For a moment overnight, there was a whiff of joy in the air: BHP Billiton had mentioned that Chinese steelmaker stocks had been reduced (as had US group Peabody Coal a week before, without any impact), commodities surged as the Chinese stock market hit a four-month high and a major gauge of shipping rates had a huge rise (just as it had some huge falls late last year).

Copper and oil firmed and other commodities pawed the ground as investors started positioning themselves, ready for a more convincing trigger. But it never came.

Reality intruded in a rather ugly way: poor earnings figures from Costco Disney, Time Warner, Panasonic and Hitchai in Japan ($US8 billion of losses between them) alongside US food companies Kraft and Sara Lee and renewed whispers about the health of Bank of America. The bank said business growth was “encouraging”, but investors fretted that it might need more aid in the next bailout package which is still to emerge from the White House.

Not helping sentiment was President Obama’s edict that salaries of executives at companies receiving government aid shouldn’t be more than $US500,000 a year in cash, though some reports suggested that it won’t stop rorting.

The China back story got a kick along as well from a report that the country’s service sector had improved last month, but a later report said the UK was doing it tough. However, there were signs in the US of a steadying there in its huge services sector, with forward orders easing back from their recent headlong plunge.

Investors in the UK didn’t concern themselves with a respected forecaster warning that the country will experience the worst contraction in 60 years. The British economy will shrink until the fourth quarter of this year as the world has the slowest growth since the end of World War II, according to the National Institute of Economic and Social Research. GDP will fall 2.7% in 2009, compared with a previous forecast of a 0.9%.

No, that wasn’t interesting as investors chased mining shares like BHP, Xstrata and even Rio.

Then the US Treasury’s funding arrangements for next month were published and they were huge, and could still be huge (try $US67 billion, or more than $US2 billion a day for every day of the month), and larger for months and even years to come. So desperate is the Treasury that it is bringing its seven-year bond our of retirement to try and tempt tetchy buyers.

That solid 1.6% rally in early trading on Wall Street turned into a sharpish fall of 1.7% for the Dow and 0.8% for the Standard & Poor’s 500 by the end of the day as reality took over. Those straws about China were ignored, the gloom about earnings, focus on Friday night’s January jobs figures, more concerns about banks and their bailouts and the rise in interest rates won out.

That rally in Europe looked a case of premature deception as the bears outwitted the bulls. Wall Street lost some of its recent enthusiasm for consumer durables with the poor results from Proctor & Gamble, Kraft and Sara Lee outweighing the still strong worries about the recession. Another concern was the sharp downgrade from Costco, which warned that earnings this year will be lower.

Normally, this is a sign of investors switching, hence the early enthusiasm for the commodities back, China surges story started in Asia earlier in the day.

But if the White House gets its bank and bailout packages out into the open and through the US Congress quickly enough, then the market will go for a big run as investors chase the rebound

The comments from BHP and several other factors saw The Baltic Dry Index, a global benchmark for global freight costs for dry bulk commodities such as iron ore, coal and grain, jump 14.6% overnight — the biggest rise since 1985. It rose on hopes that BHP’s comments would prove to be accurate even though South Korea’s Posco, one of the world’s biggest steel companies, said it had cut production targets for February.

China’s stock market enjoyed a strong performance, with the Shanghai Composite up 2.3% to a four-month high, on claims stimulus measures for the economy were working. A rise in bank lending last month helped fuel the optimism.

The really glum news was the details of the US Federal Treasury’s funding needs. They will be vast and long lasting. Bond yields rose to a recent high of 2.95% for the 10 year bond, before easing to 2.89% and then closing at 2.91%. Three month Treasury note yields hit a month high and are looking to go higher as investors move out of cash.

The US Treasury detailed its quarterly refunding needs with a record $US67 billion required next week, with nearly half in three year notes and the rest in 10-year and 30-year bonds.

But dealers said the Treasury’s announcement “opened the floodgates” for bond sales. That huge sale next week will be repeated in coming months.

But the rising level of yields is hurting the US home mortgage market where rate are now on the rise, having risen sharply in the past three weeks. The US Mortgage Bankers Association reported that the cost of a 30-year fixed-rate mortgages, excluding fees, averaged 5.28% this this week, up from 4.89% three weeks ago, which was the the lowest level recorded since the Association began its survey in 1990.

If this increase keeps on going, the US housing industry will take another battering, as the recent tentative signs of new demand are choked off.