By Rudi Filapek-Vandyck

US equities rallied by up to 4% (Russell2000) on positive news from Europe and from the US housing market. The Dow Jones jumped 337.32 points to 12,103.58 (2.87%), while the S&P500 gained 2.98% to 1241.30 (back against technical resistance) and the Nasdaq lifted 3.19% to 2603.73.

Has anyone else noticed how government bond auctions in Europe are all of a sudden meeting with healthy demand? So where are the risk aversion and the worries about the future of the eurozone?

Market speculation has it the ECB's short term and long term repos this week are having their stabilising effect with European banks speculated to be lining up to buy more government bonds as these can and will be used as collateral for liquidity assistance from the ECB. The discussion soon ventures into whether the whole operation can be described as a covert form of QE by the Europeans.

As one would expect, there are voices of confirmation and others who fiercely object. Whatever the outcome of this freshly started public debate, Europe seemed in a much better mood last night and US markets were all to happy to jump on that same bandwagon.

It's probably too early just yet to declare the gates open for a late Santa rally, but needless to say hope is rising amongst the market bulls.

So the big news last night was the Spanish treasury selling E3.7bn of three-month bills for 1.735%, after an average yield of 5.11% in November, and E1.92bn of six-month bills for an average yield of 2.435%. Both results were better than expected and come on top of better than expected outcomes of auctions recently. Spanish prime minister Mariano Rajoy promised deep spending cuts in his first address to the new parliament on Monday. Yields on Spanish-2 year bonds are falling again.

Economic data also provided support, with the German IFO index - which surveys 7,000 companies - unexpectedly improving from 106.6 to 107.2 in December. Market expectations were for a fall. The IFO's gauge of the current situation was unchanged, while an index measuring executives' expectations climbed to 98.4 in December, from 97.3 the previous month.

Before I forget; the Eurozone's 17 finance ministers have -finally!- agreed to provide E150bn for the IMF, which may be used to help out member states in financial trouble. It's not the Big Bazooka, but a positive step nevertheless.

Sweden's central bank cut its main interest rate by 25 basis points to 1.75%, for the first time since 2009. Troubled Franco-Belgian Dexia will be broken up and sold off in pieces.

The combination of the first three events in particular was sufficient to give market sentiment a big boost and European bourses put in a rally, which boosted opening prices on Wall Street where the general mood was further boosted by more better-than-expected economic data.

Continuing the trend of improving data from the US housing market, US housing starts revealed a jump by 9.3% to a seasonally adjusted annual rate of a 685,000 units - the highest level since April 2010. Building permits for future construction also increased by a larger than expected 5.7%. Note overall data and activity in US housing is still extremely low by historical standards, but all turnarounds start with improvements from low levels.

US equities opened with a big jump and held on to their gains until the final bell. As can be expected, the US dollar and US Treasuries had an opposite day. US 2yr yields rose 1pt to 0.259% and US 10yr yields rose by 11pts to 1.925%.

The Euro thus rose from lows near US$1.3000 to highs around US$1.3130 but later retreated to near US$1.3075. The Aussie tried to reach for US$1.01 and failed, but has still remained above parity.

Commodities equally followed the route of highest predictability; they rallied. Nymex crude oil rose by US$3.19 or 3.4% to US$97.24 a barrel and London Brent crude rose by US$3.32 to US$106.96 a barrel.

Base metal prices were stronger on the London Metal Exchange. Metals rose between 1-2.6%. Gold grabbed the opportunity to jump back above US$1600/oz. The Comex gold price rose by US$20.90/oz to US$1,617.60.

It's going to be a good day today in Australia too.

In other news of the day, NASA scientists have for the first time been able to detect two planets of Earth size in the universe. Apparently there was civilisation once, but it all crumbled and disappeared after building up too much debt after which central bankers got addicted to printing extra money. The first part of that sentence is true, the second part I just made up.

When it comes to accurately predicting the RBA's interest rate decisions this year, Westpac's chief economist Bill Evans got all the publicity in 2011 and for all the right reasons. Underlying his prediction the RBA would start cutting the official cash rate (at a time when many peers were still in a tightening mind set) was the accurate assessment that Europe was going to have its self-inflicted recession and this would pull down the rest of the world as well.

So far, that's exactly what has been transpiring, with the exception of the US where economic data have, on balance, continued to surprise to the upside even with China and the rest of the emerging economies largely surprising to the downside. It's not all only about Europe, of course, and the year's final assessment for China sees economists at Westpac predicting more negative surprises to the downside in the opening months of 2012.

Westpac's view on the world can be best summarised as more pain first, with relief to follow around mid-year. This is also why Evans & Co's prediction is that the RBA will cut deeper than most economists today are expecting. Westpac thinks the official cash rate will go a low as 3.75% by mid next year, against an apparent market consensus that 4% will prove the trough.

In line with this assessment, the Australian dollar is anticipated to trough at US93c in about six months' time, but expected to return to parity by late next year. Pretty much unchanged from the levels AUD/USD is trading at today.

Westpac's view on the world might be a little more downbeat than at most other places, but there certainly are more experts around who have already decided that mid-2012 looks the most likely turning point for the global economy and for equities and other risk assets that need a better environment, and more risk appetite, to perform well.

Still, nothing of all this actually means the odds are in favour of such a scenario playing out. I already mentioned the dire forecasts from chartists such as Daniel Goulding in an earlier Overnight Report (see the past two weeks) so I'll make today's mention a brief one. Goulding published his freshly updated forecasts for 2012 yesterday and his target for year-end 2012 is 3800 for the ASX200.

This is double digits below where the index sits today, so I don't think much more needs to be said about what trajectory Goulding thinks lies ahead.

Contrary to what forecasts by the likes of Westpac and Goulding suggest, however, the outlook for next calendar year is not as yet set in stone. If Evans & Co are correct in their assumptions, we will see at some point QE3 come back into focus at the Fed and central banks in Asia and elsewhere will inject more stimulus as well. We might even see the ECB finally join the chorus.

There is, above anything else, also room for a completelty different scenario; one that sees Europe only suffering a mild recession and with global growth dynamics thus picking up sooner than market consensus now appears to be expecting. Wild guess? Nothing but a pipedream?

It's what market analysts at Danske Bank are anticipating and their firm belief in a rosier outlook for the months ahead is like a breath of fresh air in a fog congested train tunnel. Danske's team led by Chief Analyst Allan von Mehren predicts a resilient economy in the US and underlying resilience in emerging countries will support Europe in climbing out of its economic quagmire much sooner than widely projected.

Danske Bank believes Europe will experience two successive quarters of negative growth, but the first one (Q4) is nearly behind us with only the second one still in front of us. It goes without saying that a shorter downturn in Europe will have a beneficial impact on global risk appetite and this will thus be good news for all investors who held on to their resources and energy stocks.

Also adding to Danske's confidence is that fiscal headwinds for Europe remain strong, but they are not getting worse, while the outlook is for the financial headwinds to soften. A turn in the business inventory cycle will add more oomph to the European recovery.

As such, the difference between a positive scenario as outlined by Danske Bank, and the more downbeat ones as suggested by the likes of Glushkin Sheff's Dave Rosenberg is the latter believes current economic strength in the US is but a lagging indicator and US data will soon follow the rest of the world into a global downturn, while Danske Bank suggests the US economy is leading the rest of the world out of its economic slump.

Note to occasional readers of FNArena's Overnight Report: starting December 13th, I have used the daily Overnight Reports to line up diverging views and outlooks for financial markets and the global economy in the year ahead from experts both inside and outside Australia. In case you find it too unpractical to search for past reports in our archive (or you may not have the access), I will provide a summary in Friday's Overnight Report, which will be the final one for this year.