Crude Shift: Oil Pullback Proves Short-Lived as Rally Adds Fuel to Market

A profit-taking pullback in crude seems to be short-lived as export data out of China helped give markets a lift in the early going. But tomorrow's Labor Dept. Report is expected to show a hefty spike in unemployment. earnings weak.
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Key Takeaways

  • Oil prices rebound after Chinese export data come in stronger than expected

  • Latest U.S. jobs market data shows 3.2 million workers file initial unemployment claims

  • Market expecting a rough non-farm payrolls report tomorrow

(Thursday Market Open) Wall Street seems upbeat this morning as data out of China provided some optimism about the global economic recovery from the coronavirus-led downturn and investors’ focus domestically on states returning to work.

Overnight, data showed Chinese exports in April were better than expected, helping oil prices resume their upward climb. Crude has been on an uptrend recently, serving as a kind of optimism gauge as traders seem to be thinking there will be some kind of demand out there for black gold even though the global economy still has a long way to go in its recovery.

Think of the oil ebb and flow as a search for equilibrium, but with both supply and demand in flux. We have a storage glut, but rig counts have been trending down pretty rapidly, according to Baker-Hughes data. After the initial demand shock and a couple months of lockdown, states are starting to reopen their economies, which will bring back demand, but it’s uncertain as to how much and how quickly.

True, oil prices took it on the chin yesterday, as some participants booked profits from recent gains. This morning, crude is up more than 9%. The volatility in oil also underscores how fortunes can change as the global news narrative ebbs and flows with good and bad news on a daily basis.  

The day-to-day swings in the oil and stock markets seem to be more emotionally driven than they might be in otherwise normal markets. That’s reminiscent of last year’s ups and downs tied to the trade war drama between the U.S. and China, a narrative that has been reemerging as President Trump has talked about new tariffs on Chinese goods in response for its handling of the coronavirus and threatened to cancel the agreement if China doesn’t meet its commitments on U.S. goods and services purchases.

Those rumblings, and the reality that the pandemic is still a major threat to the global economy, seems to keep investors on edge, despite some cautious optimism at the moment and a resilience in the market that is helping stocks like Disney (DIS) and Apple (AAPL). Traditional safe-haven investments gold and Treasuries are in demand this morning, even as equities index futures were solidly in the green and the Cboe Volatility Index (VIX) was lower.

Eyes on Jobless Claims Ahead of Tomorrow's Payroll Numbers

This morning, weekly jobless claims figures showed another hefty rise—3.2 million workers filing initial claims. A consensus had expected a print of 2.9 million. Jobless claims numbers haven’t always held the market’s attention like they have been recently. But now they mark one of the most up-to-date readings on how the coronavirus is affecting the real economy.

Yesterday, a private payrolls figure from ADP Research Institute and Moody’s Analytics that showed huge jobs losses weighed on sentiment. That employment situation report for the U.S. non-farm private sector showed 20.236 million people lost their jobs from March to April. Although that number was better than a consensus had expected, it still represented the biggest-ever drop for the data series.

That number presages what is expected to be a similarly terrible government non-farm payrolls report for April tomorrow. A consensus expects that report to show a decline of 21 million jobs. The unemployment rate is expected to rise dramatically as well—from last month’s 4.4% to a whopping 16.2% according to consensus reports. It’s possible that trading could be subdued today as market participants may not want to buy or sell too heavily ahead of the big jobs number tomorrow. 

The market has been expecting jobs numbers to be bad as restaurants, movie theaters, and many other businesses remain closed as the coronavirus pandemic continues. But there’s something about seeing expectations made reality and entering the historical record to give investors pause.

Wednesday’s Market Mixed

And pause is what the market did on Wednesday, with the Dow Jones Industrial Average ($DJI) and S&P 500 Index (SPX) dropping 0.91% and 0.7%, respectively, while the Nasdaq Composite (COMP) gaining 0.51%.

In addition to the ADP report, a pullback in oil prices—which turned out to be short-lived—also created a somber mood on Wall Street. The crude selloff came after a strong rally that had been powered by hopes of an economic recovery as states begin to reopen. But that sentiment proved fickle, and traders may have been using the day to book some profits. The decline in oil helped send the SPX Energy sector tumbling by more than 2.6% for the day. 

 In earnings news, Disney’s shares ended only slightly lower after the entertainment and media conglomerate’s revenue came in ahead of expectations but its earnings were worse than forecast. The company said its profit took a hit of as much as $1.4 billion from the coronavirus during its most recent quarter. DIS also suspended its dividend. On the bright side, revenue in the segment housing its streaming business rose sharply. So, all in all, you could probably call a close just 0.18% lower a win. Even better—shares are pointing higher ahead of Thursday’s open. 

At General Motors (GM), both top and bottom lines beat expectations. Its shares finished the day nearly 3% higher. The company managed to make money even as the coronavirus hit sales and forced it to shut factories.

Now is probably a good time to remember that the first three months of the year didn’t hold all of the coronavirus-related financial pain for companies. There is likely to be more ahead for investors in the next earnings season.

CHART OF THE DAY: CRUDE REBOUNDS: After pulling back yesterday,crude oil futures (/CL–candlestick) rebounded today on optimism about demand as some states begin to reopen. The energy producers represented by the S&P 500 Energy Sector Index (IXE–purple line) pulled back yesterday as crude prices dropped. Will IXE continue to follow oil prices? Data source: CME Group, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Champing at the Bit: Just because people are stuck in their houses doesn’t mean they don’t want to buy new ones. There's apparently pent up demand from potential home buyers who would otherwise have been checking out new abodes if the coronavirus hadn’t put the kibosh on real estate showings and meetings with brokers. The latest Mortgage Bankers Association survey showed that applications for loans to purchase homes rose for the third week in a row, led by strong growth in California, Texas, and Arizona. “Although purchase activity remains almost 19 percent below year-ago levels, this annualized deficit has decreased as more states reopen amidst the apparent pent-up demand for home buying,” Mike Fratantoni, the MBA’s chief economist said in a release accompanying the numbers.

Mortgage Rates At Record Lows: One reason people may want to get out and buy homes once lockdowns end is that mortgage rates are super low. In the weekly report, the average interest rate on certain 30-year fixed-rate mortgages fell to 3.4%, which is an MBA survey record. The latest weekly mortgage rate data from government-backed mortgage giant Freddie Mac showed the U.S. average for 30-year fixed rate mortgages fell to 3.23%, close to a full percentage point lower than one year prior and the lowest rate since the agency started keeping tabs. “These low rates are driving higher refinance activity and have modestly helped improve purchase demand from their extremely low levels in mid-April,” Freddie Mac said in a statement accompanying the numbers. “While many people are benefiting from low mortgage rates, it’s important to remember that not all people are able to take advantage of them given the current pandemic.”

Why Are Rates So Low? It seems like the home buying demand boost from ultra-low interest rates could help make the housing market more resilient than other parts of the economy when it comes to a post-coronavirus recovery. One risk to that outlook is that many borrowers could become less creditworthy because of the economic downturn, raising the risk of defaults or would-be buyers out of the market altogether. Regardless of the outcome, let’s take a look at why rates are so low at the moment.

For one thing, the Federal Reserve has lowered its key short-term interest rate target to a range of 0% to 0.25% in response to the coronavirus outbreak. Though the Fed funds rate is an interbank lending rate, it’s used as a benchmark for other consumer lending rates. Additionally, investors have been piling into U.S. government debt because they’ve wanted an investment considered safer than equities. When people buy Treasuries, that pushes down the effective yield. All this pressure on both the front- and back ends of the yield curve—all else equal—tends to make its way into the market for mortgage-backed securities.  

Good Trading,



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This week's economic calendar. Source:

Key Takeaways

  • Oil prices rebound after Chinese export data come in stronger than expected

  • Latest U.S. jobs market data shows 3.2 million workers file initial unemployment claims

  • Market expecting a rough non-farm payrolls report tomorrow

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