By Greg Peel

The Dow closed up 180 points or 1.6% while the S&P gained 2.0% to 1225 and the Nasdaq added 1.6%.

It was a busy night on Wall Street of earnings reports, economic data, and finally on again-off again newspaper reports. The Dow was down 100 points early in the session, largely carrying on from Monday's reaction to Merkel's bucket of cold water. 

We had learned the Chinese September quarter GDP yesterday in the Asian session which, at 9.1% year on year growth, was down from 9.5% in June and short of the 9.3% consensus forecast. Markets are jittery about a slowing China, and hence Australia reacted badly on what was already a weak day and Wall Street took the number on board with early weakness as well.

But how bad is 9.1%? It's hardly the stuff of hard landings. Beijing has been incrementally tightening monetary policy with the specific intention of reining in China's runaway growth while not crashing it, and one would have to say the plan is working. Let's not forget that Beijing's target growth ever since the GFC rebound has been 8%.

Soon the economic data and earnings reports began to flow on Wall Street nevertheless, and from there the market turned. Bank of America posted a very big earnings beat, although a lot of that was to do with the same accounting trick Citigroup pulled on Monday. BofA lost its “biggest bank” status to JP Morgan in the quarter, but the shares finished up 10% on the day.

A theme of all of the reports now in from JPM, Citi and BofA has been losses in the “investment banking” arms of the operations – trading, broking, underwriting etc – as opposed to the commercial banking businesses. It's not so surprising given the quarter's volatility and market weakness, and the same theme is also playing out for Australian banks and particularly Macquarie ((MQG)). It was expected that Goldman Sachs, which is not a commercial operation, would also suffer, and it did. Goldmans posted a loss for the quarter yet still managed a 5% share price gain on the day.

On the economic front, this month's NAHB housing market sentiment index surged to 18 from 14 last month to shock all and sundry. This index has been stuck in the low teens for months and months, economists had been expecting only 15 this month, and a result of 18 represents a seventeen month high. It also gave Wall Street a bit of a high, even though this is a 50 neutral index. Recent availability of cheap mortgages was credited which, if accurate, suggests the Fed's policy strategies are working.

The September producer price index came in with a 0.8% gain – significantly higher than the 0.2% expected. The result is a two-edged sword given that on the one hand healthy producer inflation is a sign of an economy not sliding into recession, yet on the other hand a lack of deflationary pressure makes QE3 less and less of an option.

On all of the above, the Dow was up about 100 points as we headed into the final and always most interesting hour. Then came the London Guardian's news wire bombshell. Germany and France had agreed, suggested the Guardian, that the E440bn EFSF should be leveraged up to two trillion euros. Yes – E2trn. That's about US$1.5 trillion, which is roughly double that of 2008's US TARP. And bang, the Dow was up 250 points.

For starters, why would Merkel calm everyone down on the Monday with warnings of over-optimism and then turn around on the Tuesday and announce the biggest ever rescue fund figure in the history of all mankind? Particularly when there appeared to be a forced news blackout out of Europe at least ahead of this weekend's summit? And so it was that the disbelievers started looking at the detail and saw that something was very wrong.

CNBC's European reporter made a very early call that E2trn seemed like a fantasy given commitments already in place for the EFSF that would limit its leverage to only E1trn. The Guardian suggested that of the E2trn, E100bn would be used to recapitalise Europe's banks. That's well short of the E200bn minimum the market feels the banks need, and as such potentially bad news. It also seems a very small chunk of the E2trn.

Wall Street quickly turned again, and then a report came in from rival news service Dow Jones that the Guardian had it “totally wrong”. The Dow then rocked and rolled to its close of up 180.

No one doubts that global financial markets are currently “headline driven”, and this was a fine example. Presumably some European official will now be forced to clarify or at least deny.

In the meantime, the euro was also a reactionary force last night and finished the New York session up having been down earlier, leading the US dollar index to fall 0.2% to 77.01. The Aussie still managed to put on a cent to US$1.0285. Gold was down around US$50 at one point in New York but rallied to close down only US$9.20 at US$1663.30/oz.

Any massive European rescue fund is a tough call for gold, given it removes a lot of the risk premium on the one hand but requires further substantial monetary inflation on the other.

Base metals had a quiet night for once, and were closed before the Guardian report, as was oil which saw a US99c gain for Brent to US$111.15/bbl and a US$1.96 jump in West Texas to US$88.34/bbl.

The SPI Overnight was up 55 points or 1.3%.

After the bell it was Tech Time, with all three of Intel (Dow), Yahoo and Apple reporting. In short it was thumbs up for the chip maker and global economic bellwether Intel (up 4% in the after-market), a yahoo for Yahoo (up 3%) and a rotten Apple (down 6%) with the man not yet cold.

Mixed fortunes there for the kick-off to tonight's session, but tonight we have American Express (Dow), Morgan Stanley, Travelers (Dow) and United Technologies (Dow). Along with the CPI and the Fed's Beige Book.

In Australia Westpac will release its monthly inflation expectations survey, which will be interesting for the RBA, while BHP Billiton ((BHP)) and OZ Minerals ((OZL)) will post September quarter results. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

By Greg Peel

The Dow closed down 40 points or 0.4% while the S&P lost 0.3% to 1203 and the Nasdaq gained 0.6%.

Yesterday China released its September trade data, which saw both export and import growth numbers falling below expectations. Analysts had forecast exports to have grown by 20.7% in the month over last September, and imports by 24.5%. Results of 17.1% and 20.9% were thus disappointing compared to equivalent August results of 24.5% and 30.2%.

The upshot is China posted a trade surplus in September of US$14.5bn compared to US$17.8bn in August and US$31.5bn in July. While the surplus reduction trend is encouraging from the point of view of reducing the global imbalance between emerging market surplus and developed market deficit, the apparent slowing of the Chinese economy is not encouraging at a time the developed world is staring at potential recession.

But are we really that surprised? Europe is China's biggest export market and it is clearly heading into recession. The reduction in export demand must flow through to a reduction in import demand. China may be able to rely on its domestic economic growth to provide a disconnect with problems in the developed world, but it is not totally immune from those problems. The Shanghai stock index is down 23% from its November high.

There is another, more concerning problem now coming to the fore however. For years the rest of the world has treated Chinese data almost with amusement, given the speed with which it is delivered if nothing else. Yesterday Beijing delivered September trade data while this week developed economies are reporting August data. Beijing manages to provide quarterly GDP results inside a month after the close of the quarter, and everyone else takes three months to provide a final result. At least one Chinese official has, in the past, admitted that such data lean more toward estimation than actual numbers.

Foreign houses, such as HSBC, do provide their own estimates to counter what is possibly spin from Beijing, and recent history suggests the two sets of figures are not as far apart as to be that significant. However over the past few years China has been listing various stocks on foreign exchanges, which has provided a means for foreigners to invest in the emerging market powerhouse when direct investment on Chinese exchanges is limited to locals. Disclosure and reporting rules are very strict in the developed world, but not so in China. A month or so ago US investment funds aired their concern that numbers being posted by the plethora of internet start-ups – Chinese versions of Google, Youtube and Facebook for example – did not look right, and indeed drilling down exposed potential ownership questions as well.

A growing distrust in Chinese corporate reporting came to a head yesterday when it was revealed China's sovereign wealth fund has been forced to enter the stock market and buy local bank shares to prop up debt-laden lenders. In so doing, debt issues were exposed of which global investors were unaware in terms of their extent. Out of control lending by Chinese banks has been a foreign concern ever since Beijing's enormous post-GFC stimulus package was launched, but ascertaining accurate numbers has proven a difficult task.

[For more on Chinese bank lending, see today's Market Insight recording.]

The bottom line is that the rest of the world is losing faith in the integrity of Chinese reporting, both government and corporate. The impact is also being felt in pricing of Beijing's recently listed sovereign bonds, known colloquially as “dim sum” bonds, which has come under pressure through sheer uncertainty. Such uncertainty undermines what many foreign investors had previously viewed as a safe haven compared to sovereign bonds elsewhere, such as those of debt-loaded Europe or the US.

Other foreign observers nevertheless dismiss such concerns, suggesting China simply has enough firepower to easily sort out any debt problems among its banks, and that on the wider scheme of things the Chinese growth story remains intact. One might argue that it is comforting to see dictatorial China's government simply step in and prop up bank capital on a whim, compared to the two years (to date) of European dithering and disagreement to get to the point of even considering propping up banks.

The Chinese situation nevertheless weighed on Wall Street from the open last night, and then came the September quarter result from leading US bank JP Morgan (a Dow component). JPM actually beat forecasts on the earnings line, but the absolute result represented a slowing from the previous quarter as investment bank profits were impacted by the weak markets. Management was cautious in its outlook, suggesting the December quarter will bring more of the same as global volatility persists.

JPM shares finished the day down 5% and led all of the financial sector lower. History suggests that a bull market cannot occur unless the financial sector – a proxy for the health of an economy – leads the way. By 11am the Dow was down 141 points.

It appears, however, that the buyers are now lying in wait. The Dow reached almost back to square in the last hour before slipping slightly again at the death. The S&P 500 held over the 1200 mark. Tech stocks, as represented by the Nasdaq, are clearly popular at this level. For the financials there's still a long row to hoe, and JP Morgan pointed out new regulations were going to cost the bank US$500m and weak investment banking results would mean the cutting of 1,000 jobs.

To back up apparent faith in the tech sector, Google came out after the bell and blew the Street away with its revenue and earnings results. Google share are up 6% in the after-market and will no doubt provide Wall Street with some strength from the open tonight, all other things being equal.

In Wednesday night's trade in London, talk of China coming back in to the copper market had base metals prices pushing higher after they had fallen the night before. Last night news of the weak Chinese trade data had the fickle LME turning on its heels yet again. Copper fell 2%, and all metals were down 1-3%.

There was little impact from the US dollar last night as it was steady on its index at 76.95. Australia's surprisingly positive unemployment result yesterday now has economists suddenly dismissing a Cup Day rate cut from the RBA, and hence the Aussie is up another half a cent to US$1.0207.

The Chinese data also gave Nymex traders a reason to sell, so West Texas crude was down US$1.32 to US$84.55/bbl. Again the spread widened, given Brent fell only US25c to a number that would have any English cricketer shaking in his boots – US$111.11/bbl.

After a tepid response to this week's three and ten-year bond auctions from the US Treasury, traders were expecting last night's auction of thirty-years to be better received. Why? Because Chubby Checker is a seller of the short end and a buyer of the long end. But demand again disappointed, indicating that the world's thirst for safe haven US Treasuries is waning now there is light at the end of the European tunnel. 

The most watched price on Wall Street at the moment is, however, the VIX volatility index. The VIX peaked amidst the recent turmoil at 48 and has remained above the 30 level – the level above which loosely signifies fear – for three months. That hasn't happened since 2008. Traders have been waiting for the VIX to fall below 30 as it would quantify an easing of concern and bode well for a stock market rally ahead. This week the VIX has come down to flirt with the 30 level but just can't quite manage to fall through. It closed at 30.7 last night, suggesting investors will wait for more definitive resolution in Europe before true optimism can be justified.

The SPI Overnight fell 5 points.

Today sees the release of China's inflation data for September, and tonight sees US retail sales. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

By Greg Peel

The Dow finished up 102 points or 0.9% while the S&P gained 1.0% to 1207 and the Nasdaq added 0.8%.

The eyes of the world have been on one parliament building for the past 24 hours, anticipating the making of history, the beginning of a new era, a battle royal fought out across the benches, and no – it wasn't anything to do with Canberra and carbon tax. Indeed to the stock market, the carbon tax is old news.

Rather the fate of the world was held in the balance in the ancient city of Bratislava, capital to the mighty global economic force that is Slovakia. Blood has been spilt in the former Eastern European territory, a government has been brought down, and not since Soviet tanks rolled into the then united nation of Czechoslovakia in 1968 has the world been so on a knife edge as it watched on with dread.

News came through in the Asian session yesterday that the Slovakian parliament had voted down the bill to ratify the proposed E440bn European Financial Stability Facility, despite sixteen of the seventeen eurozone member parliaments having already passed their respective bills. In reality, this could have been a Lehman moment. But the world also knew that the opportunistic party politics were being played out and really there was no way in God's green earth Slovakia would not end up passing the bill. As it was, the ruling coalition party fell on its sword, promised an election, and with opposition support the bill was then passed.

So we now have an EFSF. Or, if you like, a Euro Fin Stab Fac. The next step is to leverage up that E440bn in order to provide enough funds to shore up European banks as they relent to what will likely be a 50% haircut on the value of their Greek sovereign debt holdings. The specifics of the next stage will be revealed, so we are led to believe, at the EU summit now scheduled for October 23. And then seventeen member parliaments will have to vote on it.

And so it goes on. To understand more about the EFSF, European banks, and right through to Australian banks, tune in today at 4.30pm for FNArena's Market Insight program on the BRR network.

It was a very big day on Wall Street on Tuesday, but they bought it again last night on the Slovakian news. As the Dow pushed forward to be up 209 points before 3pm – and at that point square for 2011 – traders laughed in spite of themselves that one lousy vote in Bratislava (as one might imagine, many Americans were seen running to their Atlases) could so impact on the colossal markets of Frankfurt, London and New York. Markets are currently headline driven – forget fundamentals – and there are plenty of headlines to come.

And there are plenty of commentators looking at the low volumes, the falling levels of short positions (implying short-covering), and the fact Europe still has a long way to go in deciding this rally has provided a good opportunity to sell. I posted a graph on Tuesday showing that while 1200 on the S&P 500 was loosely the top of the recent trading range, two previous break-outs had failed at 1220. Last night the S&P hit 1220.25 and then someone blew the whistle. The Dow fell back 100 points to the close.

Attention now returns to the US earnings season, and tonight's report from leading commercial and investment bank JP Morgan Chase. No one can agree what sort of result the banks, which live and die on the state of the economy, will post or what their guidance will be like.

Ahead of JP Morgan, Australia will today see the September unemployment numbers which may prove critical to the RBA's Cup Day rate decision. Although again I point out that the November meeting falls right in the middle of the EU and G20 meetings which might make a policy change a tough timing issue. Today also sees China release its September trade balance.

News out of the LME is that China is in buying copper again. This, along with the EFSF news and subsequent weaker greenback, had base metals deciding last night should be an up-day. Copper jumped 3% and the others followed with 1-3% rises (pretty much the reverse of Tuesday night).

The euro surged of course, sending the US dollar index down 0.8% to 77.01, while the carbon tax vote had little global impact on the relevant currency as the Aussie has surged almost two cents to US$1.0157. It looks like parity is back again, and all the heartache that comes with it.

It is not unusual for gold to get stuck in a trading range for a while following one of its regular bubble-and-bust episodes, and it would seem we're in one now until perhaps some truly new news emerges. Gold rose US$10.30 last night to US$1676.40/oz.

The oil pits were quiet, with Brent rising US63c to US$111.36/bbl and West Texas falling US24c to US$85.57/bbl. Looks like the spread is back to widening again.

US stocks have rallied 9% from their previous low in about a week since Europe announced it would get its act together. On the flipside, US bond prices have fallen – by an astonishing 30% in the benchmark ten-year. That yield hit 1.7% at its nadir, and last night settled up 6bps at 2.22% following tepid demand for the Treasury's auction. Imagine losing 30% on your stocks in a week! Slovakia and Chubby Checker have a lot to answer for.

The SPI Overnight was up 30 points or 0.7%, pretty much reversing the fall yesterday which followed the initial Slovakian rejection of the EFSF bill.

As noted, FNArena's ratings winner Market Insight will be broadcast today at 4.30pm on the BRR network. Today's topic – Banks. Just click on the image of the handsome guy and Rudi on the website to tune in live, or catch up tomorrow when the archived recording is posted.

Ahead of Market Insight, Rudi will make a regular appearance on the Sky Business channel at noon. 

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]