Europe firms as Brent follows WTI’s lead lower

Morning Note

European markets are cautiously higher after yesterday’s decline, but the daily momentum indicators are fading. The reality of economic collapse is being seen in oil markets, but – juiced by central bank support and of course being much more forward-looking than, for instance the June oil contract – equity markets are displaying greater optimism. I’d say oil markets are telling us how bad things are right now, while equity markets tell us how good or bad investors hope/fear things will be next year.

Now it’s the turn for Brent. Turmoil in global oil markets dragged Brent futures under $16, leaving the front month trading at its weakest since 1999. The collapse in WTI at the start of the week has spooked the market and now we see similar concerns about floating storage starting to fill up as physical storage constraints worrying WTI. The roll this Friday could be gappy, although Brent is cash settled, not physically, so in theory it ought not to be as troubled and negative prices are unlikely. That said, if global storage is running out – and that is what the Brent trade is starting to suggest – then there will be no bid and prices could hit zero.

WTI remains under pressure with the June contract suffering a ‘flash crash’ yesterday as it slumped as low as $6.50 before recovering above $10. The June contract, whilst not immediately facing the same liquidity problems as the May contract did on Monday, is going to be under pressure all the way to expiry with nowhere left in the US to take physical delivery. It too could turn negative if paper traders are left holding the baby close to expiry. July is trading around $18.40, August is above $21. Edward Morse, head of commodities at Citigroup, says oil could bounce back to $50 by the end of the year.

Meanwhile the damage is being felt in oil ETFs which are needing to shift their holdings further out in future months. The United States Oil Fund (USO) is ditching its June holdings as it tries to shore its balance sheet, and this will be having an impact on the front month trading. It will also be sharpening the super contango. It becomes a vicious circle as long as no one wants to take delivery. Yesterday saw more than 2m June contracts traded, the CME Group said, the busiest single day for the month ever.

The pain in oil markets is unsettling risk appetite more broadly, with the S&P 500 down 3% and the Dow shedding over 600 points yesterday. It was the worst day for the three main indices since April 1st. Charts and momentum suggesting the rally has lost steam and 50-day SMAs (blue line) almost seem to be frightening the market and forcing it to back off. The question is whether sentiment sours from here and we retest the lows or it’s just a pause in the rally. Earnings are not telling us an awful lot as uncertainty reigns. The key is the emergence from lockdown and restart of economies. And of course, finding a vaccine.

Dow Cash, 1-Day Chart, Marketsx – 08.32 UTC+1, April 22nd, 2020

Whilst European markets are higher today after yesterday’s drop, the momentum is fading and the DAX has broken under trend support. Again the 50-day SMA is major barrier.

DAX Cash, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

A major boost for Netflix as it added almost 16m new subscribers in the first quarter, well ahead of expectations. The company has been boosted by lockdown measures and should see more net subscriber adds in Q2 but notes in the circumstances it’s all ‘guess work’. But this might be as good as it gets this year – Netflix won’t get a better opportunity to gain new members than now. I’d also be concerned that after such a big runup in the stock to all-time highs, the upside is pretty well discounted now and viewing figures will start to decline as lockdowns end. A stronger dollar is hitting foreign earnings and spending on content is delayed by production shutdowns. EPS was a slight miss but Netflix profits are always a little lumpy due to inconsistent spending on content.

In FX, GBPUSD broke down through near-term horizontal support and out of its range yesterday and with the bearish bias persisting the next level comes in around 1.2160, the Apr 6th and late March swing lows. Near-term though the 1hr MACD is positive after a potentially bullish crossover late yesterday.

GBP/USD, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

 

Week Ahead: Covid-19 earnings season, Amazon & Netflix to report

Week Ahead

Amazon surged to a record high last week as markets bet that the company is well positioned to weather the coronavirus pandemic. Lockdown has forced even more consumers to switch to online shopping, and the surge in demand has seen Amazon go on a huge hiring spree, adding 100,000 new workers in March and announcing plans for another 75,000 hires. Cowen Analyst John Blackledge believes Amazon may have witnessed a surge in demand during March equivalent to its annual Prime Day members sale.

The tedium of lockdown is likely to have driven up subscription rates for its video and music streaming services and its Kindle library as well. Guidance will show how sticky Amazon expects these new customers to be once lockdown measures are lifted.

Remember, you can follow the biggest earnings season stories with our daily coverage on XRay.

Netflix earnings

Streaming service Netflix is expected to reveal a huge surge in subscriber numbers when it reports earnings this week. Expectations that Netflix will continue to see its popularity surge over the coming months drove the stock to a new record high last week. Even after lockdown is over, the consumer shift towards streaming services is likely to remain, as social distancing and fear over a resurgence in COVID-19 cases keeps people away from cinemas – and going outdoors in general.

UK and US jobless data

There are plenty of predictions for the impact of the coronavirus pandemic upon the world’s leading economies, but markets continue to be hounded by fears that these might not be pessimistic enough. More labour market data from the UK and US this week could heighten or assuage those concerns.

In the UK, thanks to the government’s pledge to pay the wages of furloughed workers, the unemployment rate isn’t expected to climb more than a percentage point during 2020. In the US, economists believe 20 million Americans will file new jobless claims during April. A sharper or softer rise than expected in either of these metrics will cause markets to reprice their expectations that these forecasts will be met or exceeded.

Will markets focus on shape of recovery as PMIs slump?

Business activity across the Eurozone and the UK plunged to record lows last month, and we know there’s more bad news to come. The Eurozone composite could drop as low as 20 during April, with the UK reading predicted to slump to 21. The real question is whether markets believe the recovery from this downturn will be a rapid one – confidence in a sharp pullback could soften any negative reaction to another round of gloomy PMIs, assuming markets are in an optimistic mood.

Netflix, Apple, Disney: Who will you back in the battle of the streamers?

Equities

Netflix was once the king of streaming, but its dominance could be coming to an end. Competition has already been fierce thanks to Amazon Instant Video and Hulu, but the streaming market is about to get a lot more crowded.

NFLX has now turned negative on a year-to-date basis, with the stock feeling the pressure thanks to an uncertain outlook for the company. Both Apple and Disney are launching their streaming services this year and Netflix is sure to suffer as a result – especially as both drastically undercut its pricing.

Apple TV+ launches on November 1st and reportedly has a budget of $6 billion in order to help it get some of Hollywood’s biggest stars involved. Already on the starting line-up are Reese Witherspoon, Jennifer Aniston, Jason Momoa and Oprah.

Apple is offering a first-year subscription completely free with the purchase of any new Apple device – a great way to leverage its existing market even if they do already have other subscriptions.

However, it remains unclear whether Apple TV+ will also have a library of licensed shows and films alongside its own original content. Without this its offering could seem rather sparse at launch. The service will launch with nine shows and Apple plans to add another five over the next few months.

This lack of choice could see consumers treating Apple TV+ more as a supplement to Netflix – are many really going to cancel their subscriptions for the sake of nine shows?

Is Disney a bigger threat to Netflix than Apple?

While Apple has the capital to throw behind new content, Disney represents a more established threat. Its streaming service, Disney+ is set to launch with an extensive back catalogue of beloved classics. And that’s not to mention mega-franchises like Star Wars and the Marvel Cinematic Universe, as well as content from National Geographic. This is a much bigger blow to Netflix.

Like Netflix and Apple, Disney will also be investing heavily in new shows. In the first year the service will premiere over 25 original series, as well as 10 films.

In this respect, Apple seems like something of an outlier. It’s tiny library of original shows may attract Apple enthusiasts, and the small price tag might see it sit alongside consumer’s existing subscriptions. Given that a lot of consumers will be getting the first year free anyway, it will be a while before we know whether those initial subscribers translate to paying subscribers in twelve months’ time.

Apple could be hoping to use its TV+ offering as a way of ensuring brand loyalty. Amazon already does this with its Instant Video Service. It’s only a few pounds or dollars more each year to opt for the full Prime subscription, which also includes free delivery and music streaming.

Even if it is built to sit alongside its competitors, it still creates problems for Netflix. The last time the company raised prices it lost subscribers – with more alternatives out there Netflix will have to think twice before it ups its costs again. Just how loyal are Netflix customers: if the company raises its prices will they drop rivals to free up disposable income or just jump from the most expensive ship?

Netflix tumbles on subscriber woes

Equities

The latest earnings report from Netflix rattled investors and sent the stock tumbling in afterhours trading and languishing during yesterday’s session.

Netflix was off 17% on Wednesday evening and, despite paring gains during trading yesterday, closed 11% lower.

According to the new numbers, Netflix lost 130,000 customers in the US during the second-quarter. It’s the first time the streaming service has reported dwindling subscriber numbers in eight years. Analysts had expected US subscriber numbers to grow 352,000 across the period.

Netflix is well established in the US, and overseas is where the true growth potential lies. But the numbers here are disappointing as well, with Netflix managing to add just under half (2.83 million) paid subscribers in international territories of the 4.8 million forecast by analysts.

Netflix stumbles as competitors line up

It’s a worrying sign of weakness at a time when competition in the video on demand space is heating up. Apple, Disney, AT&T and Comcast all have streaming services in the works. The launch of these will see popular content disappear from Netflix.

For instance, Disney’s streaming service will be the exclusive home of Marvel and Star Wars movie. The two most-streamed shows on Netflix – The Office and Friends – will soon been removed as they head to Comcast’s streaming platform and HBO Max, run by AT&T, respectively.

Netflix said in a letter to shareholders that it believed the second-quarter “content slate” was less appealing than it had anticipated, driving fewer signups. The company also noted that subscription rates had slowed slightly more in regions where prices have recently increased than in those where the cost has remained unchanged.

Can Netflix afford not to raise prices?

This could reveal that Netflix is in a tricky position. With so many competitors, Netflix may find itself unable to raise prices as users can easily switch to an alternative video on demand service. But in order to stay attractive Netflix needs to continue investing heavily in content – and this does not come cheap.

Netflix has enjoyed a long run as the King of streaming. But it’s an expensive crown to keep, and the coming few quarters will see many new challengers to the throne step forward.

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