By Greg Peel

The Dow closed down 137 points or 1.2% while the S&P lost 1.1% to 1281 and the Nasdaq dropped 1.3%.

The first thing to note here is that Australia is currently leading Wall Street rather than following it as usual, given the critical situation at present is in the Asian time zone. Having fallen 6% on Monday, yesterday the Nikkei fell another 10% as the focus moved from the cost of the tsunami to the threat of nuclear meltdown. With all eyes on Japan, the ASX 200 fell 100 points.

Wall Street awoke with the same attitude and from the opening bell the Dow was down 300 points. There had been just a little bit of value-seeking in Australia on the death yesterday but for Wall Street the session was simply all one way – up. Value buyers entered the market to ensure a close near, albeit not at, the highs of the day.

Aside from simple perceived value, reports coming from Japan over the session were of falling radiation levels, suggesting the reactors were beginning to be contained. However the situation remains fluid, experts are talking of a crisis approaching Chernobyl proportions, and each hour is critical. It would appear, at least, that Prime Minister Kan is candidly keeping the world right up to date.

So we just don't know. And when we just don't know, we don't hang around to find out. A popular expression during the GFC rout was “don't try to catch a falling knife”, and so far it is the brave who have entered the market on the buy-side. That trick didn't work on Monday. For speculative commodity funds, last night was the night to simply exit to the sidelines which meant indiscriminately selling everything. Commodity funds (and thus underlying commodities) have been the target of speculation upon speculation in recent months, as investors seek to capture gains in prices of oil, food and metals on the basis of the inflation that they themselves are exacerbating. These are risk trades, and uncertainty is the enemy of risk.

Brent oil fell US$5.15 to US$108.52/bbl last night, and WTI fell US$3.67 to US$97.47/bbl. Copper and zinc fell 1%, aluminium 2.5%, and nickel and tin 4%. Soft commodities lost 5% or more. Precious metals were not spared either. Gold fell US$30.90 to US$1396.80/oz and silver – which is both precious and industrial – fell 4% or US$1.48 to US$34.39/oz.

One might have expected that on the threat of nuclear meltdown, gold would be a safe haven trade. That's exactly what happened when this writer was trading gold the night the Chernobyl news broke. But these are different times, commodity funds have grown to be all the rage, and gold is simply a component. When those funds are sold, gold goes down with the ship.

The massive repatriation of yen continues, which includes the exit of the Australian bond play on the yen-Aussie interest rate differential so popular with Japanese retirement funds. The Aussie has fallen nearly two cents over the last 24 hours to US$0.9912. But after a period of being ignored, the US dollar was finally finding safe haven interest last night, meaning the index held steady at 76.34 despite heavy selling against the yen.

Helping to push US stocks higher later in the session was the release of the Fed's latest monetary policy statement. In it the central bank again slightly upgraded its outlook for the US economy, suggesting conditions in the jobs market “appear to be improving gradually”. This was also a statement in which inflation was very specifically addressed, which is new, with the Fed suggesting the current (not counting last night) jump in oil and food prices was only “transitory”. The Fed nevertheless suggested it would “pay close attention to inflation and inflation expectations”.

Despite such a focus, the members voted unanimously to leave the funds rate unchanged and to continue to see through the QE2 program. This is in itself a change, as there has long been at least one dissenter looking for a rate rise. There was absolutely no hint of QE3 despite many in the market continuing to assume it is inevitable. The contrary view is that the Fed will cease QE2 in June as planned, meaning it stops using freshly printed money from the Treasury to buy bonds, but that it will continue to reinvest the interest proceeds from QE2 and any maturing positions back into bonds. You might call it a sort of “QE two and a half”.

On the subject of inflation, the Empire State manufacturing index came out at 17.5 for this month – up from 15.4 to mark a nine-month high. But economists were looking for 18.3, and talk from manufacturers was of their struggle with rising input prices.

The NAHB housing market sentiment index edged up to 17 from 16 which is the highest level since May 2010. Remember – this is a 50-neutral index (the Empire is zero-neutral).

The VIX volatility index jumped 15% last night to 24 to reflect the growing uncertainty. In the context, this is still a low number. With MENA remaining an issue along with euro-debt, one might have thought an earthquake and nuclear meltdown threat would have investors rushing for protection. But one must consider all the factors.

Commodities have been heavily sold on a simple short term exit from the risk trade. Yet it is acknowledged that as soon as Japan can begin to rebuild, it will mean a big jump in commodity demand. As to when that might happen is anyone's guess when there is a threat half the country will disappear under a mushroom cloud. So for now, it's just a case of “I'm outta here”. As can be seen by the rally back in stocks last night, value buyers are anticipating the situation further out on the time curve. And Wall Street was watching the Nikkei futures trade higher as well in overnight trade as value seekers looked to exploit what they see as an oversold Japanese market.

To reflect the rally-back on Wall Street after Australia's big fall yesterday, the SPI Overnight closed up 13 points or 0.3%.

Rudi will not be appearing on Sky Business today as regular scheduling has been cancelled in favour of specific Japanese coverage.

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