It’s hard to make sense of what happened yesterday here and overseas last night except the economic denialists in the US have been dragged kicking and screaming from their cave, and those very silly people who saw “China slump looms” and “Black day for Aussie dollar”, ought to be locked up for their own good and not allowed near a dealing terminal for life.

The big falls on markets around the world yesterday and overnight after the Fed’s two-day meeting and move to try to push interest rates up at the short end and down long term, was one of the more astonishing over reactions to the obvious that we have seen for some years.

While some would argue that it was a spectacular own goal by the US Federal Reserve, others would say US central bank has forced the pollyannas among US investors to wake up to the realities of the American economy. It is sick.

What spooked the markets was the Fed’s gloomy outlook for the US economy and comments such as this from the post-meeting statement: The key quote was “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.” By the way, that’s the outlook for America, not Australia, or China, or several other economies.

That dose of reality obviously surprised investors, especially in the US where the Standard & Poor’s Index is down 7% in two days. But you’d have to ask what planet were many fund managers on. The slow slide in the US economy has been obvious for two months, while the eurozone’s woes have been steadily deepening by the week.

The Fed told the world it was guaranteeing not to change its interest rates (currently at a record 0%-0.25% for at least the next two years after its August meeting. That means US official interest rates won’t have changed since December 2008, raising the question, has the recession really gone away. US unemployment remains above 9%, 46 million Americans are on food stamps and the same number live in poverty.

The second bout of quantitative easing of $US600 billion failed to boost demand in the economy, demand for loans, cut unemployment or do anything significant except finance a rather greasy speculative surge that boosted oil prices and helped choke off whatever recovery was starting to emerge in some parts of the US economy. On present indications that was the bigger own goal for the Fed.

In Australia, while our market is down 20% since the highs in April, (so the bears are crowing), the Aussie dollar is down about 13% from its high of more than $US1.10, at just over 97 US cents this morning. That is down 5% since Wednesday (five  cents).

Some reports had the usual fear-and-loathing headlines, such as: “Dollar dives in black day for global sharemarkets”. So, strangely in the minds of the market kneejerkers the falling dollar is a “black day” while the rising dollar is also bad news, judging by much of the commentary since the dollar rose over parity in February and stayed there.

A lower Australian dollar is also good news because for some companies it will relieve pressure on their business, if it trades around this level for a while. Companies such as BlueScope Steel, some retailers, OneSteel and a host of others competing against imports have moaned about the unfairness of it all and the unfair competition from internet purchases by those naughty consumers. But now the dollar has fallen, easing pressure, will there be any acknowledgement of that? Nope, all we will get will be moans about its “temporary” and more is needed.

It won’t have much of an impact on internet purchases off shore or travel because both were surging before the currency climbed above parity with the greenback and stayed there from February onwards: the campaign by Gerry Harvey and Sollie Lew to impose GST on offshore internet purchases under $1000 pre-dated the sharp rise in the currency since February of this year.

And if the currency persists around parity or less, it will actually boost export income compared with the past few months: the steep plunge in the currency in 2008 actually helped push export income sharply higher (in terms of the Australian dollar value) for some months until the impact of the Lehman Brothers collapse shut down markets, slashed commodity prices and global trade.

But it was more than the dollar and more than sharemarkets: gold fell 4% or $US74 an ounce, making a mockery of all those gold bugs who reckon the metal is a great place to hide when markets get tough: silver, gold’s friend, plunged 10%. Oil fell nearly 7%, copper slumped 8.6% or a massive 32 US cents a pound in New York as speculators sold out and fled to the now AA-rated US government bonds and cash. The image of headless chickens charging for the exits and elbowing aside the mild-mannered lemmings already there was nauseating.

A rate cut in Australia has become more of a chance, especially if markets continue falling and financial pressures urge, as we saw from mid 2008 onwards. Certainly a rate rise is off for months to come, but will the “Rate Rise Looms” mob among local analysts and commentators understand that?

But next week looms as a nasty test of this nervousness in markets with the third estimate of US second quarter economic growth, and surveys of global manufacturing from China, Japan, Australia, the US, Europe and other major economies. But much of these surveys will be a problem for the European and US economies.

Overnight saw a questionable reaction to the first estimate of Chinese manufacturing activity for September, which showed another slight contraction. Suddenly commodity bears appeared out of the woodwork from Goldman Sachs, Citigroup and others and spruiked their wares on Bloomberg.

But they forgot what the HSBC/Markit preliminary China Manufacturing Purchasing Managers’ index, was telling us about China: no real change is the answer, a bit subdued, but still growing strongly.

In fact the so-called “flash” PMI fell to two-month low of 49.4 in September, from 49.9 in August. So it is actually back at July’s level. Gee that’s a shock, but don’t tell the China bears and their tame mouthpieces in broking houses and the media.

“Fears of a hard landing are unwarranted. External demand weakened a little but official trade data still show solid export growth,” said Qu Hongbin, China economist at HSBC said in the usual monthly statement. “Resilient domestic demand is sufficient to support around 8.5-9% growth [in China] in the coming quarters.”

Oh, growth of 8.5-9% in coming quarters? You mean no real change and the solid growth will continue to the end of the year?

That growth rate is eight times what growth in the eurozone would run at next year and seven times as strong as America’s. As the Fed finally conceded this week, the economic and financial pressures in Europe and the US do represent downside risks for the US economy. But for the rest of the world? Only if investors, governments and others lose their heads, as the former seemed to do overnight.