The word of the day Wednesday was "CONTAGION", and while we have heard it quite a bit lately, it was publicly uttered by European Central Bank official Axil Weber, commenting on the spreading European debt crisis, and quickly became widely quoted in news services around the world.   Attention was focused on European debt contagion above all else as stocks and commodities fell, the dollar rose against the Euro, and Eurozone credit spreads continued to widen.

For the day, the MSCI World Index of stocks dropped 1.2%, falling into negative territory for the year; the S&P 500 dropped two-thirds of a percent to 1165; the Dow was down half a percent to 10868; and in Europe Spain's IBEX fell 2.3%.   In Japan, investors came back to a rough market after being closed for a three day holiday, and the Nikki 225, catching up with world events, sank over 3%.  The Euro dropped as much as 1.4% against the dollar during the trading day, crossing the psychological and technical barrier of 1.3, before recovering partially to close at 1.2825, and the Euro dropped by the same magnitude against the pound. Oil dropped below $80 per barrel and nickel slid 11 percent; while the US and German treasury yields fell in a flight to safety.  The spread between Greek and German 10 year bonds widened to 731 basis points, a record in the data going back to 1998.

Turning back to the US, Wednesday's drop added to Tuesday's 2.5% air pocket, even as the domestic economy showed continued signs of improvement.  The Consumer Staples and Health Care sectors had slightly positive returns for the day, with all other economic sectors down, the worst being energy, which fell 1.5%.  The ISM non-manufacturing business index held at a four year high of 55.4 for the second consecutive month, and and ADP labor report showed that 32000 jobs were added in April.  Meanwhile the CBOE Volatility Index, or VIX, oft discussed on this call, rose for the second day to a three month interday high of 24.9.  The long-run average level of the VIX is 20, and it reached an all time high in November 2008 of 80.8.

Oil, which closed Friday 86.15 per barrel, is now below $80 on the strong dollar and fears of slower economic growth.   More generally, the Jefferies/CRB index fell 1.3%, after dropping 2.3% on Tuesday, for a two day drop of 3.7%.

The human side of the debt crisis was brought out yesterday, as Greek protester against austerity set a bank in fire, resulting in three deaths. 

Moody's signaled it may cut Portugal's credit rating to Aa2.   This follows last weeks actual downgrade of Spain by S&P of one notch to AA. European Bank Debt CDS rose to a one year high of 154, and CDS for Portugal surged 85 basis points to a record 429.

In Australia, the government floated a plan to increase taxes on mining profits by 40% after 2012, which caused global mining stocks to be hit and several mining companies, including Rio Tinto, to publicly state they would put some development plans on hold.

 For today, we'll be looking for initial jobless claims, and continued earnings reports, which will hopefully take the focus off the European debt crisis.