By Greg Peel

The Dow fell 44 points, or 0.3%, while the S&P lost 0.6% to 1433 and the Nasdaq dropped 0.8%.

The pullback continues. There is nevertheless no hint of panic in markets at present and for many a pullback was always on the cards and can only be healthy. Wall Street ran very hard ahead of the QE3 announcement and added a final jump on the day, but while the downside might be shored up by monetary policy, the upside remains unclear from here.

So we note that when markets can find no real reason to go up, they usually go down. We can explain profit-taking further by the fact this week is the last of the September quarter, although we may yet see a late flurry of buying from underweight funds. We can acknowledge that the European economy is only contracting further, that China's slowing and lack of policy response is providing concern, and that the US economy remains in limbo. There is further concern that next month's US reporting season may not be a good one, and there is building nervousness as TV screens show pictures of rioting in both Spain and Greece ? the former ahead of tonight's budget and the latter as Greece looks to further budget cuts to satisfy its bail-out requirements.

On the basis of the list above one would reasonably expect stock indices to have fallen a lot more, but we have a safety net of global monetary policy support either in operation or ready to roll. There is a risk that a Moody's reassessment of Spain's credit rating at the end of the week could see a downgrade to junk, but while last night Spain's ten-year yield jumped over 30 basis points this was only to reach 6%. Prior to the ECB's commitment that yield was over 7%.

The US ten-year bond rate spiked to 1.8% post the QE3 announcement before settling back at 1.7%, but this week has seen the yield slide down to 1.6% as investor confidence takes a little bit of a setback. Similarly, the VIX volatility index, which has been somnolent below 15 and even below 14 prior to this week, has now ticked up towards 17. It's not much, but it does indicate some put option buying is back in vogue.

The net result of all of the above is that the US dollar, the value of which should be completely undermined by the promise of unlimited printing, has been rallying back since having fallen on the QE3 confirmation. If the greenback is rising, the world is worried, and last night the index rose another 0.2% to 79.84.

The rise in the US dollar has rather stalled expectations of the reflationary push of QE, hence gold, despite every man and his dog being bullish, continues to drift lower. It was down another US$8.30 to US$1752.40/oz last night. A stronger dollar has a similar impact on commodity prices.

Tuesday night's sudden spurt of Chinese base metals buying ahead of next week's holiday period proved short-lived, with LME prices falling back 1-2% last night. Brent crude fell US55c to US$109.90/bbl and West Texas dropped US$1.19 to US$90.18/bbl. We recall that while lower energy prices are good for the economy as a whole, the sizeable capitalisation of US Big Oil implies a negative impact on stock indices.

All Australian eyes are on the Chinese spot iron ore price at present, but it is playing its own game. Having bounced back to around US$109/t from US$86 and fallen again to US$103, last night it rose US50c to US$104.20/t. Looks like there might be some consolidation near the US$100 mark before prices can rise back towards US$120 as many an analyst expects (hopes?).

The US economic data release of note last night was new homes sales for August, which fell 0.3%. While the result seems to buck the recent trend of an improving US housing market it's actually misleading. New sales numbers are up 28% over twelve months and demand remains at a two-year high. New home prices jumped a whopping 11.2% on average in August, which explains why sales dipped.

Once again we are at a point where we must bungle through the headlines from Europe tomorrow and Saturday morning. The new Spanish budget is announced tonight and the Spanish bank stress test results are announced tomorrow night along with Moody's credit rating decision, for what it's worth. Clearly the rest of the world would like Rajoy to just give up and ask for a bail-out so we can all get on with it, but as we well know, nothing in Europe ever happens expediently. Earlier in the year we were wishing the eurozone would just please give Greece the bullet. (It may yet do so, but not before Spain is sorted.)

Over on Wall Street there are those expecting, and even hoping for, a net 5-7% pullback. Such moves have dotted the trajectory of the US market since 2009 and in theory we are overdue. As to whether we can get as far as 7% assuming we have further to go, is debatable. At the end of the day most punters are longer term QE-bullish.

The SPI Overnight fell 18 points or 0.4%.

A glitch in my calendar had me suggesting the Fed Beige Book was out last night, which it wasn't, and the last revision for the June quarter US GDP is out tonight. My apologies. After I finish this report I will have myself taken out and shot.

Tonight in the US also sees durable goods and pending homes sales.

Rudi will appear tomorrow on BRR Media's Friday Afternoon Round Table at 3pm.

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