A new Dow record - rational exuberance or just plain wishful thinking?

The Dow Jones hit another record high yesterday. It shot up more than 280 points.

The surge of animal spirits came amid decent July sales forecasts from Wal-Mart and Target. Rio Tintos $38.1bn bid for Alcan also helped. But most importantly, a number of analysts commented that "worries about subprime lending appeared to be overdone," reports The Telegraph.

And just like that, in the wave of an analyst's pen, the subprime problems have vanished.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Like a BBC executive confronted with doctored footage of the Queen, this market believes exactly what it wants to believe, regardless of evidence to the contrary.

Analysts' were still tipping tech stocks well after they fell off their perch in March 2000. Experts' thought US house prices would never fall. And if you go back far enough, we imagine there were a few geniuses who genuinely believed that tulips would never, ever go out of fashion

The Dow Jones rebounded from its recent subprime-induced troubles yesterday, but we reckon the market will be wobbly for quite some time to come.

The mood has swung to wild optimism once again, and wishful thinking that problems in the mortgage market will just go away. The economy will be just fine, despite the devastation being wrought in the value of the one asset that has been propping up US consumer spending since the turn of the century - housing.

There'll be many more mood swings to come - expect a rapid plunge into depression the next time some bad news on the subprime market comes out.

And over here in the UK, we should be keeping a very close eye on the US subprime problems - because they could cross the Atlantic at any moment.

Kensington Mortgages, one of the more high-profile UK subprime lenders, warned that arrears rates could jump by 20% in the next 12 months. The proportion of the company's book in arrears of 90 days or more fell to 9.4% from 9.6% in the first half, but the group expects it to rise to between 10% and 12%.

In truth, the group doesn't seem terribly worried. In fact, the main problem Kensington is having, is that there's too much competition out there. Chief executive Alison Hutchinson said: "There are now 54 operators in a market in which there were just 24 a year ago." New business, profits, profit margins and outstanding mortgages all fell sharply as business feels the squeeze.

With statistics like that, it's no surprise that the Bank of England has found it difficult to rein in the housing market. You have the Bank tightening on one hand, and the subprime lenders competing ever more aggressively on the other.

This is what drove the US subprime boom. All the subprime lenders cared about was getting more business in the door - they didn't actually care who they were writing loans for, or how creditworthy they were. Of course, they care now that lenders are going to the wall in their droves, but it's far too late.

The same is happening here. The Financial Services Authority recently started to get worried about the subprime sector and found that bad practice was rife. This is exactly the sort of thing that creates mis-selling scandals - after the crash comes, and people are staggering about, clutching their financial war wounds and looking for someone to blame.

And with around two million mortgages set to reset to much higher levels in the next 18 months, trouble is on the horizon. The most recent survey from the Royal Institution of Chartered Surveyors suggested that house prices are growing at their slowest rate in 18 months. Rics has proved a decent indicator of turning points in the market before - we don't doubt that it'll do so again.

By the way, if you've ever wondered what the plethora of property surveys out there actually measure, you should read this week's issue of MoneyWeek, out today. Ruth Jackson takes a look at the various housing market indices, what they mean, and how reliable they are - it'll certainly help you make sense of how newspapers can be talking of soaring prices one week, then proclaiming a housing bust the next.

If you're not already a subscriber, you can sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.

Turning to the wider markets

In London, the FTSE 100 ended the day 62 points higher, at 6,697, as Rio Tinto's bid for aluminium giant Alcan and the rising copper price sent the mining sector soaring. Vedanta and Antofagasta both gained 6%, while Xstrata climbed 5%.

Elsewhere in Europe, the Paris CAC-40 closed 101 points higher, at 6,103, whilst the Frankfurt DAX-30 gained 73 points to close at 8,126.

Across the Atlantic, US stocks gained strongly amid solid sales forecasts from Wal-Mart and Target. The Dow Jones hit a record high, adding 283 points to end the day at 13,577. The Nasdaq was 12 points higher, at 2,651. And the S&P 500 closed up 8 points at 1,518.

In Asia, Japanese stocks ended the session higher as the Bank of Japan kept rates on hold. The leading Nikkei-225 index added 63 points to close at 18,112. In Hong Kong, the Hang Seng had hit a new record high today, having risen as high as 290 points to 22,897.

Crude oil had climbed to $72.83 whilst Brent spot was at $76.77.

Spot gold was at $662.80 this morning, compared with $660.30 in New York late last night. And silver had crept up to $12.89. For a more in-depth gold market report, see our section on investing in gold.

In the currency markets, the pound was trading around 2.03 against the dollar this morning. Meanwhile, the pound was at 1.4730 and the dollar was at 0.7257 against the euro. And the dollar was at 122.4 against the Japanese yen.

And later today, the Dutch Supreme Court will shed light on who is most likely to win the battle for ABN Amro, the biggest takeover in banking history. Royal Bank of Scotland and Barclays are going head-to-head over the group. Today's decision on whether to block the sale of ABN's US unit LaSalle to Bank of America, will swing the odds in favour of one or the other, with RBOS hoping for a block.