By Greg Peel

The Dow lost 12 points or 0.1% while the S&P fell 0.1% to 1337 and the Nasdaq added 0.4%.

In yesterday's Asian session, ratings agency Moody's warned that having examined Beijing's audit of Chinese local government debt exposures it had potentially found significant discrepancies which may lead to a negative watch being placed on Chinese sovereign debt. Moody's has insisted Beijing gets its act together. (See story later today: China Is Not The Next Greece.)

At 2pm New York last night, Moody's decided to downgrade Portugal's sovereign debt by four notches to junk status.

In the meantime, the ECB announced last night it would ease its stance on restructured Greek debt. French and German banks which hold the bulk of Greek bonds have both offered, under individual terms, to take a hit on their investments and roll exposures into longer dated maturities thus reducing the risk of Greek default. While this should make the world a happier place, ratings agency Standard & Poor's has since warned that such a restructure would be deemed a technical default. Under its rules, the ECB would thus be precluded from holding Greek debt as collateral, meaning a default would be unavoidable. But last night the ECB qualified its stance by suggesting all three major ratings agencies ? S&P, Moody's and Fitch ? would have to declare technical default before the central bank would refuse the collateral.

It's a subtle qualification, but an important one. What it does is place the fate of the world squarely in the hands of the ratings agencies ? the same agencies that accepted money to provide AAA ratings on junk mortgage CDOs up to 2007 and then downgraded the ratings of any bank holding these junk mortgage CDOs in 2008, on the basis that of course they weren't AAA. It has since been alleged by many that the ratings agencies must have been either highly incompetent or highly corrupt. US authorities have been conducting investigations.

One might reasonably have assumed traders would return from their long weekend and take some profits last night following the best week for Wall Street in two years, but while the indices opened slightly lower there was little enthusiasm on the sell-side. Moody's questions over Chinese debt should have rung some alarm bells but economists note that much of Chinese local government borrowings are against commercial infrastructure projects which will cover their own interest costs, and hence they do not strictly imply a sovereign risk.

May factory orders in the US rose 0.8% having fallen 0.9% in April, reflecting a turnaround in availability of parts from tsunami-ridden Japan. By midday Wall Street was back at the flatline and commentators were assuming a week of light volumes and sideways trade ahead of the jobs report on Friday and the start of earnings season next week.

But at 2pm, Moody's Portugal announcement hit the screens and the euro took a sharp dive, sending the US dollar index up 0.6% to 74.70 by session-end. Wall Street followed and the Dow was down 40 odd points, until someone pointed out that the bond markets have been pricing Portugal's debt as junk for months now. Once again, Moody's is light years behind the curve. Wall Street quickly recovered most of its losses to the close.

Prior to the Portugal announcement, gold had already posted a solid session and is up US$19.80 to US$1516.10/oz. There may be an element of repositioning on gold for the new quarter, as well as taking Chinese debt into consideration. Either way gold rose steadily on the day. Silver was also reignited, jumping 4% to US$35.53/oz.

Commodities markets had closed prior to the Portugal announcement. Before the late dollar rally Brent oil was up US$1.77 to US$113.74/bbl on the back of a 2012 forecast average price upgrade from Barclays Capital, being a US$10 increase to US$115. West Texas gained US$1.97 to US$96.91/bbl and the release of strategic reserves is now but a distant memory.

Aluminium was the talk of the LME, rising 2% on tighter inventories and news that Chinese smelters with high costs and negative margins were delaying output ramp-ups. Copper continued its steady rise and the rest of the complex followed.

Also preventing Wall Street from sliding last night was increasing confidence in a Congressional resolution to the debt ceiling issue as President Obama announced he would hold an unscheduled press conference after the bell. While he did not ultimately announce any breakthroughs the suggestion is that with further planned discussions a resolution will soon be reached. The Democrats are now prepared to cut some spending from Medicare and Medicaid. Public health insurance is anathema to Republicans.

US bond prices fell precipitously last week as stocks rose, so the Portugal announcement was enough to encourage a bit of a rebound last night. The benchmark ten-year yield fell 6bps to 3.12%.

While a 0.4% fall in the Aussie dollar over 24 hours could easily be attributed to the rise in the US dollar index, the Aussie hasn't been paying too much attention to that index (of which it is not a component) of late. The drop came yesterday on the release of a much less hawkish monetary policy statement from the RBA.

The SPI Overnight was up 9 points or 0.2%.