The release of
higher than expected US Producer Price Index figures yesterday sent the markets
into another tailspin. The core rate of inflation, which excludes more volatile
items like food and energy, was up 0.3 per cent in May, marginally higher than
the 0.2 per cent expected by analysts. Core intermediate goods prices were up
1.1 per cent month on month, making it 6.3 per cent year on year.

There is indeed
reason for worry. There are concerns the markets are dealing with a legacy of
monetary policy left too accommodating for too long, allowing inflation to gain
a foothold. The only responsible reaction is for the world’s central banks to
undertake liquidity withdrawal, causing the slowing in the world economy.
Investors are consequently becoming more risk averse to avoid potential losses,
and therefore we are seeing significant losses on the world
markets.

Yesterday’s
considerable losses on the ASX mean that the markets have lost slightly less
than 10 per cent since the record highs of early May. The calamitous figures
are seemingly endless. Yesterday’s 2 per cent loss was the second such loss in
the last three trading sessions. The All Ords lost 2.4 per cent to 4807.2, down
from 5318.2 on May 11.

Wall St slumped
further overnight, with the Nasdaq down for the eighth session straight, and the
S&P500 down more than 1 per cent. The Dow Jones also declined, wiping out
its entire 2006 gains.

The August gold
future was being traded for as low as $US565.50, nearly 25 per cent from the May
12 high of $US739.20. Copper, which was the major pre-correction market driver,
was again down 7 per cent, down a total of 20 per cent since May peak. Silver
is down 28 per cent since the peak. Oil prices also sank, with Light sweet
crude for July delivery falling $US1.80 to $US68.56 a barrel. Henry could go
on, but won’t.

Henry’s betting
that the further losses on Wall St will push the ASX down more the 10 per cent
today, the official definition of a market
correction.

The market
correction coincides with the managing director of the IMF, Rodrigo de Rato’s
visit to Australia. As reported in The
Oz
today, De Rato said that Australia has positioned itself well for a
potential economic downturn by paying off its debt, and for utilising the CAD
for investment rather than consumption, as is the case in the
US. De Rato described the market
losses as “a fairly modest correction of previous increases in asset prices”, so
at least he’s an optimist.

Read more at
Henry Thornton.