\n\tBy Greg Peel<\/p>\n
\n\tThe Dow fell 115 points or 0.9% while the S&P lost 0.8% to 1403 and the Nasdaq<\/span> dropped 0.7%.<\/p>\n \n\tWhat's the state of the global economy? Well we know that on Wednesday Japan announced its trade deficit had expanded twice as much as expected, and yet Japan is meant to be, along with Germany and China, one of the world's three big exporters and trade surplus economies. Then on the subject of China, yesterday HSBC issued a flash manufacturing PMI for August of a nine month low 47.8, down from 49.3 in July.<\/p>\n \n\tOn the subject of Germany – backstop of the eurozone<\/span> economy – an equivalent flash manufacturing PMI hit a disturbing 45.1, with the flash services PMI falling to 48.3 from 50.3. The eurozone's<\/span> composite PMI (manufacturing plus services) remained at 46.6 for its seventh consecutive month of contraction. One must appreciate that if a PMI is steady under 50 from one month to the next, it does not mean the sector was steady. It means the sector contracted by that amount last month and contracted again by that amount this month.<\/p>\n \n\tThe only good news came from the US flash manufacturing PMI, which rose to 51.9 from 51.4. US manufacturing is expanding. Do we need QE3<\/span>?<\/p>\n \n\tWell if you ask the stock market, the answer would be no, and we're not going to get it. Last night St Louis Fed president James Bullard told CNBC the minutes of the last Fed meeting were now a “bit stale” and voiced his opposition to QE3<\/span>. In Wednesday night's trade, Wall Street looked like it was set for a pullback until the release of the minutes reignited<\/span> hopes of more stimulus. While Bullard is not an FOMC<\/span> member this year, his comments were enough to give Wall Street the “as you were” signal and no one was much surprised that stocks again went into sell mode last night. Having climbed to the previous highs on no new news, indices are ripe for profit-taking ahead of next month's critical central bank meetings.<\/p>\n \n\tOn that note, there is the potential for Spain to reach a decision tonight on whether or not it needs a bail-out. Spanish officials have been in discussions with eurozone<\/span> officials for a while now, and tonight parliament is set to get together for a chat. If the answer is no, the ECB<\/span> will in theory not act and down we'll go. If the answer is yes, the first major hurdle for ECB<\/span> action is cleared (the other being this court ruling). The suggested plan is that the EFSF<\/span> buys Spanish bonds in the primary market and the ECB<\/span> buys Spanish bonds in the secondary market.<\/p>\n \n\tIn the meantime, Fed speculation has taken the spotlight. Not only is everyone arguing about whether we will or won't get QE3<\/span>, they're arguing about whether if we do get it, would it do any good, and they're even arguing that QE3<\/span> is potentially bad. But a funny thing happened last night.<\/p>\n \n\tIf one sees that Wall Street is down for a session, in the prevailing climate of the past three years one would immediately assume the euro was weaker in the session, thus the US dollar was stronger, and commodity prices lower. If monetary policy speculation is doused, as it was last night, you'd expect the US dollar to be stronger (no money printing), gold to be weaker, and US bond yields to be higher (no Fed bond purchases).<\/p>\n \n\tYet last night the euro pushed higher and the US dollar index fell 0.2% to 81.37. Gold jumped another US$16.10 to US$1670.60\/oz. Base metals all rose 1-2% and Brent crude added US10c<\/span> to US$115.01\/bbl<\/span> (although West Texas was indeed weaker). The US ten-year bond yield, which had fallen 9bps<\/span> on Wednesday night on heightened QE3<\/span> speculation, fell 5bps<\/span> to 1.66% on lessened Fed speculation.<\/p>\n \n\tDo we really now have lessened speculation in the wake of Bullard's comments? Well no, if you're judging by the other markets. The stock market seemingly acted in isolation but then perhaps the stock market was always going to retreat from its previous highs. While the US flash PMI number was positive, and new home sales saw a jump of 3.6% in July, weekly new jobless claims showed an unexpected jump to a five week high. This was enough, according to bond market commentary, to maintain expectation of QE3<\/span>, given the Fed's specific concerns over the labour<\/span> market.<\/p>\n \n\tSo which is it to be? Well again all I can say if we just wait a couple of weeks, we'll find out.<\/p>\n \n\tThe SPI<\/span> Overnight fell 26 points or 0.6%. The Aussie has ignored the weaker US dollar and concentrated on the weaker Chinese PMI in falling 0.6% to US$1.0440.<\/p>\n \n\tAfter yesterday's avalanche we have now passed over the hump of the earnings season. It will still be busy today and all of next week, but not quite as frantic. Today's report highlights include Billabong<\/span> ((BBG<\/span>)) and Woolworths ((WOW)).<\/p>\n