Zac Hall, 9to5Mac:

Digital compasses like the one inside the new Apple Watch Series 5 and iPhone 3GS and later rely on a magnetoresistive permalloy sensor called a magnetometer to detect levels of magnetism.

And:

Apple warns that bands with magnetic clasps may cause interference with the built-in compass.

It’s an edge case, but if you prefer Apple Watch bands with magnetic clasps (such as Leather Loop, Milanese Loop, and Modern Buckle), be aware they might mess with the compass.