Sentiment weakened despite positive data from China yesterday and from Europe last night.
Uncertainty about when the Fed would start winding back its stimulus program weighed on investors following various comments from Fed officials last night.
The need for Congress to raise the debt ceiling also added to the uncertainty for investors.
Meanwhile, in Germany, Merkel is more than likely needed to form a new coalition government despite her party's strong win over the weekend. Share markets in Europe and the US weakened.
The Dow and Nasdaq lost 0.3% and the S&P500 fell 0.5%.
US treasuries rose (yields fell) as weaker risk appetite boosted demand for relatively safer government debt. Bonds were also reacting to the dovish comments from Fed President Dudley, despite keeping open the likelihood the Fed would taper this year.
The US dollar index was relatively unchanged, although the US dollar strengthened against the euro on dovish comments from ECB president Draghi.
Draghi last night committed to low interest rates, and said the ECB was ready for another long-term refinancing operation (LTRO) as an option to keep money market interest rates down.
The Australian dollar rallied on the strong Chinese data yesterday, and lifted back to above 94 US cents.
The positive run of Chinese data, the Fed refraining from slowing down stimulus and easing geopolitical tensions have been the multitude of factors that have supported the AUD over the past few weeks.
Commodity prices fell despite the upbeat data from China and Europe.
Easing geopolitical tensions between US and Iran and higher crude output from Iraq saw oil prices fall on expectations of stronger supply.
Commodity prices may have also been weighed down by uncertainty about the Fed tapering its asset purchases.
Australia: No domestic data released yesterday.
The HSBC PMI rose from 50.1 to 51.2 in the flash estimate for September, which was the highest since March.
A jump in the sub-index for new export orders also provides an encouraging signal for the global economy. The lift in the index is providing greater reassurance that China can achieve authorities' growth target of 7.5% this year.
The Euro zone composite PMI rose from 51.5 to 52.1 in September, suggesting activity remains expansionary. The services PMI rose from 50.7 to 52.1, the highest in more than two years.
The manufacturing index however, fell from 51.4 to 51.1 in September.
The Chicago Fed national activity index rose from a revised -0.43 in July to 0.14 in August, back into positive territory for the first time in six months.
A number of Fed officials spoke last night. New York Fed president Dudley said that the timeline Bernanke outlined in June for scaling back the central bank's stimulus measures is "still very much intact."
However, he also highlighted the headwinds from rising long-term interest rates, higher taxes and lower public spending, as well as growing questions over the debt limit and government funding.
Richard Fisher of the Dallas Fed said that the decision to refrain from stimulus hurt the central bank's credibility.
Fisher, who is a non-voting member, said that he disagreed with the decision of the committee and argued against it.
Lockhart, president of the Atlanta Fed also gave some dovish comments warning that lawmakers needed to work on reversing declines in labour productivity and new job creation.
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