Did the US bulls just go over a cliff?

The green shoots of optimism that were being seen on the US economy, its stock markets and in global commodity prices look like being dashed.

The near 4 per cent drop in the S&P500 index over the past week is in itself no disaster -- it followed a rise of 15 per cent from the June low. But the reasons for the decline, namely lower corporate earnings growth, economic and policy ructions from the Eurozone and a fragile outlook for China, are unnerving and appear to be getting more problematic.

Some big US companies are posting disappointing profits. Du Pont, 3M and United Technologies are all under-performing. There are more high profile job shedding which can only undermine the already fragile confidence of US consumers. The various surveys on manufacturing activity are turning lower after what may have been a temporary uptick during the US summer.

US politics is looking particularly messy, with the Presidential election too close to call, and with that, there is more posturing from the candidates about "taking the fight to China” over currency manipulation and the dumping of cheap goods into the US. Whatever the merits of arguments about the Chinese yuan and its dumping of manufactured goods into the US, the last thing the US economy needs is a trade war with China.

A close election in the US is also bringing the so-called fiscal cliff into view. This is clearly unsettling markets. While it is widely assumed the fiscal disaster would be avoided as common sense in Congress prevailed, the probability of some disruptive economic event from a fiscal blow-up post election is growing by the day. No longer is it clear that the fiscal contraction will be averted in full and as a result of this and the recent news, it is increasingly unclear whether the US economy will grow by as much as 2.5 per cent in 2013.

In the Eurozone, the problematic news continues. The Spanish government has downgraded its already dreadful economic outlook with GDP now forecast to fall for a fifth straight quarter which means GDP will drop by 1.7 per cent through the year to the September quarter. Amid this, Prime Minister Mariano Rajoy is still reluctant to implement the reforms that will see Spain qualify for the financial assistance it needs as it faces a huge debt financing obligation over the next year. The markets will not take kindly to any failure of Spain, the fourth largest country in the Eurozone to meet its debt refinancing task.

There was also news from Greece where the government has failed to get agreement on the reform agenda that aims to cut its spending by a massive Euro 13.5 billion in order for it to meet the conditions for further financial aid. There remains a fear that the conditions imposed on Greece are too draconian, with the leader of the Democratic Left Party, Fotis Kouvellis saying the demands which focus on mass lay-offs, cuts in severance pay and the reduction of the minimum wage "will be of no fiscal benefit to our country … they will simply feed unemployment and further burden a recession that is huge already”. Kouvellis has a point.

Commodity markets are looking at this rapidly deteriorating scenario with trepidation. The RJ/CRB index of commodity prices has fallen by 8 per cent in US dollar terms from a mini-peak in September. It is now down close to 20 per cent from the level in August 2011. For Australia, the fall in commodity prices is more precipitous with the Australian dollar remaining well above parity. While it is too early to be sure about the veracity of the Treasury forecasts in this week's Mid Year Economic and Fiscal Outlook, much more in the way of bad news from the global economy would pose threats to the economic and fiscal outlook.

The commodity price falls last night were broad and severe. Oil fell a further 2.4 per cent overnight, copper was down 1.5 per cent while the market darling at the moment, gold, fell 1.1 per cent to US$1,708.

A strong US matters to the world -- it is still the biggest economy and the driver of global demand. A recovery in the Eurozone is also vital if the world economy and markets are to register decent growth in the year ahead.

The recent trends on both these fronts are disconcerting, a point showing up in stock and commodity markets.