By Greg Peel

The Dow closed down 79 points or 0.7% while the S&P fell 0.8% to 1310 and the Nasdaq dropped 1.4%.

Let's start with yesterday's Australian data. The construction PMI rose to 44.6 in February from 40.2 in January to represent an easing of the pace of contraction but a contraction nevertheless, marking nine straight months of such. The January number was low given the weather impact.

ANZ's job ads survey showed a 1.2% increase this month over last to mark a 19.3% increase year on year. The February unemployment numbers are due out on Thursday.

The TD Securities monthly headline inflation gauge rose to 3.6% from 3.4% last month following a 5% increase in food prices. This number will not impact on the RBA's rate-setting decisions as the central bank expects core inflation, which excludes food and oil prices, will remain under 3% for some time.

All in all not the sort of stuff that might spark a fall of over 1% in the stock index, but then local issues are not in the frame. Take out the ex-dividend impact and one can consider concerns over slowing in China, concerns over QE3 and of course the big one – concern over the oil price – were all enough to scare investors out of the market yesterday. Traders have taken to watching the oil markets, which trade around the clock, on a minute by minute basis.

And what was going on yesterday was more news coming through of what is now being called a full scale civil war in Libya. Battles are being fought at oil installation locations and foreign powers are dithering in their response. The US, so steeped in deficit, is wondering whether it can actually afford to intervene. But can America afford an oil price that keeps rising? It is a given that high oil prices will derail the US recovery. But the government also holds vast strategic reserves and is now thinking of releasing them.

Libyan oil is very important to Italy and other European importers which really don't need another shock to an already fragile system (note that Moody's downgraded Greece again last night and put it on negative watch, suggesting its austere road to recovery might simply be too much of a challenge). Libya also supplies a lot of oil to Asia but very little to the US. For the US, Libya is not the real concern.

The real concern is the unrest in the region in general, and in particular Saudi Arabia. Even then, the US gets more oil from Canada, Mexico and Venezuela than it does from Saudi Arabia and also a good deal from Nigeria. But take Saudi supply out of the equation, and who knows where the oil price will run to. Protests are being planned in Saudi Arabia and Kuwait this week. Yesterday it was the turn of Lebanon to join the fray.

Wall Street is running on rumours. Last night's rumour, just before the opening bell, was that Gaddafi was ready to negotiate an exit. Oil prices fell and the Dow opened up 74 points. But the rumour was quickly dismissed and oil started running the other way again. Brent rose to over US$118/bbl and WTI to almost US$107/bbl.

I reiterate that Brent is the relevant benchmark, but Americans are watching West Texas. Notably yesterday Deutsche Bank's Australian energy sector analysts decided to switch to Brent from WTI in their oil stock valuation models and in so doing step-jumped target prices upward. When oil prices rose towards their peaks last night, US stocks began to tumble again. Oil ultimately retreated but stocks kept falling, just as Australia had seen an extended sell-off. The Dow fell to be down 128 before finally some late buyers were found.

In the end, Brent crude closed down US$1.18 to US$114.79/bbl and WTI closed up US50c to US$104.91/bbl.

If stock investors have finally lost confidence in resolutions to MENA (Middle East & North Africa) unrest, so too have commodity funds. Base metals finally broke down in London last night on furious fund liquidation, sending aluminium and lead down 1%, copper, tin and zinc down 3%, and nickel down 4%.

The Greek downgrade had the euro weaker last night, and the retreat in the price of oil took pressure off the US dollar, allowing the index to close slightly higher at 76.47. The Aussie slipped a little to US$1.0113. Gold closed steady at US$1432.50 but there's little stopping silver, which was up another 1.5% to US$36.07/oz.

Not only has stock market trading across the globe become a day to day proposition right now, it has become an hour to hour proposition. Last night the VIX volatility index jumped 15% before pulling back to an 8% rise at 20.63 – still quite a low number compared to last year's European scare.

The markets might have become a little panicked but this is not a GFC and not considered as dangerous as the euro crisis, despite the fact the price of oil could completely derail the global economy. There is no doubt hope that the US government will release strategic reserves, that foreign powers will shut down Gaddafi, and that elsewhere in the region more peaceful concessions can be negotiated among rulers and their people. But the situation is fluid.

The SPI Overnight was down 23 points or 0.5%.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.