Is it thin holiday trading and the optimism of a new year that tends to result in financial markets putting on a good show in January, or is there more to it this year? Will 2012 see some recovery after a dismal 2011?You could be excused for thinking that January had been a terrible month in the credit markets, at least in Australia. All the talk has been about the record credit spreads being paid by banks on their wholesale debt raisings.However, a broader indicator of the health of credit markets is the Markit CDS indices. By the end of January, the Aussie iTraxx index had contracted (improved) by 12.5 per cent since the end of 2011.Over the same period, the S&P/ASX 200 index rose by 5.2 per cent.The pattern has been repeated across the US and Europe. The US CDX index contracted by 16.6 per cent, while the S&P 500 increased by 5.3 per cent and the European Main index contracted by 20.8 per cent, while the German Dax index increased by 12.2 per cent.This improving trend in both credit and equity markets didn't just start in January. It has been underway since September last year. The Aussie iTraxx has contracted by 34 per cent since its October peak of 240 basis points.The US and European CDS indices also contracted at the same rate.The S&P/ASX 200 is up by only 11 per cent from its low at the end of September. The S&P 500 hit its low point a few days later and is now up by 21 per cent. And, since its low in early September, the DAX is up by a whopping 31 per cent.We now have an improving trend of some months duration in global financial markets. What is driving it and can it be sustained?We can point to the obvious: more signs of strength in the US economy and that the slowdown in China will not be as bad as feared. The same cannot be said of Europe, as it is either already in recession once again or is about to go into recession. However, the liquidity crisis faced by European banks in the second half of last year seems to have passed. And, while the sovereign debt crisis appears no closer to being resolved, there is some optimism that European leaders are gradually moving in the right direction.The clear turning point in the eurozone seems to have been the latest round of the European Central Bank's Longer Term Refinancing Operation (LTRO). This is long term repurchase lending to eurozone banks.In the auction conducted on December 21, the ECB lent €489 billion at just one per cent per annum, against a much broader range of collateral than it has been prepared to accept in the past. Anticipation and the occurrence of this event, along with the next LTRO, due this month, have done much to ease liquidity in the eurozone banking system and allay credit fears about eurozone banks. This is evidenced by the contraction seen