Gulf dealmaking machine hits the brakes

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0:17Good morning from the Financial Times. Today is Tuesday, May 12th, and this is your FT News Briefing. All eyes are on this week's U.S.-China summit, and prospects for peace in Iran are looking worse by the minute. Plus, business in the Gulf was booming, but the war in the Middle East is forcing bankers to slow things down. I'm Mark Filippino, and here's the news you need to start your day.

0:52The month-long ceasefire between the U.S. and Iran is hanging by a thread, or as U.S. President Donald Trump puts it. I would say the ceasefire is on massive life support where the doctor walks in and says, sir, your loved one has approximately a 1 % chance of living. He spoke from the Oval Office yesterday after he rejected Tehran's counter-proposal to end the war. After reading that piece of garbage they sent us, I didn't even finish reading it. They said, I'm not going to waste my time reading it. Washington and Tehran have bounced peace deals back and forth since the temporary ceasefire came into effect in early April, but the two sides haven't been able to agree on what happens to Iran's stockpile of highly enriched uranium.

1:43The leaders of two global superpowers and geopolitical foes will sit down together later this week. Donald Trump arrives in China tomorrow, and he'll hold a summit with President Xi Jinping. The two countries are locked in a bitter trade war. So can they find common ground? Here to tell us more is the FT's chief foreign affairs commentator, Gideon Rockman. Hey, Gideon. Hi. So give us some background about the trade environment this meeting is happening in. Who has the upper hand heading into the talks? Well, I think probably you'd have to say that China slightly has the edge simply because they responded to President Trump's very extreme tariffs of last year, which were up to 145%, by restricting the exports of critical minerals and rare earths.

2:26And that more or less forced America to cut tariffs to a level that China can cope with. And they haven't really gone up since then. And I think the Americans know that if they really went for the all-out trade war, that China could redeploy that critical minerals and rare earths weapon, which has really quite severe effects on American industry. Ford Motor, for example, were closing down production lines in response. So China, I think, does have the edge in the pure trade aspects. So if China holds the slight edge here, what cards does the U.S. hold? Well, I think there are things that China still wants from America.

3:02I mean, ideally, they would like tariffs to go down even further. And there are these restrictions on tech exports, which are a serious inconvenience for the Chinese. That said, I think that one of the things that is also giving America pause is the sense that China is still making rapid technological progress, even in AI. And some leading American tech firms, such as NVIDIA, say that these tech restrictions are actually going to backfire on America because they spark indigenous Chinese development. So that's the trade side of things. I also want to talk to you about geopolitics, particularly the war in Iran.

3:37China has tried to broker peace between Iran and the U.S. recently. How do you think Trump will play that with Xi? Well, I think Trump's got a couple of issues. Firstly, I mean, he never likes to project weakness, but America is looking pretty frustrated in Iran. However, I think he'll want to put a brave face on it in China. He doesn't want to look like he's losing this war. If China can help deliver the Iranians in some way, then obviously America would be very interested in doing that. On the other hand, if the price of that is an enlarged Chinese road in the Middle East, there'll be some in Washington who would hesitate about that.

4:14How likely is that the two sides can agree to anything meaningful on either trade or Iran in these meetings? Well, look, I think anything that comes out of the Chinese-American summit is meaningful in one sense, in that these are the two most powerful countries in the world, the two largest economies, and their trading relationship is incredibly important, not just for them, but also for third parties. So more or less, however they adjust it, will be watched very, very carefully. But I don't think you're going to get some huge agreement. That said, I think one big thing that everyone's watching is Taiwan.

4:46The Chinese would love Trump to shift America's position on Taiwan and particularly come out and say that he opposes Taiwanese independence as opposed to just not supporting it. And those kind of semantic changes do actually matter. I think it's unlikely that Trump would do that, even though I doubt he cares about it much personally. I suspect the people around him will have prepped him not to do that. But if he were to do it, it would be a big moment. Gideon Rockman is the FT's chief foreign affairs commentator. He also hosts the Rockman Review podcast. We'll have a link to that in the show notes.

5:19Thanks, Gideon. Pleasure.

5:27Remember that make or break speech from Britain's prime minister we talked about yesterday? Well, he gave it. Keir Starmer tried hard to save his position after disastrous results in last week's local elections. I know that people are frustrated by the state of the group, frustrated by politics, and some people frustrated with me. Starmer took responsibility for his Labour Party losing hundreds of seats, but despite growing calls from within his own party to resign, Starmer said he's not going anywhere. I also take responsibility for delivering the change that we promise, for a stronger and fairer Britain that we must build.

6:11Three parliamentary private secretaries resigned shortly after his speech. All of them publicly demanded Starmer step down. UK government bonds also weakened yesterday. The yield on the 10-year guilt rose and hit 5%, underperforming other bond markets in Europe.

6:32A lot of deal-making in the Gulf has come to a standstill, just as banks in Dubai and Doha were ready to hit the big time. The region was on track to make more than a billion dollars in deal fees this year for the first time in two decades. But instead, the war in Iran has put mergers on ice and lowered companies' valuations. The FT's Nico Perazzi covers business in the Gulf for the FT from Dubai. He's here to talk us through what's been going on there. Hey, Nico. Hi, Mark. So set the scene for us, if you don't mind. And what's been going on where you are and what kind of deals were people expecting this year?

7:05Well, I spent more than 15 years in the region and ever since COVID. So I'm going back a few years. There was really a sense that the region had arrived, that everything was falling into place. You had all these positive developments all happening at the same time, right? You had these giant sovereign wealth funds. They were investing abroad. They were anchoring large deals in entertainment, sports, and artificial intelligence. The Gulf almost became a lender of last resort. The contrast with other parts of the world was especially striking because IPO markets in Europe were not doing well. Here, they were doing exceedingly well.

7:44So for the banks, that fueled expectations that this would be the breakthrough year. And then the war in Iran happened. How is that disrupting these plans? So the mood on the ground here is actually, contrary to what one might expect, not that bad at all. There's this kind of business as usual image that they're trying to project, which the government is trying to do, but the bankers are trying to reflect that. Now, obviously, there has been a disruption, right? So if we look at the numbers, the first quarter went off to a good start this year, but then you see a drop off in April in M &A volumes, IPOs, the IPO market in the UAE, where I'm based, has come to a standstill.

8:22There was not a single IPO since the beginning of this year. And then you also had this immediate impact, right? So the financial center was also caught in between one of these attacks. It was damaged two of the towers. And so a lot of these international firms feeling threatened, they closed offices. So a lot of the dealmakers left Dubai, Abu Dhabi, until they now start gradually returning. But even still, there are still some deals that are going ahead, right? Yeah, absolutely. I mean, throughout the conflict, you still had these big names, international names, opening offices, Bain Capital, Hill House.

8:57I think Citadel secured a license. Blackstone invested in a payments and data platform. So deals were continuing. Now, obviously, the fundamentals, as some say, are still in place. It's still a very capital-rich region. But I think what most bankers expect is that deals will take longer. The pricing will change. Valuations need to be adjusted. And some deals might just be canceled altogether. Nico, what's the best case and worst case scenario for these financial centers? I mean, the best case is almost obvious. An immediate ceasefire, a peace deal. That's what bankers and everyone else are hoping for.

9:37If that happens, I think the region could probably quickly turn the page again. They have a history of overcoming these crises, most recently the COVID crisis. And again, there's a lot of capital still in the system. Now, worst case, uncertainty remains, hostilities escalate. Now, that would really hurt investors' confidence, especially from abroad. It's very unlikely that private equity investor will sign off on any deal when the prospect of continued hostilities remains in place. Nico Perazzi is the FT's Gulf Business Correspondent. Thanks, Nico. Thank you, Mark. You can read more on all these stories for free when you click the links in our show notes.

10:17This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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