By Greg Peel

The Dow closed up 95 points or 0.8% while the S&P rose 1.0% to 1357 and the Nasdaq gained 1.2%. The big jump in tech in the past two sessions has been led by Microsoft (also a Dow component), which is launching a new tablet.

One might argue last night was a delayed reaction, that after strong rallies last week markets simply needed Monday night's session to pause and reflect before making the next move. At the forefront of Wall Street sentiment last night were expectations for some further encouragement from the Fed, which will announce its policy and hold a press conference tonight.

There are plenty on Wall Street who believe the Fed has no need to do anything at all. At this stage the situation is not so desperate. Yet even that school concedes the Fed will not wish to toy with frazzled market sentiment. Few believe Bernanke will go another full round of bond purchases (QE3), so consensus has an expectation the Fed will twist again, like it did last summer. The Fed is concentrating on the US jobs situation and the last payroll numbers were not encouraging.

As to whether an extension of Operation Twist ? the selling of short date maturities to buy long dates without increasing net purchases ? has had much impact up to now or will have any impact ahead, it is again seemingly more of a sentiment issue than anything else. The Fed needs to be objective, but will likely not wish to upset markets at this vulnerable stage. Meanwhile over in Europe, the news is improving.

There was a report out last night that Merkel was ready to drop her resistance to direct sovereign bond buying (think Spain, Italy) by the rescue funds (ESM, EFSF) and had said so at the G20. The Dow was up 156 after this news until another report denied the first. However there is talk that the Greek parties are close to forming a coalition and that Greece may have a government as early as tonight, and there is talk that Merkel is preparing to ease off on her pro-austerity stance to appease the new pro-growth French government and others across the eurozone.

Last night the UK, French and German stock markets were all up around 1.8%, while the Spanish and Italian indices jumped around 3%. Assisting the mood was an auction of short dated sovereign debt in Spain which, despite runaway Spanish long date yields, was well oversubscribed. Spain sold around E3bn of 12 and 18-month bills and received over E8bn in bids. As a result there was some relief in the rise of the Spanish ten year.

That's the good news. The bad news is Spain had to pay 5.07% for its 12-months when only a month ago it paid 2.99%, and the ten-year yield remains above the 7% line in the sand. Talk now is that were that yield to reach 7.5%, the ECB would be forced to act with a second bail-out.

Interestingly, German bonds have come under a deal of selling pressure over this French/Greek election period. Once the safe haven of all Europe, and more highly sought after than US Treasuries, the German ten-year yield has bounced swiftly from around 1.17% back to around 1.50%. The bottom line is that if austerity measures are eased in the eurozone, and growth pursued, the funding can only come from one source ? Germany. This reality may also explain why last night the German ZEW survey of economic sentiment plunged from a surprisingly strong 10.8 last month to minus 16.9 this month. Yet still the German stock market surged, and why not? Stimulus is good for stocks and investors appear to be switching their positions out of bonds to take advantage.

On the other side of the pond, there were more signs last night the US housing market may indeed have bottomed. Housing starts fell 4.8% in May albeit April's number was revised up, but more importantly building permits, which precede starts, shot up in May to numbers not seen since Lehman. On Monday night the housing market sentiment index showed a tick up to 29 from 28.

So it was a combination of data, hopes of relief in Europe and hopes for Fed action tonight that sent Wall Street higher last night, although indices did not close on their highs. It could all fall into a hole again tonight of course, were the Fed to disappoint, or were the Greek parties to hit a stalemate, but that is unfortunately the current world in which we live. One of no control over the headlines.

Having shot up on Monday night, the US dollar index fell back 0.7% last night to 81.40 as the euro decided to go for a run. This was nevertheless not an impetus for gold which, with danger potentially easing, dropped back US$10.00 to US$1618.10/oz. The Aussie's recovery nevertheless continues, with the Battler (can we still call it that?) up another 0.7% to US$1.0191.

Base metals simply reversed their small falls of Monday night with the exception of nickel, which is up 2%. Brent fell US29c to US$96.05/bbl but West Texas rose US86c to US$84.13/bbl.

Fed speculation had the US ten-year yield up 3bps to 1.62% while the VIX was steady.

The SPI Overnight rose 26 points or 0.6%.

So again we wait ? for the Fed, for a Greek government, and/or for any news on concessions from Angela Merkel.

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