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Aramco in focus as Europeans stocks close in on two year highs

Aramco in focus as Europeans stocks close in on two year highs

European markets have started on the front foot this morning, with the DAX making new 14 month highs, helped by the better than expected October payrolls report out of the US which had the combined effect of not only pushing the S&P500 to new record highs, it also made it less likely that we would see the US Federal Reserve cut rates again before the end of this year.

This goldilocks report also had the added bonus of reducing concerns that the US might be slipping into recession, and with optimism around a possible signing of a US, China trade deal later this month, increasing over the weekend, markets in Europe are all higher with the Stoxx 600 up above 400 for the first time since January 2018, and closing in on its highest levels in two years.

Comments by Wilbur Ross, US Commerce secretary that he was optimistic of progress and that talks were “in good shape” and that there was “no natural reason” why a deal couldn’t be signed has helped drive momentum this morning. 

The main gainers have been the usual suspects of basic resource stocks but also companies with decent Asia market exposure of the likes of Burberry and Prudential

Oil prices also finished last week on a high surging strongly over optimism about a positive outcome to the latest US, China trade discussions, and the better than expected US payrolls numbers. The recovery in oil prices was also welcome news for Saudi Aramco as it looks to push its IPO out of the door next month.

There has been talk that Saudi officials are softening their expectations about a $2trn valuation, with some expectations that it could come in as low as $1.5trn. Even if it were to come in lower than that it would still make Aramco the world’s most valuable company, putting it above both Apple and Microsoft who both have $1trn valuations.

It is true that its ability to generate profits outweighs every other company on the planet, however its vulnerability to external attacks was thrown into sharp relief in September with the drone strikes on its plants at Abqaiq and Khurais.

Last year the company had revenue of $356bn, making generating net income of $111bn, as it looks to sell off 2% of the business on the Riyadh exchange. Contrast that turnover with Apple or Exxon Mobil which both generated revenue of nearly $260bn, and the numbers are impressive.

The big concern investors are most likely to have is while the Saudi valuation may well be on the high side, it is hard to put a number on a company that generates all of its income by way of fossil fuels, where supply is already plentiful, and whose use is already in decline, as renewables become more mainstream.

Global investors are coming under increasing pressure to ensure that their investments are more environmentally friendly, and with the likes of “Extinction Rebellion” turning up the volume on climate change, big investors are likely to be much more cautious. We’ve already seen this year the $1trn Norwegian sovereign wealth fund scale back its oil and gas investments.  This would suggest that any valuation close to $1.5trn is likely to have more downside risk than upside risk, something to consider perhaps?

British Airways owner IAG announced this morning it is paying €1bn for Air Europa, Spain’s third largest airline and one of the key revenue earners for the Globalia Tourist group. Operating out of Madrid the airline operates routes to 40 destinations across Europe, Asia and the Americas.

This acquisition helps consolidate IAG’s position in Madrid as a key European hub, competing with Amsterdam and Frankfurt. 

Ryanair’s latest numbers showed that Q2 profits came in ahead of expectations at €910.2m, with CEO Michael O’Leary blaming European regulators for delays in returning the Boeing 737 MAX to service, which has meant the airline has had to extend leases on older aircraft to keep up its schedules. Ryanair has 135 orders for the MAX and it appears that O’Leary wants the planes back and flying again so that it can get the first MAX jets in the air by March or April next year. While he may get his wish it is hard to see if passengers will be as easy to convince given some of the recent news out of the US and Boeing and some of the governance around the certification of the aircraft.

On currency markets the euro has been slowly edging higher against the US dollar as traders look to the first policy speech by new ECB chief Christine Lagarde, later today. It is hard to see too much in the way of upside from these levels, just shy of the 200 day MA, with expectations that she will paint a fairly dovish picture for the European economy. Today’s manufacturing PMIs from the four biggest European economies paint a picture of a region mired in recession with Spain manufacturing PMI coming in at 46.8, a six year low, with economic activity in Italy and Germany also contracting with only France showing a modest expansion.

We got a flavour of what to expect last week when Lagarde said that “we should be happier to have a job than have our savings protected”  This is a particularly worrying comment from a central banker whose time frame should be multi-faceted, and who, as well as taking a short term view on monetary policy, really ought to be taking a long term view when it comes to boosting provision for an aging population. Negative rates are already prompting destructive feedback loops in the European banking system, and given Lagarde’s tenure at the IMF, one fears for the economic governance of the Euro area.

US markets look set to build on Friday’s record high for the S&P500 with another record open. 

It’s another big day for earnings today with the latest Q3 numbers from Uber, and they are likely to be grim reading, not only for investors, but for Softbank as well, whose stakes in a number of unicorns have gone sharply into reverse after some initial promise. Somewhat belatedly investors have realised that multibillion dollar valuations need something to back them up, and being profitable, or at least the prospect of being profitable, needs to be part of the business plan. This year alone the company is on course to lose $8bn, having lost $5.2bn in Q2 alone, outstripping last year’s loss of $3bn at a stroke. As a result the company has started to cut staff, while also looking to expand in India and other emerging markets. Its food operation while growing, still makes up a very small part of overall revenue, and the outlook for that business is no less competitive than its bigger ride sharing rival. Even a $50bn valuation, which the company currently has looks optimistic when set against these sorts of numbers.

Fast food chain McDonalds is also set to be in focus after its CEO Steve Easterbrook was dismissed for violating company policy over relationships with co-workers. Under Easterbrook’s guidance the company has overseen a significant turnaround in its fortunes so this could be regarded as a blow, however some of the gloss had started to come off his leadership in recent months as the company came under fire in terms of how it dealt with some of its franchises and workers.

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