Sustained market moves such as we have seen in stocks and oil over the last few months are never the result of one piece of news or data point, so it follows that one should be careful of interpreting one thing as the catalyst for changing direction. Still, with a jobs report this morning that can only be seen as indicating real strength in the U.S. economy, it is hard not to see it as a potential turning point for both markets. Nor is that the only good news. Over the last couple of days there have been indications that the worries that have beset the oil market in particular are all being resolved.
This morning we learned that non-farm payrolls increased by a whopping 312k, well above expectations for around 180k, and wages grew by 3.4% on an annual basis, indicative of strong growth to come. The reaction in stocks may be tempered by the possibility that the Fed will see that as a reason to continue raising interest rates but for crude oil, it is hard to see a downside. If the Fed does raise rates further, this report shows that the U.S. economy can withstand it, and if they do it will be in response to rising prices, a dynamic that will apply to crude as well as everything else.
This jobs report was also strong enough to have implications beyond U.S. borders. America is not the world, but a vibrant U.S. economy can go a long way towards lifting global growth. That is especially true given that China announced that they are further loosening restrictions on banks and that trade talks with the U.S. have resumed.
As I said above though, a collapse like this is never about just one thing. The demand side worries have been accompanied by increasing evidence of oversupply in the market. On that front we heard that exports from Saudi Arabia fell dramatically in December. That suggests that the most recent output cut deal agreed by OPEC and other major producers is achievable, or at least that they will is there to have a good stab at it.
In reality, none of this is really news. The U.S. economy has been strong for a while and the deal to cut output was announced months ago, but a market driven by fear convinced itself that none of that mattered. Traders, in both oil and equities, were anticipating a worst-case scenario. Now, however, there is firm empirical evidence that that is not what is happening.
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It should, therefore, be no surprise that crude futures are bouncing this morning, but after three months of focusing only on bad news and ignoring the good, I am sure that many are expecting a retracement, either during today's trading or on Monday. This isn't the first time that logic has suggested a recovery in crude on this move, and I will freely admit that I have been fooled into calling prematurely for a recovery on a couple of occasions, but this is different. This is not about what will happen, it is about what is happening. In this "Show me the money" market, that is what traders have been waiting for.
Of course, the thing about a news-driven move is that it can easily be reversed by future news. Once again though, this feels different. The news we have is varied, and addresses all of the market's concerns. There really seems to be no reason right now for renewed selling, and with traders caught short the recovery could be almost as spectacular as the drop.
By Martin Tillier