FTSE 100 shrugs off Monday M&A madness

The UK index is bucking the positive tone to European markets today and is losing a quarter of a per cent, as the energy and materials sector weigh on the index at the start of this week.

The energy sector makes up 16% of the FTSE 100, so the drop in Brent crude oil, which has fallen back through the $80 per barrel threshold as we wait for the conclusion of Thursday’s Opec meeting, is also weighing on sentiment at the start of the week. However, there have been some important M&A developments that it would be wise not to ignore.

The M&A factor: 

There has been a boom in merger news this year, and as we approach December it is showing no sign of slowing down.  The latest announcements came from:

• BT: It has confirmed that it is exploring the opportunity to buy O2, the mobile phone operator, from Telefonika. It is also looking at another undisclosed target in the UK mobile sector. If BT does buy O2, it would come full circle, as BT owned O2, which was then known as BT Cellnet, up until 2005. Back then shareholders pressured BT to get rid of its mobile phone division, which was incredibly bad timing as since then the mobile sector has soared. This deal is a sign that traditional telecoms companies are branching out and looking for growth in the mobile sector. We think that mobile and smart phones will be a big story for investors next year, so it is no wonder that the market likes the idea of BT buying back O2, its share price is up 3.3% so far on Monday, and if the deal progresses then there could be further upside.
  

• Smith and Nephew: The pharma company saw its share price spike 10% on news that US rival Stryker, a company based in West Michigan, was considering making a bid. Typically, the company that is being bid for sees its share price rise when an offer is announced, however, we would urge caution about getting too excited about S&N’S share price at these levels. There has been a wave of US pharma companies looking to buy their UK rivals this year, however, the US government’s plans to tighten tax inversions have scuppered some of these deals, including Pfizer’s bid to acquire Astra Zeneca, which caused excess volatility in A&Z’s share price this summer. Thus, we could see some sellers come in and disrupt S&N’s share price after Monday’s gains, so look out for some volatile moves in the coming days.

• Friends Life: has agreed the terms of an all-share tie up with its larger rival Aviva. The market is a little under-whelmed, Friends share price has fallen 3% so far today, as it questions why Aviva is buying more exposure to the UK market when it should be looking for international targets.

The dollar effect…

The M&A boom in the UK this year has been partly driven by the strong dollar. The pound has fallen some 8% versus the US dollar since the start of July, and is one of the weakest performers versus the buck so far this month. When the pound is weak, it makes UK companies an attractive takeover target. If the dollar uptrend continues, as we think it will, then some companies may push ahead with M&A activity even though they risk irking the US government who are looking closely at tax inversions by US companies looking to relocate their headquarters’ overseas to lower their tax bills. If you are following stocks, it’s worth keeping an eye on dollar trends and the impact this could have on global M&A activity.

The oil effect:

As we mention above, the energy sector is 16% of the entire FTSE 100 and it can come under pressure when the oil price tumbles. Petrofac, the oil services company, is the latest casualty of the oil price decline, having to re-state its earnings causing its share price to plunge 25% today - the biggest drop on record.  If the oil price continues to decline then we could see further woes for the energy sector.

The technical picture:

While the oil price is a concern for the FTSE 100’s energy sector, we continue to think that this index looks strong from a technical perspective. Just because the FTSE 100 has tumbled on Monday, we don’t think that the uptrend is over. Last Monday the FTSE also took a tumble before clawing back losses to close the week 1.5% higher on the back of a Chinese interest rate cut and dovish comments from ECB president Draghi.

The technical picture is also supportive of further gains in the FTSE 100. Last week’s break above key resistance at 6,695 – the 200-day sma - was a medium-term bullish development and is now a strong level of support. If we manage to stay above this level then we could see back to the September highs at 6,900. If we fall back through the 200-day sma then this would suggest a deeper pullback is on the cards and we could see back to 6,600 in the coming days and weeks.

Figure 1: 

Source: FOREX.COM. PLEASE NOTE THESE PRICES DO NOT REFLECT THE PRICES OFFERED BY FOREX.com