Episode 13: Disney and US jobs

This is Before and After from Refinitiv, I'm your host, Roger Hirst. In today's Before section, we'll be looking at WTI Crude Oil and the U.S. jobs numbers. In the After section, we'll be looking at Disney's figures. 

These days, everything is affecting the price of oil. The US-Iran skirmish saw oil fly up before giving back the entire move and heading lower. And now we've seen the shocks of Coronavirus, which some are estimating has kept Chinese oil demand by as much as 20%. Certainly large swathes of the country are in lockdown in an unprecedented response. If we see oil remain below $52 and establish what was a key support level now as a new point of resistance, we could see stress for oil companies. We've already seen one close below $50 before recovering again over the last couple of days. Now, unlike equities, which have sharply rebounded around the world this week with financial assets responding to a huge stimulus from the PBoC, and expectations that other central banks would soon follow suit. Commodities, notably copper and crude oil, have only just rebounded from the recent lows. And this massive divergence reflects the disruption to the real economy far better than equities do. A particularly vulnerable asset class to further declines in the oil price, would be the high yield energy sector in the US, where the stress of lower oil prices has been compounded by a recent liquidation within high yielding corporate bonds. But like equities they've staged a recent rebound as well. HYG -  the I-Shares broad based high yield ETF, looked like it was trying to put in a top in early 2020. Stress in the energy complex would have ripple effects across corporate bond yields. Oil and gas and pipeline related shares comprise around about 10% of the HYG. In late 2015, WTI Crude had a drastic sell off, taking it from over $50 down to under $30 a barrel, and we saw HYG on the same move sell off from the high 80s to around about $76 a share. A sell off in oil in early 2019 again saw the HYG head lower. But the latest sell off in crude has yet to show up in the price of HYG. In fact, you can see on this chart just how pronounced the divergence has become. Because the latest pessimism priced into crude has so much to do with Chinese demand, it's also worth keeping an eye on the price action of Sinopec and Petro China. Also, keep in mind that huge support level around $42.50. It's still some way off in absolute numbers, but it's only about half of the decline that we've already seen this year. A break of this level would make the decade's lows in oil very vulnerable, with dire consequences for oil sectors, and it would also imply that global growth is in real trouble. At the moment, it looks like central banks are in control of financial assets, partly aided by Trump's acquittal. But that doesn't mean they're in control of the real economy. A confirmed break of these levels in oil would be a sign that their powers may, in fact, be rather one dimensional. 

It's time for US payrolls again. These used to be some of the most widely anticipated macro numbers in the monthly calendar, but because they've only occasionally veered away from the 6, 12 and 24 month moving average range of around about one hundred seventy six thousand to one hundred ninety nine thousand, they've lost a little bit of their luster in recent years. But of course, it's when we start to ignore them, that a big miss or beat will get things moving again. Last month's job number was weak - with mining and manufacturing sectors particularly sluggish. The December non-farm payrolls came in at one hundred forty five thousand, versus one hundred sixty thousand expectations. But still not miles from those moving averages. A pickup in construction could begin to show in effect in January's report, which is slated to be released on February 7th, which is today. Could an upside surprise be on the cards with the forecast for the non-farm payrolls that is below the six month moving average of one hundred eighty nine thousand gains per month? That forecast, however, is certainly in line with a view that the U.S. economy will decelerate in 2020, with the economy adding fewer and fewer jobs. That would take a real collapse in non-farm additions to really ring the alarm on what has otherwise been a very solid part of the current economic US conditions. Though many will rightly highlight the quality of new jobs is often well below the quantity. For instance, last month, along with a tepid payroll data, we had the weakest increase in average hourly earnings. Those average hourly earnings came in below the forecast, climbing 2.9% from a year earlier, which was the first sub 3% reading since July 2018. Stocks sold off on that day, which has become a little bit of a rarity these days falling 30 basis points - and US 10 year yield declined by 3.5 basis points, i.e. bonds rallied. So we could be back in a similar situation this week, if we get a weak number, considering that US equities have again been touching the all time highs. The difference between then and now is that we've already had our fair share of news bomb price action in early 2020. The Fed appears to be taking a back seat - but they've not really started to unwind that massive year end liquidity injection yet. Should we get an outlier report to the upside or downside we can expect, or maybe hope would be the better word, a decent slug of price action. Though it might actually be a strong figure, which unsettles the market, because that might reduce the need for more virus fighting central bank liquidity. And it's these animal spirits which have been driving equity prices of late. And it would need an absolutely show stopping payrolls number to push the virus off the front pages of the financial press. And that might be something like a number below 50 or above 350,000. 

Disney crushed the EPS estimate of one dollar forty three a share and came in at one dollar fifty six. Disney Plus also beat the loftiest estimates of 25 million subscribers and came in at 26.5 million users. Disney stock traded up on the instant reaction in the aftermarket, trading as high as one hundred forty nine ninety five - a gain of 3.5%, but then gave back all those gains as investors had a chance to digest the information. And that price action is a bit bearish in the near term, given Disney recently came up from the January lows of one hundred thirty four point eight one. We need to see Disney hold 140 for support and push past 150 for any new bullish move to gain momentum. And anyway, why bother with Disney when these days you can make or break a full year's worth of P&L in a single afternoon trading Tesla? 

There it is - WTI Crude and U.S. jobs in the Before, Disney in the After. Refinitiv data throughout. This has been the Friday episode of Before and After. Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv's future market updates. 

We'll see you on Tuesday.