Bears lick their wounds in Equity rally

First-quarter earnings results from aluminium giant Alcoa marked the start of earnings season in the US last week.

The results were released after US markets closed on Monday night, and showed a loss of $201m, much less than the $497m loss suffered in the same quarter last year. However, Alcoa's revenues of $4.89bn were shy of the $5.24bn analysts were expecting, and it traded lower on Tuesday. This weighed on the broader equity market early on Tuesday, but did not have a lasting impact and the Dow Jones closed above 11,000 with a slight gain.

On Wednesday the Dow Jones achieved triple-digit gains, closing at 11,123, its highest level since September 2008. This strong move up was in reaction to excellent results from JPMorgan and Intel, and better than expected US retail sales figures.

Intel's revenues of $10.3bn were 44% higher than the same period last year and beat Wall Street expectations. Gross margins climbed above the company's earlier expectations to 63.4%, and it also boosted its guidance for the current quarter. Intel stock was trading more than 3% higher on Wednesday.

JP Morgan was the first major bank to release earnings, and did so in spectacular style, announcing a $2.47bn profit for the quarter. These results pushed shares in the financial powerhouse up 3.7%.

Overall, the market reacted very well to news from America's corporate sector last week. Improving economic indicators from the US and China added weight to the rally in equity prices. In the US, retail sales were up 1.6% in March with strong auto sales boosting that number. China reported year-on-year GDP growth of 11.9% for its first quarter, higher than the 11.7% investors were forecasting.

Ireland, meanwhile, achieved month-on-month retail sales growth of 14.9%, or 3% higher than in February 2009 – the first time in two years that a positive number was achieved.

Investor and consumer confidence is growing in most parts of the world. The UK, however, is suffering a slight pullback in confidence, as reported by the Nationwide consumer confidence survey. The building society cited the uncertainty surrounding the forthcoming election and the recent budget as the main factors worrying consumers. Polls still indicate Britain may be facing a hung parliament in May, which may impede a concerted plan to tackle its economic problems.

Equity prices have now enjoyed almost two-and-a-half months of solid gains and have left the bears licking their wounds. It will be interesting to see if the bulls can keep this trend going for much longer.

It would come as little surprise if there was some retracement in equities on the back of a bad profit number, bringing bears back into the market. However, given the strength of the corporate and economic figures being released at the moment it is difficult to see any such reversal taking hold.

Brent becomes the premium crude again

With the Dow Jones breaking above 11,100 and the USD weakening, it was no surprise to see the commodities market move higher last week. However, it was a very topsy-turvy week in the oil market, as prices were very bearish at the beginning of the week but strengthened as the week progressed. At the time of writing US light crude was trading at $85.50/bbl.

There has been no real explanation for the fall-off on Monday and Tuesday which saw prices drop to a low of $82.50/bbl. With the US light crude May contract expiring on Friday, it could have just been that a lot of traders who were long were closing out their trades and cashing in their profits before expiry.

What is even more puzzling is that US light crude prices have now fallen below those of brent crude.

Historically, US light crude has traded above Brent crude for two main reasons. For one, light crude is better quality oil that requires less refining and secondly transportation costs for light crude are more expensive, thus inflating the price. Over the past few years though this phenomenon has reversed quite frequently and Brent has been the premium oil. In fact at one stage when US light crude was deep in contango due to major storage problems in the US, Brent crude was trading a staggering $9 higher than light crude. But this extreme was very much an anomaly and it is very rare to see Brent trading more than $3 higher than light crude. The most important statistic though, is that this phenomenon has always normalised with US light crude returning to be the premium priced oil. At the time of writing Brent still seems a lot stronger than light crude, but traders should be alert that aware that this trend may normalise over time. If this were to occur, buying light crude and selling Brent crude would be a very profitable trade with much of the underlying exposure to a very volatile commodity reduced.

Paddy Haran and Vinay Sharma, Delta Index