Crude Rallied as Strong Earnings Boosted Economic Optimism

Crude oil's rally accelerated in NY session as equities surged after strong earnings reports, less-than-expected decline in existing homes sales and surprising rise in house price. Optimism from these data overshadowed an unexpected increase in initial jobless claims.

Currently trading at 79.2, the front-month contract for WTI crude yesterday jumped to a 11-week high at 79.42 before settling at 79.3, up +3.58% while the front-month Brent contract rose +3.25% to close at 77.82.

Caterpillar, 3M and UPS all reported strong earnings and forecasts upgrades. Caterpillar's net profit jumped +90.6% y/y to $707M (1.09/share) in 2Q10 while the market had anticipated a profit of 0.84/share. At the same time, the management upgraded FY 2010 net profit forecasts to $3.15-3.85/share from previous estimates of $2.5-3.25/share. 3M also raised its full-year estimates after posting stronger-than-expected earnings for the second quarter. The company's net profit soared +43% y/y to $1.12B (1.54/ share) in 2Q10, compared with consensus of a milder rise to 1.47/share. The management projected that profit excluding Medicare-related charges will reach 5.80/share this year, compared with April's estimate of 5.6/share. UPS expected its adjusted earnings will reach 3.35-3.47/share this year, up from a previous prediction of 3.05-3.3/share, as the management is confident that the 'slow pace' of economic recovery in the US can be compensated by rise in prices and strong international shipments. Strong earnings results as well as forecasts upgrades are indicators to investors that economic recovery in the second quarter remained intact. More importantly, companies' confidence over the full-year outlook suggested slowdown in US economic growth should not be serious.

More housing data were released yesterday but the results were encouraging. Existing home sales dropped 5.37M in June from 5.66M a month ago. The decline was less than consensus of 5.2M, House price surprisingly climbed +0.5% m/m in May following an upwardly revised +0.9% gain in the prior month. The results were taken positively as other housing market data signaled housing activities has been weaker-than-expected since expiry of the first-time buyer tax credits.

The disappointment probably came from initial jobless claims which rose +37K to 464K, compared with market expectations of 450K. However, the market largely ignored this as the 4-wwek average, while adding +1K to 456K during the reporting week, was lower than the same period last month.

Gold price surged to as high as 1201.2 before pulling back to 1195.6 at close. The benchmark contract gained +0.32% over the day. There has been a tug of war going on between bulls, who believe gold would rise on further monetary easing, and bears, who fear deflationary pressure would hurt the yellow metal.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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