By Greg Peel

The Dow rose 254 points or 2.3% while the S&P gained 2.8% to 1210 and the Nasdaq added 3.3%.

Hurricane Irene did not cause as much damage to New York City as was feared, but while the NYSE was open it was still difficult for many in the financial market workforce to make it into town. Hence volume on the exchanges was light last night. We are also rapidly approaching the end of the month, and data shows fund managers a very underweight equities.

This means any sign of good news has the power to trigger a sharp upside scramble, which was pretty much the theme of things on Wall Street last night.

It is now the morning habit of a Wall Street trader on arising to first check whether any new havoc may have been wrought in Europe overnight before deciding what the day might bring. Last night traders awoke to the news two of Greece's largest banks had agreed to merge. The new entity would instigate an E1.25bn rights issue and E500m of convertible bonds would be issued to a Qatari investment fund which would provide a 17% stake on conversion. On face value, the tier one capital ratio of the new bank would reach 14%.

The news sent the Greek stock market up 14%, and the stock markets of Germany, France, Spain and Italy up over 2%.

Adding fuel to the fire was a scheduled testimony from ECB president Jean-Claude Trichet to the European Parliament suggesting eurozone growth would likely be weaker than expected and fear and uncertainty would remain heightened. While he also noted inflation would likely remain above 2%, the testimony was taken as a hint that the ECB did not intend to raise rates any further at this stage. We recall that as Greece threatened to implode and eurozone contagion threatened to spread earlier in the year, the ECB raised its cash rate, just as it had done during the 2007 credit crisis.

The news out of Europe was alone enough to inspire more confidence on Wall Street, and then along came the US July personal income and spending numbers. A double dip was back on the agenda last month when it was revealed spending fell in June and savings rose despite a rise in incomes, but July's numbers showed a 0.8% jump in spending on a 0.3% rise in incomes, and a drop in the savings rate to 5.0% from 5.5%. The increase matched the jump in February which was the biggest since mid-2009.

What double dip?

Of course it was August when the world began to fall apart, with debt ceiling wrangling and the S&P downgrade masking ongoing indecision in Europe, so there may be no point in getting too excited just yet. The other issue is that we are now officially in a "bad news is good news" phase given the world expects the Fed to act, one way another, if the US economy appears to be faltering. So do we thus say that good news must be bad news? Well, not on last night's performance. Maybe good news is good news and bad news is a good news safety net.

That seems to be how gold saw it last night. Last Friday on Wall Street we had the unusual, in recent times, situation in which both stocks and gold rallied. Up to then, money had been flowing out of stocks and into gold as a safe haven. On Friday, an open door for more QE measures from the Fed meant stocks rallied on stimulus potential and gold rallied on money printing potential. But last night gold fell as stocks rallied, by US$39.40 to US$1788.50/oz, given better economic news means less likelihood of money printing.

The fall in gold also formed part of a "risk on" session, in which stocks rose, the US ten-year bond yield rose 8bps to 2.28%, the VIX volatility index fell 9% to 32, and the Aussie jumped another cent to US$1.0688 despite the US dollar index being steady at 73.68.

Oil all rose, with West Texas up US$1.90 to US$87.27/bbl and Brent up US52c to US$111.88/bbl. It was a public holiday in the UK last night so the LME was closed and there was no base metal trading.

It was a solid day yesterday in Australia but the futures want to go on with it, as the SPI Overnight is up 58 points or 1.4%.

So once again we might ask the question, is it all over? Can life go back to normal again? The answer is maybe, but we should bear in mind that one European bank merger still leaves plenty of others in balance sheet difficulties, banks were up on the back of the news in New York but insurance companies led the charge, having been sold down heavily last week in case of Irene devastation. It's officially the last week of the summer holidays in the US, and volumes were very light last night given many could not get into work.

It's also close to month's end, and US fund managers are underweight equities. This could mean a very sharp rally both into September and beyond, but all we need is one little trigger out of a still turbulent Europe and we might be right back down again.

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