By Greg Peel

The Dow closed up 14 points, or .1%, while the S&P was flat at 1418 and the Nasdaq added 0.3%.

The yield on the benchmark Italian ten-year bond jumped 30 basis points last night to 4.75% in the first market reaction to the Italian prime minister's announcement he would be resigning after the passage of the budget. The equivalent Spanish yield quietly snuck up 10bps to 5.54% as well.

Europe's latest turmoil was not lost on Wall Street, however one gets the impression traders are somewhat "over" Europe right now, or at the very least they see Europe as peripheral to the more pressing issues at home. Global markets will nevertheless look for any signs the former prime minister Silvio Berlusconi has regained popular support in Italy to a level sufficient to reinstate the previously ousted leader and potentially return the country to the parlous state of over a year ago.

Nor is Wall Street overly concerned about China. After posting a very encouraging slew of November sales and production data on the weekend, China's trade numbers released yesterday were a serious disappointment. The market was expecting a 10% increase in exports and a 2% increase imports, but the results came in at 2.9% and flat, respectively. October's 11% increase in exports had been an earlier pointer to a Chinese recovery.

Can we blame it on Cliff? The drop in exports reflects a drop in demand from China's major export customers; Europe and US. Falling demand in Europe will never surprise, but sudden weak demand from the US appears to coincide with the growing realisation post-election that Cliff is approaching. Meanwhile, China's local Asian trading partners are holding up their end to provide core business.

It seems someone would have to drop a pretty big bomb outside the US for Wall Street to be distracted from the issues at home right now. Cliff will likely linger all the way to year-end and while there is little sign of progress, traders have given up on chasing the market up and down on every minor ebb and flow of the rhetoric. Or maybe the computers were just losing too much money against each other. This week's major distraction is, however, Wednesday's Fed monetary policy statement, economic forecasts and press conference. In other words, what happens with Operation Twist?

Ben Bernanke has already indicated there is not a lot the Fed can do about Cliff. If America goes over, the Fed does not have the balance sheet capacity to prevent recession. It's another impetus for politicians to sort things out, but in the meantime the Fed is going in somewhat blind to its scheduled Twist expiry at year-end, and this week sees the last scheduled FOMC meeting for the year. It's difficult to predict what Bernanke might do, but converting the Twist into QE4 (by dropping the selling leg) is a popular assumption. This would see the Fed back buying longer dated bonds once more (QE1-2) alongside mortgage-backed securities (QE3).

Anticipation of just what Wednesday might bring kept the US bond market at bay last night, with the ten-year yield relatively steady at 1.62%. In earlier times a 30bps jump in the Italian yield would be countered with a fall in the US yield as safe havens were sought. Both the US stock market and bond market are inwardly focused at present, it appears.

On the other hand, the London base metals market was anything but inwardly focused last night. Traders appeared to shake off the Chinese trade data to focus on the more encouraging sales and production data released on the weekend, while also picking up on Wall Street's belief that Cliff will be resolved one way or the other. Any further stimulus announced by the Fed on Wednesday would also be negative for the US dollar and thus by default positive for commodity prices. It is possible commodity fund managers have decided it's time to get set ahead of expected fresh Chinese stimulus in the new year as well, and momentum did the rest. Copper rose 1%, aluminium and zinc 2%, lead and nickel 3% and tin 4%.

If the LME is expecting a weaker greenback it was not the case last night, with the US dollar index slipping only 0.1% to 80.32. Gold edged up another US$8.00 to US$1712.00/oz and the Aussie is steady at US$1.0488.

Nor did the oils share the LME's excitement, with Brent rising US21c to US$107.31/bbl and West Texas falling US27c to US$85.66/bbl.

The Chinese spot iron ore price usually doesn't pay much attention to macro issues and mixed domestic data are unlikely a factor in another US$2.40 rally for iron ore to US$123.40/t. We seem to have some fresh momentum, which will have analysts concerned an equivalent retreat will possibly follow soon.

The SPI Overnight closed up 10 points, or 0.2%.

It's difficult to see anything but a quiet session on Wall Street again tonight, all things being equal, as the FOMC sits down ahead of Wednesday night's statement. In the meantime, NAB will release its monthly survey of Australian business conditions and confidence today.

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