By Greg Peel

The Dow rose 162 points, or 1.3% while the S&P gained 1.2% to 1324 and the Nasdaq rallied 1.2%.

Stimulus is the name of the game. They're talking about more in Japan, perhaps more in Britain, and China has just cut rates, as has Australia. In Europe, the latest stimulus is coming in the form of more debt for Spain, which on Monday night Wall Street was very sceptical about. But as far as Wall Street is concerned, one form of stimulus overrides all others, and that comes in the form of money printing by the US Treasury to give to the Fed so that the Fed can lend it back to the Treasury by buying US bonds. If this happens again it will be dubbed QE3.

QE2 ended last year, in the sense that the Fed stopped buying more bonds, but realistically it has since been maintained given the Fed is reinvesting interest payments and maturing bonds to maintain a consistent balance sheet. The central bank has also since shuffled its balance sheet, shifting shorter date assets out to longer dates. This has been dubbed Operation Twist. It's sort of a QE2.5, albeit without increasing the size of the balance sheet. Operation Twist is due to expire at the end of this month.

Greece goes to the polls on the weekend and thereafter anything could happen. What will definitely happen is the Fed's next scheduled monetary policy meeting on the following Wednesday. Even taking Greece out of the equation for a moment leaves us with a Europe in dire straits, with the yield on the Spanish ten-year bond last night rising a further 21bps to 6.74%. In sympathy, the equivalent Italian bond yield rose 13bps to 6.17%. The eurozone is yet again threatening to implode, and despite attempts over the last couple of years to insulate, US markets will feel the impact. Then throw in Greece. With Operation Twist due to expire, what will the Fed herald at next week's meeting?

If Chicago Fed president Charles Evans has anything to do with it, the Fed will sound the trumpets and announce the roll-out of QE3. "I've been in favour of pretty much any accommodative policy I've heard about," said Evans in a television interview on Monday night. Evans suggested the Fed would back moves to spur more rapid jobs growth. Given the Fed can only use monetary and not fiscal tools to achieve this, Wall Street took the comments on board as a plug for QE3.

The comments may have carried more weight were Evans actually an FOMC member, and thus could vote in favour of QE3 explicitly and not just implicitly, but Wall Street was happy to take it. The Fed has to make some decision, and the way things are going a benign statement may be none to helpful.

So last night was a night for US stocks. Despite further increases in eurozone bond yields (bar Germany), the US Treasury held an auction and nobody came. A total of US$32bn of US three-years were sold, but foreigners bought only 27%, down from a running average of 36%. The benchmark US ten-year yield rose 6bps to 1.66%.

Yet it wasn't a classic "risk on" session. US stocks were up, bonds were down, the US dollar index fell 0.3% to 82.39 and gold jumped US$14.40 to US$1610.50/oz on the thought of more currency debasement. But the real commodities did not participate despite closing with Wall Street near its highs of the session. Base metals all closed less than 1% lower in London, while Brent crude fell US40c to US$97.33/bbl. West Texas did manage a US67c rise to US$83.37/bbl.

While commodities may have underwhelmed, the Aussie is still up a cent to US$0.9963. This is the ominous, and possibly always inevitable sign. The RBA can cut all it likes, but if the Fed hits the QE3 button, the Aussie will be back above parity once more.

At the end of the day the volume on Wall Street was again light, and the volatility of the last two sessions has resulted in little net movement. The smart money is out of the market awaiting the Greek election result. Meanwhile, the EU is trying to push a new banking union on top of the trading union in which deposits would be centrally guaranteed and debts centrally managed. Sounds great for everyone else but not for Germany, who would once again simply be writing the cheques with no control over where they ended up. No way, says the Bundesbank, and fair enough.

The SPI Overnight rose 17 points or 0.4%.

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