By Greg Peel

The Dow closed down 68 points or 0.5% while the S&P lost 0.4% to 1413 and the Nasdaq fell 0.3%.

The euro jumped 1% against the US dollar last night, sending the dollar index down 0.7% to 81.89 on some fresh chatter regarding potential ECB bond purchases. If the euro's up, it's "risk on".

On Monday night a report in Der Spiegel suggested the ECB was looking to cap Spanish and Italian bond rates with promises of unlimited bond purchases. It should be noted that under such circumstances the "threat" itself is usually enough: the bond markets are not tempted to test the central bank and thus yields fall without any actual purchases being made. But either way, the report was quickly dismissed by an ECB official as premature speculation, claiming the ECB council had not even begun to discuss possible measures.

But the media was at it again last night. This time it was the UK Daily Telegraph reporting that ECB technicians are indeed examining ways to cap Spanish and Italian bond yields. And in an interview with a Frankfurt newspaper, a German member of the ECB board voiced his endorsement of a bond purchase program. Having crimped their responses on Monday night, last night markets clearly took the attitude that where's there's smoke, there's fire.

We still have Bundesbank objection to consider and the outcome of the German court case to await, but hey ? don't spoil the party.

"Risk on" and a lower US dollar mean commodity prices find support, and hence the base metals all jumped 1-2% last night. Brent crude added US94c to US$114.64/bbl and West Texas added US44c to US$96.70/bbl.

Gold is a beneficiary of both the lower dollar and any talk of increased money printing, so it jumped US$16.70 to $1637.90/oz. The Aussie is up 0.4% to US$1.0488.

Perhaps most notably, Spain auctioned E4.5bn of 12- and 18-month bills last night and achieved a lower borrowing cost than last month's equivalent auction.

And by rights, "risk on" means a rally in the stock market. The major European indices were up half to one percent, and by 11am in New York, the US indices had breached the four-year highs set in May. The Dow was up 51 points to 13,330, surpassing the 13,279 May closing high. The S&P was up 8 points to 1426, surpassing the 1419 May closing high. Did we have a break-up?

No. Wall Street has been hovering just below these levels for a few sessions like a stalled acrobatic aeroplane, and after a solid run to this point on ECB speculation it was time for a fall. Traders saw the breach as providing a sensible level at which to take profits, thus locking in ahead of whatever the ECB actually does do. As I noted yesterday, break-ups through previous highs, if they are to occur, usually require two or three attempts. And realistically there is no "new" news out of Europe. The rally to this point began with Draghi's hints of ECB bond purchases.

As to how long we can keep playing this game is anyone's guess. While a further pullback on profit-taking would make perfect sense, volumes remain low and there is no incentive to sell short given the risk of being trampled by stampeding central banks. The downside is thus fairly limited ahead of any actual "new" news. And as last night indicated, the upside is also limited. We have to wait for the end of next week for Jackson Hole, the week after that for the ECB meeting, and the week after that for the German court decision and the Fed meeting.

In the meantime, an apparently struggling China is taking a backseat. However if Europe is "saved", China is a beneficiary. Its export markets would no doubt begin to see a recovery and its domestic issues would at least be addressed with some renewed confidence. And it would all be good news for Australia.

So far the local earnings season scorecard has been a resounding "not bad", but only relative to much downgraded expectations. On an absolute basis earnings have been poor, reflecting both the macro issues and the micro issues, with the micro issues very much beholden to the macro effects of the strong Aussie and weak confidence. Meanwhile the season rolls on, and you really don't want to know how many companies are reporting today. Mind you, tomorrow will see even more. Today's stand-out highlight will nevertheless be the report from BHP Billiton ((BHP)).

The SPI Overnight was down 3 points.

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