Deal making bonanza sends UK markets higher, as dollar slumps

The focus for UK equity markets this week is domestic, after several corporate announcements overshadowed tariffs, and other international risks. The focus this morning is on BP, the UK oil major. Shell announced at the weekend that it was reviewing the merits of making a bid for BP. The prospect of Shell bidding for BP has been doing the rounds for decades, however, this time it feels different. BP is in a weakened state, it is under attack from activist investor Elliott, the oil price is slumping, and its Q1 results were seen by some as the final straw for the company.

There are no details about how much Shell would bid for BP, or if it would buy the whole company, or break it up into more digestible chunks. However, the market is starting to price in the possibility of sale, as BP’s share price was higher by 3% at one point on Tuesday, even though it has given up gains as we move through the morning, suggesting that we may need to get a firm offer on the table to boost BP’s share price. Shell’s share price is lower so far today. These muted moves, reflects the early, exploratory stage of this deal. However, for BP’s share price, this is the biggest jump since February, when the company’s Q4 results gave the market hope that the company’s strategy shift away from renewables would reap rewards. These hopes have been dashed in recent weeks, as results disappointed expectations. Then risk for the share price is that a deal does not materialize, and this causes the share price to wither.

As you can see in the chart below, which shows BP’s 1 day % change in price, going back 1 year, there have been very few daily spikes higher in the share price, with plenty of spikes on the downside, suggesting that good news has been hard to find for BP in recent months. The market was enthused, at first, by the company’s plan to re-focus on oil and gas, but the Q1 results miss, combined with US tariff fears have weighed heavily on the stock price. Shell is BP’s only hope for now.

Chart 1: BP daily percentage price move, 1-year chart.

Source: XTB and Bloomberg

Deliveroo fails to recoup IPO price

Deliveroo has also been an M&A target for a while, but it has agreed a takeover by DoorDash for 180p a share. This deal has been a long time coming, and the 40% premium on the share price is a nice sweetener for investors. However, this price is still well below the 2021 peak for the share price at 395p. This deal is good news for short term holders of Deliveroo shares, but it is still a blow for those who have been holding the shares since the IPO. Deliveroo’s sale is the end of the road for one of the most hyped IPOs in the UK in recent memory, which ended up promising more than it could deliver.  

Oil price recovery as technical signals flash red

While oil majors are driven by potential M&A news, the oil price is in recovery mode after slumping to a 4-year low on Monday.  Brent crude is higher by 2% on Tuesday. There is no new fundamental driver for this move, instead the oil price is recovering after technical indicators suggested that the oil price was looking oversold. The oil price is down 17% year to date, even though the dollar has been falling, which usually boosts the price of oil. At just over $61 per barrel, on an inflation adjusted basis, the price of Brent crude oil is barely higher than it was in the mid-1980s. Oil is cheap right now, which could prove to be a welcome boost to the global economy as it tries to recalibrate to the US’s new trade rules.

Gold heading to record highs as dollar sinks

Commodities are in focus this week, as the gold price also surges. The gold price is closing in on the record high of $3423, from April 21^st. A confluence of factors are driving up the gold price including a weaker dollar and continued strong demand from global central banks. However, there are some short-term factors that could weigh on the gold price including trade deals between the US and its trading partners, as well as a hawkish Fed. However, momentum is to the upside for the gold price, and we expect any drawdown to be temporary.

Asian FX: attempts to placate Trump

The FX market is also in focus, as the dollar tumbles, especially against Asian currencies. The dollar is lower vs. most of G10 FX on Tuesday, although it is making gains vs. the AUD and CHF. The focus has shifted to Asian FX. The Taiwanese dollar has surged more  than 5% since the start of May, the Thai Bhat and the Malaysian Ringgit are both higher by more than 2%. These moves suggest that FX is being used in the global trade wars as leverage to get more favorable tariff rates from the US, as stronger Asian currencies could placate Donald Trump. Gains in the Asian FX space have slowed on Tuesday, and unless China revalues the yuan substantially higher, which is exactly what the US wants, then we don’t think the surge higher in Asian currencies will persist.

European stock indices are lower today, although the FTSE 100 is bucking this trend and is moving higher on Tuesday, led by Next and Astra Zeneca. Tech and luxury are the weakest performers on the Eurostoxx 50 this morning, and US stock index futures are also pointing to a lower open later, as we wait for this week’s key FOMC meeting.