By Greg Peel

The Dow closed up 75 points, or 0.5%, while the S&P gained 0.7% to 1652 and the Nasdaq added 0.6%.

A rebound in base metal prices and the Aussie on Monday night stabilised the local materials sector yesterday and kept the foreign sellers at bay, allowing positive momentum to build across the broad market. China's inflation data for June showed an unchanged CPI from May at 2.7% annualised, which exceeded expectations of 2.5%. At this stage a bit of positive inflation is a good thing because disinflation suggests a slowing economy, although too much inflation is a bad thing, as it restricts Beijing's capacity to provide further stimulus.

Beijing is targeting a CPI of 3.5% for 2013, but economists expect the end result to be closer to 2.5%. While this suggests scope for further stimulus the real impetus lies in the wholesale PPI, which at negative 2.7% in June has marked up sixteen consecutive months of disinflation. Weak demand is forcing wholesalers to reduce prices, and the flow-on to retail means CPI inflation is unlikely to rise to meet Beijing's target in the second half of 2013.

Further impetus for stimulus is provided by China's short-term money market, which after the PBoC's recent orchestrated credit squeeze, has now stabilised, but at higher levels than before the squeeze. It thus costs more for small businesses to borrow, which can only imply further economic weakness. The question now is whether the PBoC has made its point and smashed China's shadow banking operations, such that Beijing could now, for example, cut interest rates to provide general economic stimulus without that cheap funding flowing once again into property speculation and high-yield wealth management.

The world, and particularly Australia, is holding its breath.

When the dour NAB business survey was released locally yesterday the Aussie once again traded under 91, with expectations firming for an August rate cut from the RBA. Yet buyers and/or short-coverers have pushed the currency higher once again, marking a 0.5% rise over 24 hours to US$0.9179. This is despite the US dollar index also rising 0.5% over the period, to 84.63.

Ongoing strength in the greenback reflects the widening gap between a recovering US economy, a struggling European economy and a seriously stimulated Japanese economy. The ECB has now declared it will maintain low interest rates for an extended period, and the Bank of England last week hinted at the potential for further QE. Last night it was revealed UK industrial production fell 2.3% year on year in May when a 1.5% fall was expected, firming expectations for BoE action sooner rather than later. Weakness in the pound and euro allowed both the US dollar and the Aussie to rise last night.

Wall Street's strength was mostly driven by Alcoa's after-the-bell profit report on Monday night. That, and underlying positive momentum. While Alcoa is no longer a valuable lead indicator for the broad market, the company's earnings "beat" in the face of aluminium price weakness, and the CEO's reassuring comments over Chinese weakness not being as much of a problem as many would assume, heartened investors who are growing in confidence ahead of the earnings season. There is a feeling the steep forecast downgrades leading into the season imply a low base from which companies can surprise.

Tonight the Fed minutes are released, and the past three minute releases have been followed by 2% falls on Wall Street over the ensuing few sessions. However, those minutes provided the first clues of possible Fed tapering, and after the last meeting Ben Bernanke ended the speculation and laid out a possible tapering timetable. The timetable was revealed at his press conference and not in the official policy statement. It is thus quite possible there is no timetable laid out in the minutes, which may well confuse jumpy Wall Street traders.

Yet it appears Wall Street is already feeling comfortable about tapering, and is moving to price in a September commencement. After last night the S&P 500 is less than 1% from its all-time high.

Gold rose last night despite the stronger greenback, by US$11.10 to US$1248.00/oz. It appears gold is trying to consolidate in the low 1200s, at least for the time being. Base metals did not fare so well nevertheless, with copper and nickel down over 1% and all others slightly weaker.

It's still a different story altogether for oil, which is ignoring the currency and focusing solely on Egypt and its possible implications. The IMF even lowered its global energy demand forecasts last night, yet still Brent rose US76c to US$108.00/bbl and West Texas rose US88c to US$104.02/bbl.

Spot iron ore is up US$1.80 to US$123.70/t.

The SPI Overnight closed up 17 points, or 0.3%.

Westpac's consumer confidence survey result is due locally today, and China will release June trade data. The Fed minutes are out tonight and Ben Bernanke is also making a speech.

Energy Resources of Australia ((ERA)) will kick off the quarterly production reporting season for the local resource sector today.

Rudi will appear on Sky Business this evening at 5.30pm.