Equities pullback as Trump-Kim fail to reach agreement

Summary:

• Stocks decline after no deal on denuclearisation
• Rolls-Royce shares slide after earnings update
• Wealth fund to increase UK investments

The FTSE has dipped to its lowest level in almost 3 weeks this morning, falling back below the 7100 mark as global equities in general have pulled back as risk sentiment took a hit after the US and North Korea failed to reach an agreement over denuclearisation for the peninsula. US president Donald Trump and North Korean leader Kim Jong Un abruptly cut short their summit in Hanoi, and in doing so cancelled a signing ceremony as the two leaders failed to make any tangible progress and agree terms on the deal. The Pound remains well supported and close to a 7-month high against the US dollar and 21-month peak compared to the Euro.    

UK stocks have declined on both a drop in risk sentiment and a strengthening of the pound. Price is now back below the 10 EMA for the first time in a month. Source: xStation

Rolls-Royce falls after posting large loss

Investors have looked through what could be described as several signs of promising progress in the latest update from Rolls-Royce, with the initial reaction instead focusing on the large pre-tax loss, with shares falling a little over 3% and pulling back from their highest level in 5 months. On the face of it a pre-tax loss of £2.9B for 2018 after a profit of £3.9B the previous year is no doubt worrying, but this is not really a fair reflection of the firm’s performance. There’s been a short term hit due to numerous exceptional factors including a £790m hit for fixing problems on the Trent 1000 engines and a £186M charge after Airbus announced the end of A380 production and if you look through these as one-offs then the outlook is actually pretty good.

Rolls-Royce shares are pulling back after the latest results were announced but the market remains not far from a 5-month high around the £10/share mark. Source: xStation

Underlying operating profit, which strips out non-recurring items, increased by 71% to £633M, cost cutting measures that are expected to achieve an annual saving of £400m remain on track while a rise in profitability saw free cash flow jump by over 80% to £568M. The big picture seems to be improving and as long as these “exceptional” items are one-offs then the firm appears on track for a continued recovery with improved results likely going forward as the turnaround strategy is clearly beginning to yield results.

Giant wealth fund to increase investment in the UK

With the latest developments on the Brexit front paving the way for an extension of the UK leaving the bloc and therefore an extended period of uncertainty, foreign business could be forgiven for postponing investment until there is greater clarity. However, the sovereign wealth fund of Norway has provided a reassuring boost, stating that they plan to increase UK investments going forward. The fund is already a sizable investor in the UK, as a co-owner of Regent’s Street, £5.6B of government debt on its books as well as holding notable stakes in Rolls-Royce, Marks and Spencer and Barclays. The state’s coffers have been filled with a huge amount of Oil money making the fund is the world’s largest and many will be hoping the decision to look through the near-term political turmoil and focus on the UK’s long-term growth prospects is an example that others will follow.