Ground Floor: The market's immediate reaction to Ben Bernanke's testimony in front of the House Committee last week was to push the Dow to another record high, writes Sheila O'Flanagan.

Traders were confident that the Fed chairman was thinking about rate cuts - even though most analysts agree he has not slammed the door on the potential for another hike if his current mood of optimism darkens.

Like all good economists, Bernanke gave an "on the one hand and on the other" testimony. The markets chose the hand in which he held the suggestion that inflation pressures were beginning to diminish thanks to lower energy and commodity prices.

They decided to ignore the other hand, where he spoke of an economy whose strength could renew those inflationary risks and lead to, if not further tightening at least a period of time where rates remained unchanged.

Bernanke is doubtless happy with the outcome of his testimony but is probably even more pleased by a comment from Nouriel Roubini at New York University, who reckoned it left "meaningful ambiguity" over the future direction of monetary policy. It doesn't matter whether you're the Fed chairman or plying your economic trade in academia - it's always good to have people thinking that two diametrically opposed things might happen.

On the European side of things, though, there's a greater leaning towards confidence, with the European Commission having raised its forecast for euro zone economic growth and chopping its inflation forecast. In fact, so confident is the EC that it revised up its original 2.4 per cent forecast to a nippier 2.7 per cent - which would mean Europe outperforming the US this year.

The commission was undoubtedly smug when it drew our attention to the continuing healthy progress of the euro zone and when it pointed to an unemployment rate of 7.5 per cent, which (though still shamefully high) is the lowest this decade.

However, so that markets would not get too enthused, the commission then said that if wage inflation outstripped productivity, then it would be looking at increasing rates again.

Nevertheless, most people in Europe are in optimistic mood, with the Germans, in particular, especially cheerful. Growth in 2006 was revised upwards following a strong last quarter (although, if you remember, there was a surge of buying to beat the VAT hike).

However the German economy, still dealing with reunification costs, has not seen sustained growth since the beginning of this century.

The "on the other hand" side of that equation is that there was a good chance of seeing slippage during 2007 and, indeed, the government's forecast was originally for growth of 1.4 per cent.

However, they have decided to be more positive and have pushed that up to 1.7 per cent while the Association of German Chambers of Industry and Commerce are even more optimistic, revising their particularly glum 1.5 per cent original forecast to a jazzier 2.3 per cent.

At the same time - and probably more exciting for everyone in Germany - they're reckoning that the unemployment rate could tumble to 9.6 per cent.

I still find it hard to think of Germany with such a high jobless level because so much of my working life was spent looking at its economy as a model of good management and low unemployment.

However, last year there were nearly 4.5 million Germans out of work (more than the entire population of this country, which is still difficult to get your head around).

All of the European economies are getting in on the act - Spain recorded growth of about 3.8 per cent last year; Italy managed to grow at its fastest rate since 2000 and clocked up 2 per cent growth for the year, and even the French - despite a terrible third quarter - managed to show a similar growth level for the year as a whole.

This means most of the analysis for Europe is "on the other hand" which probably will lead to a further tightening of rates, just in case we all get too damn cocky and pleased with ourselves.

We're well settled into 2007 in Europe and the US, but the powerhouse of the East, China, has just entered its new year.

Last Sunday marked the year of the pig, traditionally a good year for investments. Even more optimistically, it's the year of the golden pig, which only comes around every 60 years. The Chinese authorities welcomed it by raising the reserve ratio to 10 per cent, which is not a particularly auspicious sign for investors or borrowers.

However, the rationale is to cool down a continually growing economy which continues to put the euro zone and US firmly in the shade. Growth in China was a whopping 10.7 per cent last year.

While the Chinese authorities are just looking at the stark figures in front of them - a trading surplus of $177.5 billion last year is expected to top $200 billion this year and there have been record advances in the Shanghai and Shenzhen 300 index - the year of the golden pig could entice more and more people into deciding that they will speculate on the markets.

They are most concerned about the prospect of speculative bubbles - in fact the index had a dramatic one- day fall earlier this month when one senior official raised that possibility. Keeping the world's financial markets in equilibrium isn't an easy task.

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