Stocks and exchange traded funds (ETFs) rallied worldwide on better-than-expected earnings and speculation that American banks will pass government stress tests, boosting confidence in the battered financial system.

The rally was mainly supported by an exceptional earnings report by Wells Fargo (WFC), which indicated that it expects a record profit of $3 billion, well above analysts’ expectations.  This report holds utmost significance because Wells Fargo is the first large bank to unveil its financials for the first quarter of 2009. By beating expectations, it gives a much-needed boost to the financial sector.  In fact, the Financial Select SPDR ETF (XLF) was up almost 8.7% in early morning trading despite being down 25.82% for the year; WFC is 8%.

It appears that the financials were not the only sector to see some glimmer of stabilization.  Some retailers have actually boosted first-quarter performance and anticipate strong April sales. This is all despite a sixth straight month of declines in same-store sales, states Mae Anderson for the Associated Press.  Consumers still seem wary on spending and are still focusing on the necessities of life, therefore still making it hard for luxury retailers to stay afloat. But it’s putting smiles on the faces of discount stores and major grocers.  The Retail HOLDRs (RTH) is up about 1.6% in intraday trading and is up 2.6% for the year.

On a separate note, the U.S. trade deficit in February unexpectedly dropped to the lowest level in nine years as overall consumer demand for goods collapsed. In fact, the Commerce Department reported that the gap declined by 28%, imports dropped 5.1% and exports climbed from a two-year low, states Timothy Homan of Bloomberg.  The tight credit markets and rising unemployment rates are especially taking their toll on the demand for Asian cars, toys and electronics, which could be good news for the American economy.  Although a rebound in exports has prevailed, many believe that it will be short lived because of the contraction in European and Asian economies, which will directly hinder U.S. sales overseas.

On another positive note, new jobless claims fell more than expected, despite being at record levels.  The Labor Department had expected 674,000 new jobless claims as compared to the seasonally adjusted number of 654,000 that was reported.  This is great news, but we are not in the clear. The number of Americans receiving unemployment is still at an astonishing 5.84 million and the Fed forecasts that unemployment rates will continue to increase through the year, with some economists suggesting unemployment levels as high as 10%.

Overall, the markets are having a good morning.  The Dow Jones Industrial Average is up about 2.1%, the S&P 500 gained about 2.5% and the Nasdaq jumped 2.7% in morning trading.  Hopefully, the markets can extend their rally on reports of Chevron’s (CVX) earnings after the bell.

Kevin Grewal contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.