By Greg Peel

The Dow fell 106 points or 0.8% while the S&P dropped 0.8% to 1399 and the Nasdaq fell 1.0%.

The Spanish state of Valencia last night announced it would need a domestic bail-out of E5.6bn rather than the E4.6bn originally requested to avoid bankruptcy. The announcement comes hot on the heels of this week's capitulation by the state of Catalonia, which brings to three the number of Spanish states having stuck their hands out for rescue, for a total of E10bn. More are expected to follow including Andalusia, Spain's most populous state.

Spain's prime minister Mariano Rajoy ensured reporters that domestic issues could be handled by Madrid. Rajoy had just completed meetings with French president Francois Hollande after which both leaders underlined their commitment to saving the euro. Yet Rajoy is also urging unlimited bond purchases from the ECB to cap Spanish borrowing rates. That would be "the cake". Last night Spain introduced the "and eat it too".

The ECB's Mario Draghi is desperate to start buying eurozone bonds which is clearly seen as the only way to prevent disaster. The Germans must first agree, and Draghi's op-ed in a German newspaper this week smacked of publicly pleading. The other issue is that Spain must first ask for a bail-out before bond purchases can be triggered. A month ago Spain asked for clarification on the ranking of ECB bond holdings were purchases to occur, and last night Rajoy insisted he would first need to see the terms and conditions of austerity measures that would be imposed in return for a bail-out before he would ask for one.

It seems to me that Rajoy is fully aware he holds the fate of the world in his hands, and he's going to make the most of it. Forget Greece, that's just a sideshow. Spain and Portugal? Old news. Spain has already secured a line of credit for its ailing banks, so all that remains is support for government borrowing costs. Let us not forget that Rajoy is a mere politician, meaning he serves only himself using the limited intellectual capacity he has. Rajoy has regional elections coming up in October.

Greece has already been doing the rounds with a "can we have more time please" campaign. Rajoy will no doubt be expecting an easy-to-achieve set of bail-out conditions. What are the bets the first set is rejected for the sake of it? Rajoy must know he holds the cards and can play them to his advantage.

If it wasn't already becoming apparent, it is certainly now more likely that we won't be seeing any action in September, from anyone. You can stop holding your breath.

By now there must be quite a dent in Draghi's desk where he's been banging his head. He knows the world is expecting something at the ECB meeting next week, but there's very little he can do in the timeframe. Last night Italy auctioned five and ten-year bonds and sold them all without a hitch. The ten-year yield achieved was 5.82%, down from 5.96% last month. Buyers are anticipating ECB action. They are expecting Draghi to announce a bond purchase program next Thursday. What happens when he doesn't?

What will probably transpire is a healthy pullback. Markets, particularly stock markets, look to have run way too far on mere speculation anyway. The wheels are still turning ? they're just turning in typically glacial European fashion. Politicians have control, not sensible intelligent people (like Draghi). Merkel is now isolated, having lost her ally in Nicholas Sarkozy. Hollande stressed last night he will not stand in the way of ECB bond purchases, as the Bundesbank is. The Dutch go to the polls in a couple of weeks. Merkel is currently in China, no doubt cap in hand. You buy all the US debt Mister Wen, how about ours too?

And speaking of the US...

Last night America's big retail chains blew away economist forecasts with their sales results for August. Gap's same-store sales increased by 9% compared to 5.5% expected. Macy's posted 5.1% instead of 3.3%, to name but two. It's "back to school" time, and there is plenty of discounting still going on, but these are not the numbers of impending recession. In July, US personal spending rose by 0.4% to the highest level since February, it was revealed last night. Incomes rose 0.3%. Last week's new jobless claims numbers were unchanged, which is also better than expected.

Last night the Dow opened down around 65 points. News of Spain's new demands had not yet come through. Initial weakness was all about the last remaining hopefuls on Wall Street no longer expecting Ben Bernanke to preempt QE3, or anything like it, tonight in his Jackson Hole speech. He might be able to fiddle about the edges of accommodative monetary policy, but there'll be no big guns. It's not a disaster ? expectations have been fading for some time. They've been fading because recent US data have looked healthier, at least with regards to housing and consumer spending, and that's not such a bad thing. And it's all about Europe anyway.

And that leads us back to the ECB. It is unlikely Draghi will want to completely disappoint the world next week. More likely he will say "We are ready to do this, if this happens, and when that happens". Not enough to provide blessed relief, but enough to stave off complete disaster. And then we all go crazy waiting for another month to pass by.

The news from Spain saw the Dow down 100 points for the session, where it basically closed. It closed right on 13,000. The S&P closed a pip under 1400. If Bernanke delivers only more of the same tonight, that is "we stand ready", technical levels will break. Then it's over to Europe.

The US dollar index was slightly higher last night at 81.70 and gold is steady at US$1655.50/oz. The US ten-year bond is still hanging around the 1.60% mark. The Aussie is 0.6% lower over 24 hours to US$1.0291 but that's all about collapsing Chinese spot iron ore prices.

Base metals were a little lower last night, West Texas crude fell US80c to US$94.69/bbl and Brent is steady at US$112.65/bbl.

With the local market having copped a big iron ore-related sell-off yesterday, the SPI Overnight is down 18 points or 0.4%. Yesterday the spot iron ore price fall another 1.8% to US$88.50/t, below the critical US$90/t mark.

Harvey Norman ((HVN)) will post its result today, as the last of the stragglers stumble over the August finishing line. We'll also see closely watched private sector credit data. Japan will release somewhat of a monthly economic "data dump" today. Tomorrow, being the first of the month, Beijing will release China's August manufacturing PMI.

Bernanke will speak tonight. Don't anyone drop a pin.

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