A disappointing US housing market report came as a reality check for investors today, knocking Wall Street back into the red at the start of trading.

US housing starts, a measure of the number of residential homes on which construction has started, plunged 13% to a record-low annual rate of 458,000 in April, trailing Bloomberg’s median estimate for a 2% rise to 520,000 from an originally reported 510,000 the month before. The data for March was revised to 525,000. Meanwhile, building permits, a barometer for future construction activity, declined 3.3% to a record low pace of 494,000, below expectations for a rise to 530,000.

In my opinion, the recent raft of better-than-expected macroeconomic data has perilously offered the market a false sense of security. However, today’s bleak data, along with earlier US data which showed a rise in unemployment and worse-than-expected retail sales, should be viewed as a reminder that we aren’t out of the woods quite yet.

DR Horton, the largest US homebuilder by market value, fell 0.2% to $9.77 following the housing market report. Smaller rival Centex Corp declined 2.74% to $9.58, Pulte Homes slid 2.62% to $10.03 and KB Home lost 2.6% to $16.39.

There was some encouraging news from Dow component Home Depot, however: the firm has reported a first-quarter profit that topped consensus estimates. The world’s largest home-improvement retailer produced earnings (excluding one-off items) of 35 cents a share, beating Bloomberg’s average estimates of 29 cents a share.

Home Depot’s bottom line exceeded expectations because it managed to cut costs significantly; general and administration costs were slashed by 18% to $4.04 billion in the quarter. Revenues were 9.7% lower on the other hand – cost cutting can help a company beat expectations in the short run but in the long run, it is revenue growth that matters. If US macroeconomic fundamentals remain bleak then this will definitely have an impact on the top line performance of this retail company.

Shares in Home Depot sagged 5.34% to $24.63 this afternoon after soaring more than 6% yesterday. Rival Lowe’s Companies, meanwhile, fell 0.75% to $19.79.

In contrast, US banks continued to rise, fuelled by reports that Goldman Sachs, JPMorgan and Morgan Stanley were ready to pay back $45 billion in government bail-out money. Shares in Goldman traded 0.62% higher to $144.04, JP Morgan advanced 0.5% to $37.45 and Morgan Stanley climbed 2.4% to $28.96 today. In addition, rival bank Citigroup surged 5.8% to $3.85 while Bank of America edged 2.5% higher to $12.02.

Investors also welcomed news from credit card company American Express, which announced it would slash 6% of its workforce, or 4000 jobs, in order to save $800 million over the rest of the year. However, its share price fell 0.1% to $26.10.

Crude Oil Futures

Elsewhere, June crude oil (WTI) futures were up 0.20% to $59.15 a barrel this afternoon. Crude oil futures had hit a six-month high of $60.48 a barrel this morning. In contrast, July Brent was 0.4% lower at $58.24 a barrel.

Crude oil futures rallied on the back of speculation that there could be a disruption in oil supplies from Nigeria, the tenth largest oil producer in the world. According to Reuters News, a Nigerian militant group said it would blockade key waterways in the delta to try preventing crude oil exports.

‘It is a combination of factors of what we have had and concerns over supply, which is adding risk premium to the market,’ said Oliver Jakob of Petromatrix. ‘In the past few weeks, oil traded in a strong correlation with the equity market without looking much at fundamentals. Yesterday, support also came from supply disruption after Sunoco’s refinery fire, which affected gasoline output, and concerns over Nigeria.’ [1]

It is also worth noting that Atlantic hurricane season, which spans between June and November, is approaching and could also have an impact on oil prices. According to Reuters, forecasters are saying that a strong rain storm off the east coast of Florida has the potential to develop into a severe gale – it is not the first time adverse weather conditions have disrupted oil facilities in the US Gulf region, causing a rise in oil prices.

By around 3.40pm (London time) Wall Street had managed to recover from earlier lows, with the Dow Jones Industrial Average up by 22.3 points (+0.26%) to 8526.38 and the S&P 500 4.78 points (+0.53%) higher to 914.49. What remains to be seen is whether these gains can be sustained.

[1] Source: Reuters News (19 May 2009)

By Anthony Grech, Research Analyst, IG Index.

Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

The above comments do not constitute investment advice and neither IG Index nor Spread-Betting.org accept any responsibility for any use that may be made of them.

IG Index is Authorised and regulated by the Financial Services Authority, register number 114059.