By Greg Peel

The Dow fell 129 points, or 0.9%, while the S&P lost 1.2% to 1495 and the Nasdaq dropped 1.5%.

It's baaaack.

There are several reasons why Wall Street has been able to push towards previous highs over the last few months ? an improving US economy, stabilisation in China, global easing ? but one major reason has been Europe. Or the lack of any bad news out of Europe. After two years of turmoil, Europe seemed to settle down towards the end of last year, with the ECB playing safety net, Spain not picking up the red bail-out phone, Greece satisfying its own bail-out obligations, and politicians drifting into the background. On yesterday's PMI numbers, the eurozone manufacturing sector has all but stopped contracting and confidence measures in Germany have been positive.

But never underestimate a politician's capacity to take an improving situation and stuff it up.

The Spanish opposition party has called for the resignation of prime minister Mariano Rajoy as he fights to contain a corruption scandal in his government regarding secret payments, which leads right to the top. Corruption? Politicians? It would never happen in Australia.

And speaking of corruption, former Italian Prime Minister Silvio Berlusconi, now looking to reclaim government in the upcoming election and has promised to refund around E4bn in property taxes if victorious. Previously appointed technocrat Mario Monti is also running, and it is he who has been credited with stabilising Italy's runaway debt situation. He has thus, however, brought hardship to the Italian people as a result, and it becoming clear Berlusconi is choosing to lever off such woe and pander to the hip pocket nerves of distraught voters.

The bottom line is that if Berlusconi gets in, the fear is Italy will fall. Rajoy has managed to hold off from requiring a bail-out, but if his government crumbles, that bail-out may be swiftly required. Welcome back to the depths of mid-2012. The Spanish ten-year bond yield, which we haven't spoken of for so long now, jumped 24 basis points to 5.42% last night. The Italian equivalent rose 18bps to 4.42%. The ECB meets for a policy meeting on Thursday night.

The German stock market, which has also been having a stellar run alongside the rest of the world, fell 2.5% last night. France fell 3% and London fell 1.6%. It is almost exquisite timing that Europe should reappear a day after the Dow hit 14,000 for the first time in five years ? a psychological level that had the potential on its own to invoke some profit-taking.

Yes. I'm afraid it was all just a dream. Welcome back to the cold hard light of day.

The question now is whether global markets, having seen this movie so many times before, can lay off the panic button and take the further disruption from Europe in its stride? Another question is whether the lull in proceedings up to now, and indeed the three years from the initial Greek blow-up to now, have allowed for the reversing of risk positions across the globe, leaving Europe more isolated and contained in its problems? Can the ECB hold the fort? We will no doubt find out shortly.

The euro took a tumble last night as one might expect, ending its solid run up in recent weeks. The US dollar index jumped 0.5% to 79.55, but this did not deter the safe havens of gold, which rose US$7.00 to US$1674.30/oz, and the Aussie, which rose 0.3% to US$1.4028. The US ten-year bond yield fell below 2% and the VIX jumped 12%, but only to 14.

Base metals seemed dumbstruck last night and did little, leaving the oils to take the brunt. After a very consistent run-up to date, Brent fell US$1.17 to US$115.59/bbl and West Texas fell US$1.50 to US$96.27/bbl. Iron ore rose US$1.00 to US$154.20/t.

The SPI Overnight fell 35 points, or 0.7%.

So no, the GFC has not gone away. Just to drive that reality home, last night the US Justice Department moved to bring a case against Standard & Poor's for allegedly providing fraudulent ratings on mortgage securities leading up to 2007. The wheels of justice turn slowly. If the DoJ is unable to mount a winning case against Poor Standards... sorry... Standard & Poor's, at least we may see some long-needed regulation imposed upon the US credit rating industry.

It's RBA day today and not one economist is expecting a cut, which means we'll probably get one. Cochlear ((COH)) will provide an earnings report, I hear, as will Transurban ((TCL)) and Navitas ((NVT)) and we'll also be provided with updates from Westpac ((WBC)) and Macquarie Group ((MQG)).

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