Wall Street rallies as oil price drops sharply

Wall Street stocks rallied strongly on Tuesday as a sharp drop in oil prices boosted consumer-facing stocks while a plan to turn round Wachovia helped investors shrug off some disappointing earnings reports.

Most eyes were focused on the financial sector, which staged a remarkable midday volte-face to gain 6.6 per cent as investors skipped over a series of weak earnings results to focus on the positive.

Overnight, American Express reported second-quarter earnings that missed estimates and withdrew its full-year earnings forecast. The credit card company’s shares tumbled 7.1 per cent to $37.99 while peer Discover Financial lost 3.8 per cent to $14.62.

An $8.9bn loss from Wachovia and some depressing results from regional banks, including Regions Financial and Keycorp, initially added to the sour mood.

But by midday investors had shrugged off the bad news, focusing instead on a strategy from Robert Steel, Wachovia’s new chief executive, to cut $2bn of expenses by the end of 2009, sell assets and slash jobs and the dividend at the bank.

Wachovia shares swung from an 11.6 per cent loss to a 27.4 per cent gain at $16.79. Regions Financial and Keycorp overturned early losses to gain 9.6 per cent to $11.40 and 4.3 per cent to $11.99, respectively.

Joe Kinahan, chief derivatives strategist at Thinkorswim, an online brokerage, said: “Wachovia presented a plan this morning, they cut their dividend – they are doing something. This credit crisis is not going away in a month, but if we have a plan to get ourselves out of it in a year that makes the market feel good.”

There were some more consistent bright spots. Western Union advanced 8.6 per cent to $27.23 after the money-transfer company said second-quarter profit had risen 13 per cent, thanks to international revenues, and raised its 2008 profit forecast.

SunTrust Banks said second-quarter earnings had slumped 21 per cent. But that was a smaller fall than expected and the shares rallied 17.1 per cent to $39.97 after the bank ruled out a capital raising or dividend cut.

CME Group, which runs futures exchanges, said second-quarter profit had risen 60 per cent to $201m thanks to its purchase of the Chicago Board of Trade. CME shares rose 12.5 per cent to $366.27.

By the close, the benchmark S&P 500 had shaken off early losses and was up 1.4 per cent at 1,277.01 points. The Dow Jones Industrial Average was 1.2 per cent higher at 11,602.5 points, while the Nasdaq Composite was ahead 1.1 per cent at 2,303.96 points.

The day began in downbeat fashion after Apple forecast fourth-quarter profit that undershot analysts’ projections. The news, and speculation about the health of Steve Jobs, Apple’s chief executive, sent shares in the iPod maker down 2.6 per cent to $162.02.

Texas Instruments and SanDisk also disappointed investors in the technology sector. The semiconductor makers both predicted earnings that trailed analysts’ expectations. Texas shares fell 14.2 per cent to $24.48, SanDisk dropped 24 per cent to $13.62, while an index of semiconductor stocks slipped 2.8 per cent.

A $4 drop in oil prices took the sting out of the worst results. Consumer staples and discretionary stocks were among the best performers, adding 2 per cent and 2.1 per cent respectively.

Wal-Mart added 3.1 per cent to $59.06 while Starbucks rose 7.4 per cent to $15.13.

In industrials, some solid earnings news helped steady investor concerns about the health of the economy. Caterpillar, the heavy goods maker, Lockheed Martin, the defence company, Paccar, the truckmaker, and United Parcel Service , each met or beat analysts’ expectations for their quarterly results.

Caterpillar shares rose 2.4 per cent to $74.98, Lockheed Martin added 2.3 per cent to $103.88, Paccar climbed 4.4 per cent to $44.60 and UPS advanced 4.5 per cent to $62.11.

Energy was the best performing sector on Monday, but that trend petered out on Tuesday as oil prices slipped back below $130 a barrel and some decent results from the services sub-industry left investors unmoved. BJ Services and Baker Hughes rose 6.6 per cent to $31.99, and 3.2 per cent to $87.06, respectively.