Drop in oil boosts Wall Street prospects

Wall Street may extend its recovery push this week as investors bet that a further drop in oil prices will restrain inflation and boost prospects for profit growth.

The precipitous slide, fuelled in part by a recovery in the US dollar, has now taken oil prices to around $115 a barrel – or more than 20 per cent below a record set on July 11. A slide in energy prices is a welcome boost in an economy hamstrung by the housing slump and mounting mortgage losses in the financial services sector.

In the near term, consumers and business should feel some respite as energy costs recede, boosting prospects for a range of market constituents, including airlines, retail, industrial and technology sectors. Financials are also a major beneficiary as investors shift money out of energy stocks in search for bargains elsewhere.

"I think the trend in stocks is up. I do feel that July 15 represented the bottom for stocks and we are going to move higher," said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston. "I really feel what investors are looking for right here is signs the economy is starting to pick up right now."

And as the latest earnings reporting season is fast winding down, investors will have plenty of economic reports to watch next week.

In addition to keeping tabs on oil prices, investors will seek further direction from what will perhaps be the week's highlight – Thursday's release of the July Consumer Price Index, a major gauge of inflation at the consumer level.

Economists expect the overall CPI to rise 0.4 per cent in July, compared to June's gain of 1.1 per cent. Core CPI, excluding volatile food and energy prices, is forecast to rise 0.2 per cent in July vs June's gain of 0.3 per cent.

But before the CPI report, investors will pore over government data on the international trade deficit for June on Tuesday, followed the next day by July reports on retail sales and import prices, and June business inventories. Friday's economic agenda will bring July data on industrial output and capacity utilization, as well as the preliminary reading for August on consumer sentiment from the Reuters/University of Michigan Surveys of Consumers.

On the earnings front, a slew of retailers, including Wal-Mart Stores Inc, will help investors assess how much strain consumers face as home values slide and the squeeze from soaring food and energy costs takes its toll. "It looks like we are finally getting the break we've been waiting for in terms of slowing down the inflation spiral that has been taking place," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. "You have a tremendous rise in the dollar, and that's putting pressure on crude oil, which is helping to buoy US equity markets."

US stocks soared on Friday, capping a volatile week with their best weekly showing in more than three months. On Friday, the Dow Jones industrial average surged 302.89 points, or 2.65 per cent, to end at 11,734.32. The Standard & Poor's 500 Index shot up 30.25 points, or 2.39 per cent, to 1,296.32. The Nasdaq Composite Index climbed 58.37 points, or 2.48 per cent, to 2,414.10.

US front-month crude oil settled on Friday at $115.20 a barrel, down $4.82 for the day on the New York Mercantile Exchange. In post-settlement trading, crude tumbled $5 to $114.62 a barrel – more than 20 per cent below its Nymex record high above $147 set in July.

For the week, the Dow average rose 3.6 per cent, the S&P 500 gained 2.9 per cent and the Nasdaq climbed 4.5 per cent. It was the best week for all three indexes since April 20.

But even with the likelihood that stocks may extend their recovery push next week, Wall Street will still have plenty of reasons to tread lightly, particularly with recent signs pointing to further deterioration in the job market.



THE NUMBERS

0.4%: Rise in consumer price index is expected by economists in July. This is in comparison to June's gain of 1.1 per cent

20%: Slide in crude oil prices from a record set on July 11. The precipitous decline is in part fuelled by a recovery in the US dollar