Market news & insights

What do we know about the state-owned oil giant - Saudi Aramco? World’s largest company World’s biggest state-owned oil and gas companies World’s cheapest oil producer A leader in oil production Second-largest proven crude oil reserves All of the above would probably make this upcoming Initial Public Offering (IPO) one of the most hyped IPOs of all time. In 86-year of history, Saudi Arabia has officially stated its plan to float the company on the Riyadh stock exchange.

After first being announced in 2016, the Saudi Aramco officially confirmed the IPO on November 3. However, the size and scope of the IPO were unknown so far. On Sunday, Saudi Arabia’s officials have officially launched the IPO and confirmed that the domestic listing will take place in December.

Vision 2030 The primary purpose of the IPO is to diversify Saudi’s economy and its reliance on the oil industry. After the fall in the oil prices in 2015, Crown Prince, Mohammed bin Salman’s introduced the Vision 2030 which encompasses the desire to reinforce and diversify the capabilities of Saudi’s economy. The Prince has designed its vision on three main pillars: Saudi Arabia’s status as the heart of the Arab and Islamic worlds.

Becoming a global investment powerhouse. Transforming the country’s strategic location into a global hub connecting Asia, Europe and Africa. Hence, transforming Aramco from an oil-producing company into a global industrial conglomerate is a key step in raising funds for the Vision 2030.

Lacklustre International Response Even though the national oil company do have a high degree of independence, the Crown Prince has taken a more active role in the company over the years. As the purpose of the IPO is to raise funds to follow the plans to diversify the economy, the money will not be going to the company, unlike standard IPOs It is, therefore. a distinct consideration for the Aramco investor Bankers were unable to convince many international money managers of the merits of the deal which prompted Aramco to keep the IPO local. Shares will not be marketed in the US, Canada and Japan as originally expected.

The Domestic IPO On Sunday, Aramco finally provided details on what could be the world’s biggest IPO. Currently, the Chinese online retail giant, Alibaba holds the record with an IPO of $25 billion. Valuation Aramco valued the company between the $1.6 trillion to $1.7 trillion which was below their Crown Prince’s valuation of $2 trillion.

The new valuation implies that the investors will yield a dividend lesser than those from other leading oil and gas companies. A Smaller Stake Aramco decided to sell only 1.5% of its company on Riyadh’s Tadawul exchange which amounts about half of the amount that had been considered at an indicative price range of 30 Saudi riyals ($8.00) to 32 Saudi riyals per share. At the top of the range, the company could raise as much as $25.60 billion beating Alibaba’s capital raise in 2014.

The IPO will be split into two tranches: 5% will go individual investors who will have until November 28 to sign up for the IPO 1% to institutional investors who will have until December 4 to subscribe. Despite the lower valuation, a smaller stake and an IPO limited to local investors, Saudi Aramco is confident that they will have sufficient Middle Eastern institutional investors and local demand for a successful IPO. Setbacks in the Oil Market Oil Demand Oil prices have slumped in the last few years and have more than halved since mid-2014 mainly because of: A glut in global supply A lacklustre demand The dramatic fall in prices has forced OPEC members to cut back production to help stabilise supply and cushion the fall in prices.

US shale producers, geopolitical risks, tensions in the Middle East, trade tensions, and slowing global growth are key factors affecting the supply and demand dynamics in the oil market. Oil and Gas Divestment – Climate Activism Another crucial factor that has caused a shift in the oil market is the growing movement towards climate change which are subsequently pushing investors away from the oil and gas sector. The industry has faced intense pressure from activists and we might see the pressure intensifying as such high-scale IPO will undermine their fight against the climate crisis.

Saudi Aramco is among the top carbon dioxide and methane emitters. Those concerns are forcing portfolio managers to divest from oil and gas companies to embrace more sustainable investment. Drone Attacks The crippling attacks have caused major damage to Saudi Aramco’s facilities in Abqaiq and Khurais.

Even though the company recovered quickly and resumed production, investors are taking note of the nation’s vulnerabilities to attacks. As of writing, it was also reported that Yemen’s Houthi rebels has seized Saudi ship carrying oil rig. At a time where Saudi Arabia wishes to diversify and entice foreign investors, keeping the IPO as a local affair has undermined the efforts to open its economy to the world.

The much-muted details of the IPO, setbacks in the oil markets and the gruesome killing of Jamal Khashoggi have trigger hesitations from international investors to buy Saudi Aramco at full price. Saudi Aramco is a leader in the industry and will probably be able to cope with the current challenges of the industry until the industry is faced with the situation of peak oil demand. Oil Prices and the IPO The upcoming IPO will be one of the key determinants of the immediate price action of oil.

The public offering and the OPEC meeting are intertwined and oil traders should monitor these events carefully. OPEC’s de facto leader is Saudi Arabia and it is reported that the Saudis are set to push OPEC countries to make deeper oil cuts to keep oil prices higher. On the trade front, even though there are some conflicting trade headlines, there is much optimism on the trade front to keep oil prices from falling to September lows.

All-in-all, those two main events provide some upward room for oil prices.

The Loonie Best Performing G10 Currencies After a tight campaign marred by scandals, Justin Trudeau secured another term as Prime Minister. Unlike a clear win in 2015, the Prime Minister did not pass the threshold of 170 seats and will lead a minority government. The governing party will be forced to depend on other parties to pass legislation.

The voting results show deep divisions in the country: The Liberals won in terms of seat numbers. The Conservatives won 121 seats in Parliament compared with 99 in 2015 and have won the popular votes claiming 34.4% over the Liberals’ 33%. Bloc Quebecois was a huge win as they gained 22 seats.

The outcome of the election is unlikely going to drastically change the dynamics in the Canadian markets. On a broader level, there are layers of similarities between the agendas of the different political parties which will help to reduce the uncertainties that generally arises from election results. However, the Liberals governing as a minority government will rely on smaller parties to push legislation which will be challenging.

In the money markets, the Canadian dollar was trading near three-months high against its US counterpart on the Liberals win. The loonie has been on an upswing this year backed mostly by strong economic data and is currently the best performing G10 currencies: Source: Bloomberg Terminal Canada's Economy The Canadian economy outperformed its rivals which allowed the Bank of Canada to keep its benchmark interest rate steady at 1.75% while other central banks have cut their own rates in response to the global backdrop. Employment Employment rose by 54,000 in September driven by gains in full-time work while the unemployment rate declined by 0.2% to 5.5%.

The growth was mostly seen in the self-employment and public sector employees. Source: Bank of Canada Wage Growth The Average Hourly Wage Rate year-on-year in September jumped to 4.25% and marked the strongest month in a decade. Source: Bloomberg Terminal The Wage-common, a wage measure that the Bank of Canada uses to capture the underlying wage pressures reflecting the common trend across data sources rose to 2.7% in the second quarter in 2019.

Source: Bank of Canada Inflation The Bank of Canada aims to keep inflation at the 2% midpoint of an inflation-control target range of 1% to 3%. The recent annual inflation rate stood steady at 1.9% but fell low of market expectations of 2.1%. However, inflation remains close to or on target since March 2019.

Business Outlook Survey The Business Outlook Survey indicator rose to 0.40 which shows a slight improvement in overall sentiment. However, due to the challenges in the energy sector, the sentiment in Prairies remain predominantly negative. The Loonie While major central banks have been cutting interest rates, the BoC has been reluctant to do so despite the global downturn because of the sound economic environment.

The Canadian dollar has been on the rise and has retained the number 1 spot among the G10 currencies against the US dollar. After the election, the prospects of growth-boosting fiscal policies combined with a resilient economy may keep the BoC on the sidelines. If there is a coalition between the Liberals and the NDP, there could be a much larger fiscal spending than originally expected.

Tax cuts would also help to boost consumer spending. Investors are expecting further divergence between the Fed and the BoC. While the BoC is expected to keep its interest rate on hold this year and until late 2020, the Fed is widely expected to cut rates.

In the short-term, we expect the loonie to benefit from the rate divergence and the fiscal boost. In the medium-term, the Canadian dollar may weaken as the effective implementation of the fiscal expansionary policy will lower the Canadian exchange rate. See our introduction to forex for more information, including currency trading for beginners here.

The Psychological effect behind the Stock Markets’ Most Volatile Month. Generally, the volatility in October has been well-above average, and this does have a psychological effect on investors’ minds. The biggest market crashes – Black Monday/Tuesday and other turmoil had occurred in October making it the “Jinx Month”.

The sharp and sudden drop that occurred last week shows that October is living up to its reputation of being the Stock Market Most Volatile Month. It could be investors being superstitious, but so far, there are not known drivers only some theories which include: The return from summer vacations The federal government’s fiscal year which begins on the first of October The third-quarter corporate earnings. On average, more daily moves above 1% are recorded in October.

The S&P500 recorded three more than 1% daily moves already which kind of justified the belief. World Equity Indices (% Change) – Month-to-date Source: Bloomberg Terminal Besides the myth, rising yields are set to be the challenge for this quarter and appear to be the primary driver behind the recent surge in volatility. The prospect of more instability is high and quite alarming given that the US stock markets are already inflated.

The actions by the Fed have also put the stock markets in a dangerous bubble. Are the markets prone to more volatility? Alternatively, does the recent fluctuations signal a bear market?

The recent weeks of volatility are evidence that trading equity will likely remain choppy in the short-term. At this stage, it is difficult to recognise whether the bull market has reached the top and investors need to get out before the bear market or whether investors should stay away from the “buy the dip” strategy in the emerging and Asian equity markets. All in all, short-term investors might find it hard to catch the rhythm of the stock markets, but if investors were to maintain a long-term view, it might be worth listening to Warren Buffet advice: “Buy, Hold and Don’t watch too closely when the market sells off.”

Hawkish and Dovish are two crucial words widely used in our industry whenever there are central bank speeches or talks about monetary policies. But what does it mean? Central banks are more transparent than ever and forex analysts or traders try to dissect the overall tone and language used when central bankers speak to see: How the economy is flaring How interest Rate will change or foresee How the monetary policy will develop over time and affect the value of a country’s currency A hawkish tone means that a central bank is seeing the economy growing too fast and is warning the markets of excessive inflation.

Therefore, to curb inflation and slow economic growth, central banks might increase interest rate which will be positive for the domestic currency. A dovish tone is a complete opposite – The economy is not growing and the central bank is warning against deflation. In other words, there might be interest rate cuts to stimulate the economy which is negative for the domestic Currency.

Put simply, when there is a Hawkish tone, there are talks about tightening monetary policy which will probably lead to interest rate hikes. On the other side, a dovish central bank will use easing or accommodative monetary policy which will result in interest rate cuts. Recently, Major Central Banks of Key economies have turned dovish due to slowing global growth and this week the Reserve Bank of New Zealand joined the dovish chorus as well.

This article is written by a GO Markets Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions. Trading Forex and Derivatives carries a high level of risk.

Fundamental Analysis: Macro Factors The rapidly growing global interconnectedness means that the health of one country's economy can impact the world markets. As a result, traders generally follow the economic calendar to ensure that they do not miss out on any relevant indicators that may signal a move in the financial markets. In this article, we are going to review some major macroeconomic factors.

Economic Growth It is essential to understand how an economy grows to recognize the current economic environment in which an individual is investing and to predict how the market will move. In broad terms, economic growth is mainly driven by: Consumer Spending Business Investment Economic Growth is widely measured by Gross Domestic Product (GDP) which is defined as the total value of goods and services provided in a country during one year. If the health of the economy is robust, individuals and investors feel confident about the economy, which will likely boost consumer spending and business investment.

If the economy is weak, individuals would most probably save rather than spending to prepare for difficult situations. Similarly, investors will be more cautious and show some reluctance in investing in riskier assets. They will also likely seek safety with safe-haven assets.

Recently, we saw that as and when economic indicators fueled the fears of a global economic slowdown, investors seek safety with gold or other safe-havens. Employment Another significant economic data release is the Labour report. Every month, investors look at the three main components of the employment report to gauge the strength of the economy: Jobs creation: The number of new jobs created helps to assess whether the economy is growing.

Generally, a large number of new jobs is positive and is a sign that the economy is flourishing. When the numbers begin to fall, it can signal a slowing economy. Unemployment rate: Rather than the actual monthly figure, analysts normally will observe the trend in the rate to see if the labour market is contracting or expanding.

Unemployment rate helps to determine the inflationary and interest rate expectations. For example, any figure below the Non-Accelerating Inflation Rate of Unemployment (NAIRU) level will force the markets to begin to factor in a higher inflation rate. Wage Growth: Wages are the biggest indicator of consumer spending but do also have a flipside.

It can be a significant cost for a business, but it is also a source of spending and consequently means revenue and profit for a business. Even though analysing its effect on the economy can be complexed, traders tend to monitor wage growth to gauge future interest rate expectations. Inflation Inflation is an important economic concept.

It is a sustained rise in overall price levels. For trading purposes, we will try to keep it simple. The rate of inflation is important as it depicts the rate at which the real value of an investment is eroded and the loss in spending or purchasing power over time.

High inflation normally signals that the economy is overheating, while moderate inflation is often associated with economic growth as it means businesses and consumers are spending more money on goods and services. Consumer Price Index (CPI) and Producer Price Index (PPI) are the most followed indicators aside from other inflationary pressures widely monitored by traders. Interest Rates Interest rates can have a rippling effect on the economy, which is why investors generally focused on forecasting any changes in interest rate to make better financial decisions.

Any changes in interest rate can cause an immediate reaction in the financial markets even though it may take time to see the actual effects on the economy. To understand the various economic impacts, we will analyze the effects of raising interest rates in relation to consumer spending and investment. Higher interest rates mean: Higher borrowing costs Higher mortgage repayments More incentive to save than to spend Reduced consumer and business confidence.

Both consumers and investors are less willing to spend and invest in riskier assets. All in all, a rise in interest rate will reduce consumer spending and investment. Inflation and economic growth will, therefore, tend to be lower.

Hence, central banks will use the interest rate as a tool to curb or boost inflation to reach the desired level of economic growth. Investors are keen to monitor and analyze economic indicators to foresee the next move by Central banks as any changes in interest rate can create investment opportunities.

An oil price war and the pandemic struck the crude oil market at a time where the industry was already faced with a simultaneous demand and supply shock. Put simply, crude oil prices were already under pressure due to a flood of supply at a moment of diminishing demand. A Supply Glut which is mainly driven by US shale producers and a Weak Oil Demand Growth driven by the structural shift in the market! 2020 was set to be the confirmation of a new era for climate change.

As we entered a new decade, the extreme weather conditions around the world have forced leaders of many countries to reassess their actions over climate change and transform the global energy system. In the face of stronger climate action, the energy landscape is changing with the rise of renewables and the increased engagement on climate change, but there are still much debates about the pace of the transition and the extent of disruption. The Pandemic As the world grapples with the ongoing pandemic, different forms of lockdowns across the globe have severely impacted key industries of consumers of oil.

Global activities have slowed down on a massive scale with empty roads, grounded aircraft, plunging car sales and disrupted supply chains abruptly sapping oil demand. The extent of the disruptions in the energy market caused by the pandemic might leave a lasting impact on the oil market which may take years to overcome. Overall, it might still be too early to see that the pandemic could be the reason that either accelerate the pace in using renewables or delay that process.

Below $50 The coronavirus outbreak has caused crude oil prices to fall to its lowest level in more than a year and tumbled below a key $50 level. In a desperate attempt to stabilise oil prices, the world’s biggest oil producers have agreed to slash the world’s oil production to lower supply to counter the steep fall in demand. Source: Bloomberg Terminal Oil Demand Outlook While weekly crude oil inventory reports might provide some relief from time to time to the oil market, traders are mostly concerned with the ongoing uncertainty on the demand outlook.

The Oil Market Report October 2020 and the World Energy Outlook 2020 released this week provided some clarity on the energy market. In its October report, the International Energy Administration (IEA) reported that volumes of crude oil held in floating storage fell sharply by 70 mb (2.33 mb/d) to 139.1 mb in September. The IEA also predicted a significant stock draw in the fourth quarter which provided some support to crude oil prices.

However, the World Energy Outlook 2020 report released earlier this week reiterates the struggles of the energy market in the coming years. The organisation identified four main scenarios to analyse key uncertainties ranging from an energy world in lockdown to mapping out and building a sustainable recovery: The Stated Policies Scenario (STEPS) The COVID-19 pandemic has caused more disruption to the energy sector than any other event in recent history, leaving impacts that will be felt for years to come. In this scenario, COVID-19 is brought under control in 2021 and the global economy returns to pre-crises levels the same year.

The Delayed Recovery Scenario (DRS) In this scenario, the shadow of the pandemic looms large - Global energy demand rebounds to its pre-crisis level in early 2023 in the STEPS, but this is delayed until 2025 in the event of a prolonged pandemic and deeper slump, as in the DRS. In the Sustainable Development Scenario (SDS), a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement, energy access and air quality goals. The new Net Zero Emissions by 2050 case (NZE2050) extends the SDS analysis.

A rising number of countries and companies are targeting net-zero emissions, typically by mid-century. Given the forecasts on the demand side, there is also increasing pressure from OPEC members and its allies to balance the supply side and avoiding flooding the oil market with extra supply. Crude oil prices have remained stuck within a range below the $50 mark as oil traders struggled to push prices higher dragged by the dire demand outlook.

The energy sector is among the worst-performing sector in the stock market as investors are also shifting their investment towards green energy. As lockdown eased, traders will likely eye the consumption of oil in emerging and developing countries rather than developed countries which are taking more steps towards climate change. The US election outcome might also be a driver of crude oil prices in the next couple of weeks as it will depend on the stance of the government towards climate change policies.