By Greg Peel

The Dow rose 115 points or 0.9% while the S&P gained 1.1% to 1446 and the Nasdaq added 1.5% (Apple up 2.9%).

On Monday night the Republicans offered to accept tax increases for incomes over US$1 million, countering the Democrats' US$250,000. The caveat was a US$1 trillion cut in entitlements, which includes social security. The Democrats were prepared to cut by US$350 billion.

Last night Obama moved his tax hike threshold up to US$400,000, and his entitlements cuts to US$400bn. In response, John Boehner said the offer is "not there yet," but indicated that he remained hopeful.

Wall Street is making the assumption that all of the above is a sign of progress, and that a compromise is not far off. By lunchtime, the Dow was up 125 points, having closed up 100 points on Monday night on the first sign of a concession by the Republicans. However, the excitement waned slightly later in the day, as the Republicans revealed that despite ongoing negotiations, it was preparing a "Plan B" set of tax hikes (US$1m threshold) and spending cuts to put to Congress, implying the GOP is still denying Obama's mandate. Democrat senate leader Harry Reid ? he of little subtlety ? publicly snorted at the Plan B idea. The Dow fell to be only up 80-odd, but once again kicked to the close.

Wall Street is reflecting an undertone of confidence. A cliff resolution with cranberry sauce might be ambitious, but a cliff resolution with fireworks and a kiss seems quite possible. Wall Street is beyond worrying about what that resolution might imply for taxes ? particularly related to capital gains, dividends etc ? or loss of spending programs. Wall Street just wants to have a government that governs and a Congress, even if reluctant, in agreement. Only then will businesses begin to feel confident enough to invest and to hire. Only then can a US economic recovery truly be supported.

Which is a much better environment for US banks, and that's why the financial sector has led stocks higher over the past two sessions. It is accepted wisdom that a stock market rally can never occur unless the banks are leading ? they are the economic bellwether.

Meanwhile, sentiment in the US housing market has now hit its highest level since April 2006. At 47, the NAHB sentiment index remains below the 50-neutral point (good/poor), but the index has rocketed from lowly depths all of 2012 and momentum suggests more good than poor very soon. We recall that the US housing bubble began to deflate late '05/early '06.

It was in July when the Dow last put together back-to-back triple-digit gains. The "risk-on" trade was also evident last night as investors sold off bond and gold positions. The US ten-year bond yield jumped another 6bps to 1.83%, while gold tumbled US$25.60 to US$1672.20/oz as it broke technical levels. Gold moved in spite of a 0.3% drop in the US dollar index to 79.35.

The Aussie is a touch lower at US$1.0538. Funny ? it used to be the global risk indicator.

If the stock market is fired up, the commodity fund traders are not. The oils were higher again, with Brent up US$1.20 to US$108.84/bbl and West Texas up US82c to US$88.02/bbl, but these moves of around a dollar up or down have been common over the month. It is in the metals market where a lack of excitement is stark. On Monday night the base metals didn't move in London, and nor did they last night.

The suggestion from the LME is that while the typical "leading indicator" of the stock market is getting in ahead of an assumed cliff resolution, commodity funds are going to wait until they are really sure. There was also shock news in iron ore -- price is steady at US$132.20/t.

The SPI Overnight was up 29 points, or 0.6%.

The worrying part about this anticipatory rally is that it will only take one little dummy spit, one sign of a collapse in negotiations and we could see investors retreating just as fast as they are currently piling in. There is even a suggestion that traders will look for a "sell the fact" opportunity if a resolution is announced.

But hey ? it's Christmas. Let's just dream for now.

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