After the dramatic fall in US equities, Asian equities followed suit. The MSCI Asia Pacific Index fell 3.4% following Monday’s slide of 1.7%. European bourses gapped lower and spent most of the morning moving higher, though large gaps remain. At its worst, the Dow Jones Stoxx 600 was off about 3.3%, and at the time of this writing, it is half as much. US equities initially extended yesterday’s losses, but the S&P 500 has turned higher in the European morning in very volatile activity.

The US 10-year note yield fell nearly 14 bp yesterday. Asian and European bond yields have fallen today. Australia’s 10-year yield is off 11 bp to 2.82%, while core bond yields in Europe are off four-five basis points and the peripheral yields are off two-three basis points. US Treasuries yields have stabilized about two basis points above yesterday’s close near 2.70%.

Just like portfolio insurance has been cited in many narratives for aggravating the 1987 equity market crash, so are volatility-linked strategies and products being a factor in the current meltdown. These products allowed investors to be short volatility in expectations of continued calm. It has been a virtual cash register. Two such exchange traded products failed yesterday.

Yet it is important the price action in perspective. As dramatic as it is, the major bourses have given up last month’s gain and a little be more. The record point drop in the Dow Jones Industrials leaves if off 1.5% for the year. The S&P 500 is off less than 1% coming into today. Italy’s FTSE Milan is the only G7 equity market still up on the year (~2.9%). If one was concerned that equity valuations were elevated, the recent drop may have simply skimmed off some froth.

The news stream is relatively light today and the implications of the equity drop is being mulled by investors. The initial reaction seems to be two-fold. One if the broad de-risking, and the second is the economic implications. The idea is that the sharp decline in equities will impact consumer sentiment and undermine the wealth impact.Given the strength of the US, EMU and Japanese economic momentum, it may take more than giving back a few weeks’ worth of gains to pose a serious challenge. Moreover, there is no urgency for central banks. The Fed does not meet for a little more than a month, and the ECB’s course is set via 30 bln a month in asset purchases through September. The BOJ’s Kuroda argued against any near-term rate increase, arguing inflation is simply too low.