By Greg Peel

The Dow fell 519 points or 4.6% while the S&P dropped 4.4% to 1120 and the Nasdaq lost 4.1%.

Ratings agencies Standard & Poor's, Moody's and Fitch have all confirmed they are not set to downgrade the sovereign debt of France, Europe's second largest economy. Yet French president Nicholas Sarkozy last night cut short his summer holiday to hold an emergency meeting with his finance minister in order to settle on a list of potential deficit-cutting measures which were due to be decided upon at a meeting scheduled for August 24.

The reason for the urgency relates to a trickle that last night turned into a flood. From the moment S&P downgraded US debt the question was then asked: How can France, with its apparent significant exposure to the sovereign debt of the various eurozone basket cases, be considered AAA when the US is not? Surely if America has been downgraded, then France must be next?

For the last few sessions, Europe has been out of the spotlight. Late last week the ECB belatedly moved in to shore up Spanish and Italian debt markets but that positive was overshadowed by the negative of the US downgrade and the resultant market turmoil. Speculation has been rife, but last night a rumour began in European markets that France was about to be hit with a downgrade. It was only a rumour, it might be a result of Chinese whispers, it might be a result of a fraudulent attempt at "rumourtrage", and it has been denied by the ratings agencies, but global markets are so fragile at present that any rumour is being taken on face value for risk of being accurate.

Traders began to sell down French bonds, which prompted Sarkozy's rapid return to Paris. The shares of French banks, and then all European banks, and then all US banks were sold down double-digit percentages ? again. The financial sector led Wall Street down from the open to be over 400 Dow points lower.

Hardest hit was French bank Societe Generale, the CEO of which was moved to respond to the rumours around lunch time New York. Often in these cases, a CEO will paint on a Cheshire grin and disingenuously shrug off accusations of capital and liquidity problems, laughing as he calls the accusations misguided and ludicrous. At that point you know the bank has about two days to live. But last night Frederic Oudea was fuming. His frustration and anger were palpable in his initial statement and later in an interview on CNBC as he assured the market SocGen is fully funded through 2011. He rattled of the list of specific exposures to the various eurozone countries in trouble and acknowledged that they were not tiny but indeed manageable. He noted that SocGen was well inside the Basel III requirements.

When the subject of the American-based ratings agencies was raised, he was dripping bile.

He did enough to turn Wall Street around, for a while. The Dow recovered to be only around 200 points down but then the buying began to dry up. That was not good, and floor operators pointed to a large swathe of short term, leveraged trading positions which had been put on in the past two sessions to try and capture the bounce which were now looking shaky. The sudden rush down to the close tended to indicate they were being reversed.

Of course the risk now is that the ratings agencies will look at the higher cost of French debt as forced by the bond vigilantes, decide France will thus have more difficulty in refinancing, and downgrade as a result. This is what has happened over and over again with Greece, Portugal, Ireland, Spain and Italy. The market sells bonds, the agencies downgrade, the market sells more bonds and the downward spiral continues. The farce will only end the day the world wakes up to the fact ratings agencies are ignorant, incompetent and under criminal investigation. Exactly what purpose do they serve? They have already been shown up for fools in downgrading the US given US bonds have done nothing but rally in price ever since. Last night the US ten-year yield fell 12 basis points to 2.12%.

Here's an idea. How about if the ratings agencies just get it over and done with and downgrade EVERYONE, right now. Huh? If slowing global growth in the face of a massive global debt burden is going to see a cascade from the US to France and everywhere else, then surely, over time, everyone must end up being downgraded. Why not just get it over with and stop the turmoil? Because you know what? If everyone that ever had a AAA now has no more than an AA+, then AA+ becomes the new AAA. In other words, relative ratings imposed by agencies no longer hold any meaning, if they ever did in the first place. Oh and last night the currency of AAA-rated Australia fell two cents to US$1.0179. It's down about 10% since the US downgrade to AA+.

New South Wales is considered a better credit risk than the United States of America. I live here, and I think that's hysterical.

Gold was naturally the recipient of outflowing global funds last night. It's up US$51.30 to US$1795.40/oz and traded briefly above 1800. Gold is often scorned as an investment because it pays no interest, but then nor do short-term US Treasuries. Gold was also preferred last night to the other safe haven ? the Swiss franc ? because the Swiss government announced it would pursue further efforts to cap the currency. The yen is also seeing steep inflows despite the Japanese Ministry of Finance having a long record of currency manipulation. The euro was carted, as was the pound which one might say has its own issues at present, sending the AA+ US dollar index up 1% to 74.79.

Silver also jumped 4% last night, to US$39.29/oz, but base metals were mixed because the LME closed at the time when Wall Street was recovering. Copper is down 1%.

Oil has fallen steeply these past few sessions as one might expect, but last night, and despite the stronger greenback, Brent crude jumped US$3.68 to US$106.53/bbl and West Texas jumped US$2.79 to US$82.09/bbl. The spark was a surprising drop announced last night in last week's US crude inventories, but there has also been talk that OPEC might step in with production cuts in order to stem the slide. Short-covering drove the rallies.

Funny ? it was only a few months ago OPEC was arguing over production increases to cap the oil price in the Arab Spring.

The SPI Overnight fell 99 points or 2.4%.

I have been pointing out for a few days now that markets never ultimately turn on one day's massive selling and that subsequent bounces are usually met with more selling. So far that scenario is playing out. At present, as we have seen, there are plenty of punters who see sufficient value at these lower multiples to pile into stocks. Markets usually only turn when everyone, including the value-seekers, finally give up the market for dead. And that usually happens after the volatility has settled down.

Rudi will be appearing on Sky Business today at noon and then by popular demand, FNArena's own Market Insight program returns at 4pm on BRR. You can watch the show live at www.brr.com.au