oil surges as expected, page-2

Wall Street rally spoiled by oil
Crude prices soar, tempering early stock market gains. But positive economic news helps keep blue chips in positive territory.

NEW YORK (CNNMoney.com) -- A morning stock rally Wednesday was halved by the afternoon, as crude prices surged. But blue chip stocks stayed positive on a surprise jobs report and on government help for the financial and housing sectors.

With about an hour left in the session, the Dow Jones industrial average (INDU) rose 0.7%, the broader Standard & Poor's 500 index (SPX) added 0.8%.

The Nasdaq composite index (COMP) lagged behind, falling 0.4%, due to several negative financial reports.

Stocks soared at the open, with the Dow surging as much as 160 points after a jobs report surprise gave investors hope of a brighter economic outlook.

The U.S. private sector added a seasonally adjusted 9,000 jobs during the month of July, according to Wednesday's ADP employment report. That was unexpected; economists surveyed by Briefing.com had forecast a 60,000-job decline. July marked a significant improvement over June's numbers, when the private sector shed a revised 77,000 jobs. (Full story)

The ADP payrolls survey came two days ahead of the more closely watched employment report from the U.S. Labor Department, which is due out Friday.

"The markets are trading pretty well, because more jobs means less loan losses and more people paying their bills," said Bill Stone, chief market strategist with PNC Wealth Management. "With that said, we get the real number Friday - the ADP has been clocking in better than the government data and isn't a great predictor."

But by midday, the market pulled back - though still held onto its gains - even after a government oil supply report showed a surprise decline in the nation's gasoline stockpile, which countered investor sentiment that U.S. demand was falling.

"Finally we have a day where oil is up but stocks aren't imploding," said Stone. "When oil gets a bounce, financials have gotten whacked, but the economy took the sting out of it."

Wall Street rebounded strongly Tuesday, with the Dow climbing 266 points on the back of strong financial reports, rising consumer confidence and falling oil prices.

Oil: Market gains were tempered as crude prices rose $4.58 to settle at $126.77 per barrel Wednesday.

Oil had traded down about $1 before moving higher as the Energy Department's supply report showed the unexpected gasoline supply decrease. (Full story).

Economy: After initially threatening to veto the bill, President Bush on Wednesday signed a sweeping measure to offer affordable government-backed mortgages to homeowners at risk of foreclosure. The law will also bolster government-sponsored mortgage finance giants Fannie Mae and Freddie Mac with a temporary rescue plan and stricter regulation. Congress approved the bill last week. (Full story)

"It's going to be some time before we see a positive impact, but over the long term this bill is a good thing," said Stone. "The government is throwing everything they can at housing, since they know it is the center of the problem."

Additionally, the Federal Reserve said Wednesday it is extending its emergency borrowing program to assist Wall Street banks with liquidity during the credit crisis. The plan was extended until Jan. 30. The U.S. central bank originally said the plan, which began in March, would end in mid-September. (Full story)

"The Fed extending credit is positive news," said Harry Clark, founder and chief executive of Clark Capital Management Group. "It's just going to take some time before the financials can find their footing."

Financials rise again: Financial sector stocks responded positively to the Fannie and Freddie rescue bill as well as a government decision to extend a ban on naked short-selling of many bank stocks.

The U.S. Securities and Exchange Commission said late Tuesday that it will continue to ban investors through Aug. 12 from short-selling 19 mortgage finance companies without borrowing the stock. The ban includes 17 large investment banks as well as Fannie Mae and Freddie Mac. (Full story)

After larger gains earlier in the session, financials began to pull back a bit on oil. Fannie (FNM, Fortune 500) rose 6% and Freddie (FRE, Fortune 500) gained 5% Wednesday, but some banks fared even better.

For investment banks, Morgan Stanley (MS, Fortune 500) led the pack with a 6% gain. Lehman Brothers (LEH, Fortune 500) added 5% and both Merrill Lynch (MER, Fortune 500) and Goldman Sachs (GS, Fortune 500) rose 2%.

For banks, Wachovia (WB, Fortune 500) added 8%, Washington Mutual (WM, Fortune 500) gained 6%, and Bank of America (BAC, Fortune 500) rose 3%.

"Financials are going to be mixed for a while as they look to gain traction," said Clark. "The economy is still very fragile now."

The financial sector has seesawed in the past couple of weeks, as investors have balanced many banks' quarterly financial reports that came in better than expected with some dour economic news that has renewed fears that the credit crisis will not end anytime soon.

Tech earnings: Chipmaker RF Micro Devices (RFMD) swung to a quarterly loss, but the results still beat Wall Street's expectations. The company reaffirmed its outlook, matching analysts' forecasts, and shares surged 12%.

But the NASDAQ was restrained by otherwise disappointing financial reports.