The European bank stress tests and the second quarter earnings flow in the US last week overshadowed what could be a turn around in sentiment among domestic Chinese investors.

After selling down the local markets by more than a quarter this year, last week saw a sharp improvement.

Investors, rightly or wrong, now think the government will move to reinvigorate the housing market, and will not limit bank credit.

There was an upsurge in this story the week before, but the government ruled it out, but it got another, more solid run last week.

As a result the Shanghai market, Asia's worst-performing index this year, had its biggest weekly rise of 2010 so far, up 6.1%.

Helping maintain this upbeat outlook will be a report on the weekend from the Bank of Communications which ruled out a double dip in the second half of 2010 (not that one had been contemplated by many analysts), but did acknowledge a second half slowdown nevertheless.

Growth is tipped to run at around 9% or more in the six months to December, down from around 11% in the first half.

The bank, China's fifth largest commercial bank, said inflation will slow this half, while exports will continue to run at strong levels, with an average growth of 20% or more for the year.

To us in Australia, the more positive tone from Chinese investors shouldn't disguise the fact that conditions in the important Chinese steel sector are slowing, with demand for steel falling, output dropping, prices easing and demand for iron ore down sharply.

That will continue to be more important for Australia than the movements in the US markets where the strong second quarter earnings flow has made many investors think the poor economic data is not representative of the real state of the economy.

That's Pollyannaish thinking and bound for disappointment.

For example the Obama Administration is now forecasting that unemployment in the US will remain above 9% until 2012.

That is bound to damage earnings, especially in 2011.

Friday saw the Dow up 1%, the Standard & Poor's 500 up 0.8% and Nasdaq was up 1% as well on the day.

For the week, the Dow was up 3.2%, the S&P 500 3.6% and Nasdaq 4.2%.

Thomson Reuters says that of the 175 S&P 500 companies that already have reported, 78% reported earnings that topped analysts' expectations, 10% reported earnings in line with analysts' estimates and 12% missed forecasts.

In Europe, markets were mixed, with Britain's FTSE 100 little changed, Germany's DAX up 0.4% and France's CAC 40 up 0.2%.

Over the week, the Stoxx 600 Index was up 3.2%.

In Asia, the Japanese Nikkei gained 2.3% on Friday.

The MSCI Asia Pacific Index added 1% last week.

Hong Kong's Hang Seng finished up 2.8% (half the weekly rise in Shanghai, though), South Korea was up 1.1%, Tokyo rose 0.2% (thanks to Friday's strong surge) and Australia saw the ASX 200 add 0.8% over the week.

Today, our market could be up more than 40 points in early trading after a solid gain on the futures market on Saturday morning, our time.

The market finished last week strongly with a rise of nearly 2% on Friday.

The ASX200 index ended up 83.7 points, or 1.9%, at 4,458.4 points, while the All Ordinaries index added 80.3 points, or 1.8%, to 4,475.1 points.

The Aussie dollar finished at a 10 week high of just over 89.50 USc, up around 0.20c from its Australian close on Friday.