By Greg Peel

The Dow fell 512 points or 4.3% while the S&P fell 4.8% to 1200 and the Nasdaq fell 5.1%.

All talk in the market yesterday morning was as to whether activity on Wall Street on Tuesday night and Wednesday night had signalled a capitulation bottom. I suggested yesterday that markets rarely turn immediately after one big drop but first suffer false rallies. There followed an accelerating sell-off in the ASX 200 into the afternoon which surprised observers given the rebound on Wall Street. The sell-off had all the hallmarks of margin call selling ? forced selling of underwater positions by margin lenders ? which is indiscriminate and non-subjective.

Last night Wall Street appeared to suffer exactly the same fate. The selling accelerated into the afternoon, sales were across the board, and the volume was the heaviest this year. Once again the markets are being slammed by deleveraging.

The trigger for Wall Street came out of Europe amidst debt-related confusion.

The ECB held its scheduled monetary policy meeting last night and as expected, left its cash rate unchanged. But at his regular press conference ECB president Jean-Claude Trichet announced that the central bank had resumed purchases of European sovereign bonds for the first time since March. Given the eurozone has no unified bond, such individual purchases are the eurozone equivalent of quantitative easing.

This was great news. Clearly the ECB had decided the escalation of the debt crisis into Spain and Italy meant now was the time to get serious. The euro rallied and the bond yields of the two large economies fell. But pretty soon bond traders realised that the ECB was not buying Spanish and Italian debt at all. It was only buying Portuguese and Irish debt.

What did this mean? Was the ECB simply trying to send a signal that it had "the power" and hoping that bond markets would do the rest? Or should the market take the ECB's failure to buy the bonds that really mattered as a policy mistake?

The answer is not that hard given it's well known Jean-Claude Trichet is a fool. He should have been run out of Brussels in 2008 when in the face of the escalating crisis in the US he raised the eurozone cash rate. Last month, in the face of the escalating crisis in Europe, he raised the eurozone cash rate. End of debate ? sell.

European markets were tanking as Wall Street opened and the baton was passed. While analysts may attempt to now pull apart the ECB's thinking there was no time to ruminate in an already very fragile market. It was a "sell everything" session which included desperate attempts to raise cash to pay margin losses in stock and commodity positions. This is evidenced by a US$12.30 fall in the price of gold to US$1648.80/oz and a 6% drop in silver. Gold had initially rallied on the ECB news to hit a high of US$1680, so realistically it fell over US$30.

The euro turned around rapidly and the pound followed. Yesterday it was announced that the Bank of Japan was intervening in currency markets to keep a lid on the surging yen, and the day before the Swiss National Bank had cut its cash rate in an attempt to do the same. The end result is that last night the US dollar index jumped 1.7% to 75.26. The Aussie has fallen three cents in 24 hours to US$1.0467.

Money flowed out of stock and into US bonds despite already low yields. Short term bill yields are now zero to negative. The benchmark ten-year yield has fallen 23 basis points to 2.40%. The shift is all into the front end, forcing the US yield curve to steepen significantly. The 2008 low in the ten-year yield is 2%.

After seemingly breaking the impasse on Wednesday night, Brent oil again collapsed ? down US$5.98 or 5% to US$107.25/bbl. West Texas fell US$5.30 to US$86.63/bbl.

Base metals trading closed in London at 2.30pm NY when the Dow was not yet down 400 points. All metals fell 1-3%.

The SPI Overnight fell 157 points or 3.7%, having already been given a head start yesterday.

What now?

The S&P 500 finally pulled up at the psychological level of 1200 which had been a target among technicians as soon as the index had broken its 200-day moving average last week at 1280. On Wednesday night it had rallied back from below the Japanese earthquake low for the year of 1249 but that was shattered last night. The S&P has closed 12% below its April high, which to those who believe in such things officially implies a "correction". The talk now is as to whether the bull market correction rolls into a "bear market" (down 20%).

Punxsutawney Phil has been quick to point out that this time last year, Wall Street corrected by 17% before Ben Bernanke announced at Jackson Hole towards the end of August that QE2 would be implemented. Will the Groundhog Year continue to play out? In order to do so, the Fed needs to be convinced that a disinflationary environment has re-emerged. On last count, US core inflation was still ticking upward. However, many in the market believe the Fed has no choice but to act. The only questions are when and how. It is assumed direct bond purchases would not be used this time.

Was last night the capitulation low? Well, the song remains the same from yesterday ? markets rarely turn off a sharp down-day. There are more likely first to be rallies ? even sharp rallies ? which prove false, and then further falls of a less spectacular nature, before the bottom is found.

An obvious question here, for those who remember 2008 all too well, is what about fund redemptions? When Lehman went under the selling continued long into 2009 because retail investors had not yet been given the opportunity to exit the market. The funds they invested in only provided brief redemption windows ? usually quarterly ? and all hamstrung investors could do was wait for the opportunity. The feature then was of big selling at the end of each session during the redemption window. There is one very big difference now: there are not many retail investors in the market.