By Greg Peel

The Dow rose 124 points or 1% while the S&P gained 0.9% to 1321 and the Nasdaq added 0.7%. It was all one way.

It is apparently not just a rumour that Colonel Gaddafi has invited opposition leaders into talks to resolve the civil war in Libya. It is nevertheless speculation that Gaddafi is looking for a safe exit. Commentators note that Gaddafi is a shrewd operator and such “tactics” come as no surprise. The opposition leaders know this too and are wary of a trap.

The move by foreign powers towards imposing a no-fly zone over Libya has apparently progressed, but those foreign powers don't want to simply escalate the war if, indeed, Gaddafi is ready to surrender. The US government is also still ready to release strategic oil reserves if need be and last night OPEC members Kuwait and Nigeria said they could join with Saudi Arabia in increasing production rates to make up for the Libyan shortfall.

All in all, last night's developments were a catalyst for the oil price to fall. The Brent crude benchmark price fell US$1.78 to US$113.26/bbl while US barometer West Texas fell US34c to US$105.10/bbl. Note that the Brent-WTI spread is now half of what it reached at its peak.

While traders might be looking through to the day Gaddafi falls and peace and production are restored in Libya, others are more concerned about protests planned for Thursday in Saudi Arabia. This will not be over until it's over.

Having again sensed a move towards resolution abroad, Wall Street was able to focus inward once more. Last night's news came from Bank of America which declared it would no longer be looking for acquisitions but instead look to cut costs, refocus on customers, increase dividends and return capital to shareholders. BofA shares jumped 4.6% and took the whole financial sector along with them.

Meanwhile, a shift of the limelight away from MENA also means light can then be recast on Europe, where once again the situation is looking somewhat fragile. On the back of Monday's downgrade of Greek debt by Moody's, Greek bonds have again blown out to record yields and Portuguese and Irish bonds have followed suit. The reality is that the higher these yields rise the more costly it is for these governments to refinance, thus potentially derailing their budget cut attempts.

In the ongoing push to reach a more permanent solution on debt problems among eurozone members, leaders will meet yet again on Friday. It is understood Germany – the biggest contributor to the bail-out fund – is still insisting on haircuts for holders of peripheral sovereign debt. Indeed, many a commentator has since suggested haircuts (debt restructuring) are inevitable in what is otherwise a lost cause, but the new problem is that the eurozone cash rate is about to rise.

That the ECB should be even contemplating a rate rise when the PIIGS are still completely vulnerable is testament to the dichotomy across the haves and heave-nots of Europe and the fragility of the common currency zone. Germany is powering along, the euro is rising, and the ECB is worried about inflation. Yet the PIIGS will be suffering deflation for years to come and the last nail in the coffin, one would think, could be a rise in the underlying cash rate. It was not that long ago the ECB was undertaking its own form of QE via cheap loans to European banks.

The rise in the euro, and the pound, on interest rate speculation has helped to send the US dollar lower lately, along with the Swiss franc now being the preferred safe haven. But the lower the dollar goes, the higher go prices of oil and food. It's a self-feeding mechanism which, particularly given PIIGS fragility, simply cannot last.

So we sit at a crossroads. Were Saudi Arabia to erupt into turmoil, thus disrupting oil supply, the price of oil will skyrocket. Were a eurozone peripheral to default, or debt restructuring to be forced, such that the euro drops sharply then speculators could bail out of oil so fast our heads will spin.

Last night provided a taste as currency traders moved to sell down their euro positions which have been set ahead of the anticipated ECB rate rise. There was also some exit from the Swissy and the US dollar index rose 0.4% to 76.81. The Aussie continues to sit mostly on the sidelines of this turmoil, falling only slightly to US$1.0102.

Precious metals were also little affected by the supposed return to confidence, with gold falling only US$3.60 to US$1428.90/oz and silver off a smidge. Base metals took a big hit on Monday but consolidated last night on mixed moves.

The benchmark US ten-year bond yield ticked up three points to 3.55% last night following a three-year auction that saw robust but not spectacular demand.

The SPI Overnight rose 7 points or 0.15%.

Yesterday the Australian market held up despite Wall Street's drop with a bit of help from a surprisingly positive NAB business conditions survey for February. Today sees housing finance and investment lending data, along with Westpac's consumer confidence survey. And RBA chairman Glenn Stevens will address an industry group at which the media will be looking for any more hints on monetary policy.

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