By Greg Peel

The Dow closed up 68 points or 0.6% while the S&P gained 0.8% to 1286 and the Nasdaq rose 0.5%.

Well if you'd asked me before my summer break whether the Mediterranean region was an area of focus for financial markets going into 2011, I would have answered yes, definitely, although it would have been the northern shore I was referring too. But Egypt?

Hello all. Hope you had a great Christmas and New Year and are looking forward to a positive 2011. It's good to be back. It's certainly been a devastating and tragic January across the country and when I said on my pre-Christmas appearance on Sky Business that no one was paying enough attention to the weather, in terms of risks to Australian economic growth, the subsequent events were not exactly what I had in mind.

The Australian market has understandably underperformed Wall Street over the past month while the US economy and, by note of earnings reports, US companies are seemingly firing along. QE2 is working, as well it might. Indeed, this morning Wall Street has closed on a positive January for the first time since 2006. And although it's not a hard and fast rule (2009 was an obvious exception), the old adage is a positive January means a positive year.

I agree with suggestions that while the drop on Wall Street on Friday night appeared a direct response to the Egyptian crisis, after a strong run-up the market was due a breather. Funny – “Egyptian crisis” just runs off the tongue like “Greek crisis”, or “Irish crisis”, or “European crisis”. This exact time last year it was Greece which came out of left field. Then, as now, suggestions were made that Greece was an excuse to take profits after a very strong 2009, but then the fear of contagion crept in. And now we're having deja vu as Egypt's turmoil is sparking contagion fears across North Africa and the Middle East. Tunisia has been to Egypt as Dubai was to Greece.

But last new year's crisis was all about debt while this one is all about oil. There is no talk of failing banks or rising sovereign bond yields, just talk of the Suez Canal, global oil supply, and the “careful what you wish for” warning that a democratised Middle East may open the door for more widespread hard-line Islamic oppression. It may also open the door for peace-loving Muslims to form moderate and secular governments with nationwide welfare in mind. We can only hope.

The result is that last night Wall Street bounced, spurred on largely by a very solid result from Exxon. While this was a fourth quarter result, it serves to draw attention to the current oil price surge. Last night WTI crude gained another US$2.95 to US$92.08/bbl.

Have you noticed just how expensive it's become locally to fill up lately? Well that's because Tapis crude is on the wane in availability. Refiners such as Caltex have been forced to import more and more Brent Crude (North Sea) as a substitute, and the spread between Brent and WTI has been rising fast over the past months. Last night Brent closed over US$100/bbl for the first time since the oil price explosion of 2008. (Don't quote me, but I assume the Brent supply comes through the Suez Canal.)

Also driving Wall Street last night were solid economic data. The Chicago purchasing managers' index which measures activity in America's largest commodity centre saw a jump to 68.8 from 66.8 last month to mark its highest level in 20 years. This is a 50-neutral index, so 68.8 implies a very rapid rate of growth. The Dallas Fed index released last night nevertheless was unchanged.

Personal income rose 0.4% in the US in December and spending 0.7%, which were a bit better than expected. I'll make note here that last week's US fourth quarter GDP result of 3.2%, albeit a tad disappointing for Wall Street, is only the first estimate. It takes the October numbers and extrapolates them across three months. Over those months, the US economy was in an upswing, and hence it is suspect we will see subsequent upward revisions in February and March.

Over in Europe, the focus was on the eurozone CPI which rose to 2.4% in January, up from 2.2% in December. The rise in inflation sparked a rally in both the euro and the pound, sending the US dollar index down half a percent to 77.78. The Aussie rose slightly to US$0.9969.

The weaker greenback helped base metals along to fairly uniform 2-3% gains in London, and we know what happened to oil. Gold, however, fell back US$6.00 to US$1331.10/oz after Friday's solid geopolitical surge.

The SPI Overnight gained 12 points or 0.25%.

I left 2010 with a report previewing 2011 which noted that the VIX volatility index had dropped to mid-teens in the US (similar here) and that whenever it does, something always happens. It may not happen immediately but once again this time last year we had a similar scenario. No one predicted Greece, no one predicted Egypt. At teen-level volatility cost, put option insurance is every portfolio's friend.

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