injury, last night US IT giant Cisco reported earnings which disappointed and its stock is down 8% in the after-market. Cisco is seen as a tech sector bellwether.

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