By Greg Peel

The Dow closed down 12 points, or 0.1%, while the S&P lost 0.3% to 1650 and the Nasdaq fell 0.1%.

Well that was an interesting 24 hours.

On Wednesday night the Fed threw Wall Street into confusion after Chairman Ben Bernanke one minute told Congress a too early withdrawal of QE risked killing off the US economic recovery and the next minute suggesting bond purchases could be reduced within the next few FOMC meetings if jobs data continues to improve. The minutes of the last FOMC meeting suggested a growing push within the Fed to start winding back.

US stocks were sold off rather heavily as a result, the US dollar jumped and so did US bond rates. While selling was largely put down to fear of the Fed turning off the stimulus, it was also noted that the yield on the S&P 500 fell below the yield on the ten-year Treasury and likely triggered programmed selling.

The Australian market opened down from the bell, following through from Wall Street. When the US dollar jumped, the Aussie dollar fell, and right now it seems a weaker Aussie is prompting sales in Australian stocks, suggesting offshore investors, who lose money on a weaker Aussie in isolation, are departing.

The Australian market appeared as if it was plateauing late morning, around the time the Japanese market was opening to the upside. Then HSBC released its flash estimate of China's May manufacturing PMI, which showed a slip into contraction. Economists were surprised by a fall to 49.6 from April's 50.4. Goodnight Irene.

The Aussie tanked, Australian stocks tanked, and the Nikkei fell an extraordinary 7%. European markets later opened and fell 2%. The wheel came back around to Wall Street and it opened lower, to the tune of nearly 130 Dow points.

Then the panic subsided.

I suggested yesterday that despite the spectre of Fed tightening, there still appears to be plenty of US investors looking to buy on the dip. What is their view? That talk of Fed tightening is way too premature? Or that a tightening Fed would only imply an improving US economy? Either way, the buyers wasted no time on Wall Street and were in by 10am, ultimately pushing the indices back to the flatline.

US data releases in the morning included April new home sales, which rose 2.3%, the new home median price index, which is up 13.1% year on year, and the FHFA index of house prices on Fannie/Freddie mortgages, which rose 1.3% in March for a 7.2% year on year gain. But they also included the equivalent US flash estimate of the May manufacturing PMI, which fell to 51.9 from 52.1. Earlier, the eurozone flash showed an increase to 47.8 from 46.7.

The fall on the Japanese market has drawn the most attention. The knee-jerk explanation is fear of Fed tightening and then, somehow by association, fear the BoJ will also back off. This explanation is rubbish. For starters, the Nikkei opened up in yesterday's session, not down. Up 2% in fact. It then quietly rolled over, quaintly broke for lunch, and collapsed. When it did collapse, the BoJ quickly pumped in a couple of trillion more yen. The next explanation is that the fall was triggered by the weak Chinese data.

It makes perfect sense that the Australian market should tank on weak Chinese data, but does it make sense that Japan would tank when its biggest, and most hated, manufacturing export competitor sees a slip in the pace of manufacturing growth? Perhaps there's a little more to it.

First, consider that the S&P 500 and the ASX 200 are both up around 27% since mid last year. The Nikkei is up over 80% since November, basically in a straight line. Second, consider that at around the time HSBC was announcing its Chinese PMI, the Japanese ten-year government bond yield hit 1.00%, having risen from a low of 0.37% in November. For some commentators this psychological breach was the clear trigger for a correction in Japanese stocks for the first time in six months. A fall of 7% is wild, but then the Japanese don't like to muck around.

Then we come back to the US. On Wednesday night the US dollar index jumped 0.5% on Fed talk, and the Aussie fell a cent. Last night, with no new Fed talk, but a fair bit of action in the yen, the US dollar index fell 0.7%. When the Chinese PMI came out yesterday, the Aussie plunged below 97. This morning it is net 0.5% higher over 24 hours at US$0.9746. Gold traders were whiplashed yet again, with the fall in the greenback sending gold up US$21.70 to US$1391.40/oz.

I noted yesterday that LME base metals had closed higher on Wednesday night's session, but had missed all the Fed tightening talk. Thus we should have expected a fall last night, and more so given the Chinese data, but the 0.7% fall in greenback acted as a dampener. All metals are down 1%-2%, with copper down 1.9%, but it could have been worse.

It was a similar story for the oils, for which a weak China should imply lower demand. Yet Brent is down US16c to US$102.44/bbl and West Texas is up US13c to US$94.41/bbl.

Spot iron ore in China is not beholden to hedge fund speculators, so it just sails merrily along. Yesterday the price fell US20c to US$123.20/t.

After yesterday's blood on Bridge Street, the SPI Overnight is up 16 points, or 0.3%.

The smarter, and less reactionary money on Wall Street has suggested in the wake of yesterday's Fed panic that the US central bank is actually playing a covert game of sorts, which is not unusual. Any market trader will tell you that talk is more powerful than numbers, and the suggestion is that the Fed has thrown out the idea of a QE wind-back beginning soon to gauge just how the market might react. The Fed has more than once pointed out it does not want to derail any US, or global for that matter, recovery by acting too abruptly.

This view stretches as far as the Fed now being worried about the US stock market, and its seemingly irrational exuberance. The plan, supposedly, is to let a bit of air out of the Wall Street bubble now, so that when the day does actually come on which bond purchases are reduced, Wall Street does not fall precipitously from a dangerous height. Call it orchestrating a correction rather than a new bear market.

If this is the case, the Fed may have been pleased to see, for example, Australia fall 2%, Europe 2% and Japan 7%. It would not have been too thrilled to see Wall Street do very little at all.

Now what?