By Greg Peel

The Dow fell 213 points or 1.7% while the S&P lost 1.7% to 1358 and the Nasdaq dropped 1.8%.

European markets had their first chance to respond to Friday's weak US jobs report last night and they didn't muck around. The major stock indices fell 2.5-3.0% and the Italian market chipped in with a 5% loss, led by substantial falls in the big Italian banks. While many in the US have been quick to reflect on the often misleading volatility of monthly US jobs numbers and thus water down the panic, there is no denying the persistent creep of Spanish and Italian bond yields.

Last night the Spanish ten-year hit 5.83% and the Italian ten-year 5.50%. It's the highest yield in Spain since before the ECB began its LTRO monetary stimulus. The so-called "bond vigilantes" have taken to the Mediterranean bonds on expectations the two eurozone economies will struggle under austerity measures and ultimately require Greek-style bail-outs. A Spanish bond auction was not well bid a couple of weeks ago and tomorrow night Italy will hold a similar auction.

One of the problems is that the big holders of sovereign bonds on the other side of the trade are the European banks which have taken cheap ECB funding via the LTRO and invested in these high-yield instruments. The ECB wants the banks to lend into the European economy but the banks need to shore up their balance sheets and build liquidity. One wonders where the Spanish and Italian bond yields might be if the ECB were not an indirect buyer in this fashion, but the other issue is as to what will transpire when the banks have to mark their bond positions, which are now under water, to market.

The problems are feeding on themselves, and despite the fact European stock markets had to play catch-up for the lost Easter Monday session it didn't stop Wall Street looking to Europe as a good reason to keep selling. This time the US indices did not plunge on the open ? they opened square and sold off steadily over the session. Volume on the NYSE reached 4.6bn shares compared to the 2012 average of 3.8bn. It was the biggest fall in stocks this year, the S&P crashed through technical support at 1370, and the Nasdaq has breached the 3k mark, closing at 2991.

Adding to US concern is the March quarter corporate results season, which kicked off last night. For nine quarters US companies have posted solid net earnings growth as they clawed back out of the recession, with some quarters marking 10-20% growth (year-on-year). This March quarter was expected to be more muted, with forecasts at the beginning of the quarter suggesting 2.9% growth. As of last night, persistent forecast downgrades had reduced that number to minus 0.1%. Take out Apple and that would be minus 1.6%. What are stock prices if not the measure of expectations of future earnings?

Still, there remains little sign of panic among Wall Street commentators, with the words "healthy correction" a pervading theme. And Alcoa published its result after the closing bell, this morning our time, and kicked off the season with a solid "beat". Alcoa shares are up 5.5% in the after-market. Too much concern?

European governments might be having difficulty borrowing money from the world, but not so the US Treasury. Demand for last night's three-year note auction saw a return to strength after tepid demand in previous months reflected new found enthusiasm in the US economy. That enthusiasm had the Dow breaking 13k and the US ten-year bond yield shooting up to 2.40%, but after another 5bps fall last night the benchmark ten-year is back where it all began at 1.99%.

And the VIX has finally moved out of "complacent" territory, perhaps once again to show that (a) it doesn't pay to be complacent and (b) whenever the VIX falls toward 15 it is a very good idea to buy cheap insurance (put options). Last night the VIX jumped 8% to 20.

One would normally expect such a session to see a solid gain in the US dollar but yesterday the Bank of Japan elected not to provide any fresh stimulus to the Japanese economy so funds flowing out of the euro last night found their way to both the dollar and the yen, leaving the US dollar index with a 0.1% rise to 79.86. Gold nevertheless played safe haven once more, rising US$19.70 to US$1660.10/oz, while the Aussie was duly sold off by 0.6% to US$1.0249.

The European stock exchanges had been closed since Thursday night and so too the London Metals Exchange, so base metals had to play catch-up as well. All fell, but copper was the stand-out with a 4% drop. Brent crude lost another US$2.82 to US$119.85/bbl and the US$1.54 fall in West Texas crude took the US benchmark back to where it began 2012.

The SPI Overnight fell 55 points or 1.3%.

One can trace the beginnings of what now looks like a genuine correction back to the release of the minutes of the last Fed meeting in which QE3 was omitted and thus deemed by Wall Street to be off the table. It would nevertheless be foolish to believe QE3 could never return to the table were either Europe to start crumbling again and/or the US economy start slowing again, just as it did at this time in both 2011 and 2010. Indeed the deja vu is palpable, with each of the past two years seeing solid US economic data and reduced European fear early in the year only to give way to weakening US data and the eurozone again threatening to implode by mid-year.

Sell in April and go away?

Or will Alcoa's beat set the tone for a better than expected results season? More clues will come on Friday night when the big banks JP Morgan and Wells Fargo report, following the release of China's GDP report during the day.

Rudi will appear on Sky Business' Lunch Money on Thursday, 12-1pm, and on Friday he will be guest on BoardRoomRadio's Friday Afternoon Round Table (3pm).

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