Market rallies on upbeat payroll, Aramco plans IPO

The October US non-farm payroll report came in stronger than markets expected with 128k beating 89k consensus and September figures revised higher to 180k from 136k.

Unemployment rate remains little changed at 3.6% and hourly wage growth was steady at 3.0%.

The jobs report has two implications. First, a robust jobs market suggest that the Fed will hold interest rate unchanged until the end of this year, which is also in line with Powell's latest FOMC statement. Second, it defies recession fears and sent US equity markets to record highs.

On the trade front, recent cancellation of the Chile APEC summit and President Trump's impeachment inquiry has put some doubt over a potential US-China phase one trade deal. However, an interim deal with an emphasis on agricultural products is likely to be signed by the end of this year which will benefit both the US and China. When it comes to a USD$ 40-50 billion trade deal, the occasion becomes less important.

The phase one deal will benefit China because the African swine fever has led to soaring pork prices in the country and with pork meat being one of the most important sources of protein for Chinese consumers, it inevitably results in a higher CPI reading. Last month, the CPI number hit 3.0% and thus further inhibits the People’s Bank of China (PBOC)’s ability to lower interest rates. China has a high demand for meat and agricultural products and it will become a more urgent issue as we move towards the January Chinese New Year holiday when demand for meat hits its seasonal peak.

Saudi Arabia’s state-owned oil company Aramco is planning for a domestic listing in the Riyadh stock exchange. The marathon-style IPO preparation of the world’s most profitable energy company has finally come to its final stages but details suggest that the listing is constrained by its location, size and timing.

Riyadh stock exchange is remote and far less accessible for global investors compared to New York or London. Unless Aramco considers dual-listing in the future, liquidity of Aramco’s circulation will largely be confined within domestic and some institutional investors.

Saudi plans a 1-2% sale of Aramco in this IPO, which will translate into US$ 12 to 24 billion sales in the public trench based on the assumption of a US$ 1.2 trillion market value. This amount is more symbolic than to actually make much significant market impact.

Timing wise, oil prices has mostly been ranging between US$ 50-60 per barrel recently, against the backdrop of oversupply and tepid demand outlook. This factor could serve to undermine Aramco’s valuation.

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