By Greg Peel

The Dow rose 183 points or 1.7% while the S&P gained 1.8% to 1164 and the Nasdaq added 1.9%.

And then there were two. Last night the Dutch parliament passed the EFSF bill leaving only Malta and Slovakia to hold their votes early next week. The trick will then be what to actually do with the E440bn fund. We know that European leaders finally agree that bank recapitalisation ahead of an orderly Greek default is the necessary plan, but the details of that plan are yet to be determined.

The expectation is that the details are now being nutted out and will be presented at the EU summit on October 17. This leaves another ten days of room to disagree, bicker and disrupt, but one gets the felling Europe has finally figured it out. Figured out, that is, that it's time to show a united front. No end of damage has been done to reputations in the past two years, but then one can hardly look to the US as a role model either.

Last night Jean-Claude Trichet held his final press conference before the end of his eight-year tender as ECB president. Previously markets had assumed the ECB would cut its cash rate in the face of the turmoil but Trichet had poured cold water on that idea, and true to form he left the ECB cash rate steady at 1.5% last night. However he did announce a raft of other “unconventional” policy measures.

Those measures are described as “tried and trusty” by the Wall Street Journal given Trichet is reverting to strategies put in place in 2008 after the fall of Lehman. We must recall at this point that the eurozone does not have a common bond to replicate the US Treasuries or UK gilts for example, so any form of quantitative easing has to be more imaginative than just printing money to buy sovereign paper.

The ECB will restart its program of buying covered bank bonds next month and will hold two separate tenders of one-year refinancing for eurozone banks. Echoing the Fed's new policy of specifying timing, the ECB will provide banks with as much liquidity as they need until at least July 2012. In other words, we might now be able to assume that whatever happens on the default front, from Greece to anyone else, European banks will not crash under the weight of losses.

Where will this funding come from? Well that's where the EFSF comes in. It has long been noted that E440bn might cover Greece, Portugal and even Spain but not Italy, but we are yet to find out what sort of leverage will be applied to the EFSF and what sort of complex system will be put in place to feed the ECB. But perhaps the salient point here is the message European officials are now sending to the so-called “bond vigilantes” – a message which basically suggests “we're bigger than you are so you might as well back off”. For two years we have seen nothing but band-aid measures to support Greece and the other PIIGS which have not been sufficient to prevent financial markets from undermining the capacity of the peripherals to finance their budget deficits.

The Poms also got into the act last night. There's been a lot of thigh-slapping around The City of late as the British have reflected on their sensible decision not to join a common currency which has brought its continental neighbours to their knees more effectively than Nelson could ever have managed. And there has also been talk of leaving the EU. But the UK has not been immune to the goings on in Europe and its economy is feeling the fallout. Last night the Bank of England announced a 75bn pound increase to its asset purchase program to 275bn pounds, which has been dubbed a British “QE2”. 

The decision by the ECB not to raise rates last night meant the euro rallied, despite the implications of QE in the announced ECB policies. This meant the US dollar could stop rising for once and instead it fell 0.5% to 78.54 in its index. The move took the pressure off commodity prices, and as such we saw metals surge in London, with copper up 4.5% and tin 7% amongst the positive moves.

Oil chimed in, with Brent up US$3.00 to US$105.73/bbl and West Texas up US$2.91 to US$82.59/bbl. Silver was up 5%, and gold quietly moved US$8.90 higher to US$1648.40/oz.

Aside from a rolling stream of positive news out of Europe, last night Wall Street learned that the big chain stores saw their sales rise 5.8% in the September back-to-school season. Heavy discounting helped, but economists had expected only a 4.9% gain. And last week's new jobless claims rose by only 6,000 to a one-month average of 401,000 when economists had expected 410,000.

Such data underscore a commonly held belief that if you take the European effect out of the equation, the US economy is not faring as badly as many have assumed. Talk of a double-dip recession has now eased.

Australia was also pleasantly surprised by its latest retail sales data released this week, and yesterday's session was certainly a cracker. Indeed it was the biggest up-day since December 2008. Praise the Lord and pass the retsina – it's beginning to look a lot like a rally. 

We should probably remember, however, that the December 2008 rally soon gave way and the GFC low was not established until March 2009. Then, too, there was a honeymoon period as the world revelled in the TARP but soon the party faded and champagne went flat. The question thus is: is what we are now seeing just another honeymoon session ahead of an inevitable hangover?

I believe it's important to note that a significant feature on Wall Street in late 2008 and early 2009 was “redemption window” selling. Small equity investors in the US were leveraged to the gills before the GFC and could only watch helplessly as stock prices crashed given the funds they were invested in only allowed redemptions during specific quarterly windows of time. They had to wait until those windows opened, and then they pulled their money out in droves. This meant those funds had to sell underlying stock positions, and they did so relentlessly, day after day, in the period in question. Some funds had even frozen redemptions initially, so unfreezing meant further selling into 2009.

I hate to use what is usually a kiss of death expression, but this time it's different. This time not only have most investors shied away from the levels of leverage which had them in so much trouble in the GFC, they have mostly shied away from the stock market altogether. And so have the mutual funds, which are currently holding record levels of cash. And this time not only are US corporates not geared to ridiculous levels, they're sitting on mountains of readies. This time there is no desperate need to sell out of the stock market in the face of looming bankruptcy.

Such a position would then suggest that not only does this market not have the same scope to fall, it has a much greater scope to rise. Because if we can get through this (hopefully) final period of European decision-making and policy implementation unscathed, then there is an awful lot of money in the US in particular earning negative real interest on unallocated cash. If the market starts to move and the mutual funds begin to feel they're being left behind, look out.

So enjoy, but bear in mind we really are in a honeymoon phase right this very moment in which the covering of short positions is playing a major part. When they're cleared out, the next move may yet be down again before we can really, honestly, call the bottom.

The SPI Overnight was up another 68 points or 1.7%.

For those who were wondering, Apple shares closed down a mere 0.1%. In the US tonight, attention swings back to those other jobs.

A reminder that Rudi will be making his presentation, “Helping Investors Adapt To Changing Markets” at the Melbourne Trading & Investing Expo today and tomorrow at 3.45pm at the Melbourne Convention & Exhibition Centre, Seminar Room 2.

I'd steer clear of the Sydney CBD from lunchtime on today – there'll be a lot of thirsty stockbrokers getting on it. 

[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 up 153 points or 1.4% while the S&P jumped up 2.2% and the Nasdaq a full 3.0%.

If Paul Stanley still wants to rock and roll all night then all he had to do was follow Wall Street last night. On heavy volume, the Dow initially fell 250 points, clawed that back to be down only 55, and fell again to be down 200. Up to about 3pm, one might have been tempted to declare a “capitulation” session which in its self is a positive sign from a contrarian perspective, if not the ultimate signal for a bottom. But there was more to come.

Wall Street simply gapped lower on the open, driven by what seemed to be more delay tactics and dithering from Europe. Greece had hoped it would have received the next E8bn tranche of its bail-out fund by now, but a failure to project sufficient budget reductions has held that up. Initially the troika was to hold up its decision until mid-October, cognisant of the fact Greece would run out of money by end-October. Before the bell on the NYSE last night, it was announced that decision will now be held up until mid-November, at which point, one presumes, Greece would be stone motherless.

Oh God – another delay. Surely the risk of a disorderly Greek default just jumped up to almost inevitable status? At least that's the way Wall Street saw it from the bell. But if we look to the reason why the troika called yet another delay, we might see that there is method in the madness.

I opened my Report yesterday with the question: might this really be good news in disguise? I was referring to the news Greece had failed to reach its budget projection targets, in theory making it ineligible for the E8bn, the news of which had the Dow closing down 250. My suggestion was that given the disaster that would follow a disorderly Greek default, finally Europe would have to be spurred into definitive action.

Wall Street initially saw the new delay as bad news, but the reason for the delay is to allow time for the troika to renegotiate the haircut deal it had previously agreed upon (although not yet enacted) with holders of Greek sovereign debt. The initial deal was for holders to take a 21% haircut on the face value of their positions in return for EU support of Greece and default prevention. At the time, bond markets were pricing in 50% haircut. One reason markets are that much lower in the interim is the difference between 21% fantasy and 50% reality. 

It is now clear Greece cannot meet its bail-out requirements and, let's face it, probably never could. No doubt it is with this in mind the troika has delayed the Greek payment to insist upon a more substantial bondholder haircut and put such a restructure to bed. And why not? When the European banks bought the debt, it was simply a free market trading decision, and a very bad one. 

Whether or not Wall Street began to figure out that last night's initial news was maybe more good than bad in the scheme of things, it's hard to say. The market turned at 10am and started heading northward, but not before the benchmark S&P 500 index had breached the 1090 level, meaning it was down 20% from its last peak and thus, semantically, in a “bear market”. Such technical levels can either prompt more intensified selling or, in this case, buying from value-seekers. However at the same time, Fed chairman Ben Bernanke was making a testimony to Congress.

In addressing the risk of a potential run on the US banking system as a flow-on from the same in Europe, Bernanke suggested, “We would make sure we would stand ready to provide as much liquidity against collateral as needed as lender of last resort for our banking system”. In other words, if things get bad we'll stop simply twisting and roll out QE3. Whatever it takes.

The declaration was indeed heartening, but then again not all that new. And besides, given QEs 1 and 2 have failed to get markets anywhere other than where we are now, should we be excited? Maybe we were still looking more realistically at some genuine buying. And so it was the Dow was down only 55 points at midday.

Which is where it met the sellers once more, and the battle began anew. Was it hedge funds going short on the assumption Europe must surely implode, or was it simply more capitulation from investors finally giving up? The problem with the last possibility is that given current levels of cash being held by mutual funds and small investors alike, one might argue they all gave up long ago. And that reality was underscored with what happened next.

First came the news of a plan for Dexia Capital – the Franco-Belgian financial institution close to bankruptcy – which would see it park E180bn of toxic sovereign debt positions into a “bad bank”, leaving an unexposed “good bank”. This is exactly the tactic Paulson and Bernanke wanted to employ initially in 2008 for the US banks and their toxic mortgage assets. It didn't happen however, because no one could agree on what over-the-counter CDOs were really worth. Hence was born the alternative TARP plan. In the case of European sovereign debt on the other hand, exchange listings provide price discovery.

Dexia will remain as two banks until the Greek debt restructuring is clearer, but either way the governments of France and Belgium would acquire the “bad bank”. In other words, the plan is a step in the right direction – a direction that should have been taken one, if not two, years ago.

The Dexia news was enough to halt the slide, and the Dow managed to edge a bit higher. Then came the clanger. A report hit the wires from the London Financial Times that the EU finance ministers were examining possible ways to recapitalise European banks. Hellelujah, there it is – the Eurotarp. With such capital support in place, Greece can be guided calmly into an orderly default.

You want to see short covering in action? Just watch the Dow rally 350 points in under 45 minutes.

The stock markets were not the only markets to rock and roll all night. In another sign of capitulation, gold fell sharply to trade below US$1600 as once again positions were cashed in to pay margin calls. Gold subsequently bounced to be down US$40.10 at US$1617.20/oz at the New York close. The Aussie visited the 94s, helped along by yesterday's dovish RBA statement, before rebounding sharply to be up 0.3% in 24 hours at US$0.9557. The US dollar index finished down 0.6% at 79.12. The US ten-year bond yield closed at 1.82% having hit 1.72%.

Oil fell sharply and bounced back, with Brent finishing down US$1.92 to US$99.79/bbl and West Texas down US$1.94 to US$75.67/bbl. London Base metals close at 2pm New York and hence they missed the bounce. Most were around 1% weaker.

The SPI Overnight closed up 43 points or 1.1%.

Are we there yet? No. But we might just be one helluva lot closer. 

[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.]