By Greg Peel

The Dow closed down 3 points while the S&P lost 0.2% to 1361 and the Nasdaq fell 0.3%.

Ding dong, the witch is dead. In early trade on the Australian bourse yesterday, the selling continued. With the Aussie hitting US$1.10, the ASX 200 was down a good 50 points – again. But when the news came through, the market spun on a dime and by the closing bell was almost unchanged.

On ABC radio, announcer Richard Glover was perplexed. How could the death of one man, albeit public enemy number one for the West, cause a turnaround worth billions of valuation dollars? To answer his question we must remember that stocks are valued on a combination of objective forward earnings forecasts and esoteric sentiment. And sentiment is a very powerful force.

Sentiment was on uninhibited display overnight in the US as thousands of Americans, mostly young, gathered at appropriate locations to chant U-S-A and wave the flag. One is uncomfortably reminded of similar scenes from the other side of the fence – those which repulse Westerners – of radical Muslim supporters chanting, firing weapons and burning the American flag whenever an act of terrorism has achieved its purpose. It seems the common denominator is now the lowest one.

Wall Street opened with a flurry as one might have expected, and which the Australian stock market was largely forecasting, with the Dow up 66. But that was it. By lunch time Wall Street was back where it started – a complete contrast to the reaction downunder. Did traders see such a sentiment-based move as an opportunity to take profits after a good run, or was there more to it? Is Bin Laden's death good for stock markets and world peace, or is, at least in the shorter term, the opposite true? What happens now? The spectre of retaliation is now hanging.

There will be much discussion in the coming days, but one thing we can be sure of is that the removal of the titular head of al-Qaeda will not solve the US debt problem, will not reduce global inflation, and will not have any real macro effect at all. Indeed, the US dollar last night moved down again for most of the session before closing little changed in its index at 73.04.

An unchanged greenback did little to stem the tide of a precious metal exit. Within minutes of the news breaking, gold plunged and closed down US$20.10 or 1.3% to US$1545.60/oz. Silver does not often have days when it loses 8.4% or US$4.01 to US$43.93/oz. The sell-off trigger, one might suggest, was the sudden perceived removal of a longstanding element of geopolitical risk. The reality, of course, is that the world is very long precious metals.

Oil was also weaker, falling US77c as Brent to US$125.12/bbl and US95c as West Texas to US$112.98/bbl. Will oil now flow more freely or might retaliatory terrorists strike at oil facilities?

Perhaps the telling move of the session was in the VIX volatility index. It moved up 8% from 15 to 16 – not out of general complacency territory, but some protection was taken nevertheless against what can only be described as uncertainty. If anything, last night saw an unwinding of overloaded risk positions. The US ten-year bond yield is now at 3.28%.

It was May Day in the UK which meant base metal markets remained closed.

Executions aside, there was plenty of economic data to absorb last night.

We had already learned the Chinese manufacturing PMI, which eased to 52.9 in April from 53.4 in March. Battered by the Aussie, the equivalent Australian PMI fell to 47.9 from 48.4. We will have to wait until tonight to see how the UK fared, but the eurozone PMI was indicative of a German economy powering ahead with a move up to 58.0 from 57.5. The US number slipped back to 60.4 from 61.2, but still represented 21 months of straight expansion. It helps when your currency is being manipulated.

The Aussie is down 0.25% from Friday's close at US$1.0943 having pipped, as noted, 1.10 yesterday. Today the RBA will make a rate decision and following on from yesterday's surprise dip in the growth of the TD Securities inflation gauge there is now no expectation of a rate rise, if ever there were going to be one with the currency where it is. Might a “no change” call spark an Aussie sell-off? Given the currency's obvious resilience in the face of extensive offshore stock selling these past few sessions, one would have to say that's unclear.

Interestingly, on Friday night the SPI Overnight rose 32 points and couldn't have been less accurate an indicator if it tried. Stocks tanked from the open. Yesterday the physical market recovered all of its initial loss on what one presumes was an expectation of a very strong session on Wall Street last night. That didn't happen, which is probably why the SPI Overnight closed down 21 points, or 0.4%, this morning.

Today will feature ANZ Bank's ((ANZ)) half-year earnings report.

As the dust settles, the past 24 hours looks more like a “sell the fact” response than anything else, with risk coming off the table given the uncertainty of the outcome an event which does not occur too often. And might we also be reminded that it is now May?

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