FTSE 100 futures set to slide as strong pound weighs on UK exporters

The blue-chip index extended losses on Tuesday, as a stronger pound weighs on UK exporters, with Rolls-Royce dragging the FTSE 100 lower after JP Morgan offered a grim outlook for the engine maker.

  • The FTSE 100 extends losses as pound rallies against weakening US dollar
  • Rolls-Royce falls 12% as JP Morgan downgrades outlook amid mounting concerns
  • The British blue-chip index firmly on the back foot as recovery stalls

The FTSE 100 closed 1.7% lower on Tuesday, extending losses from last week, with its corresponding futures market down 2% suggesting the index will lose further ground on Wednesday.

The blue-chip index is already under pressure due to fears of a second wave of infections coming in the winter months, with the UK government’s coronavirus plans leaked in a recent Sage report.

The Sage report gave a grim outlook, with the UK government predicting to see 85,000 deaths in the winter months from Covid-19, with the NHS likely to struggle to cope with the surge in coronavirus cases while it simultaneously tries to cope with the annual flu season.

The FTSE 100 closed at 5862 points, with the index falling below the psychological 6000 point benchmark last week.

Rolls-Royce down 12% as JP Morgan offers grim outlook

The engine maker was the biggest loser on the FTSE 100 on Tuesday, with the stock falling 12% amid a dismal outlook, with the company looking to raise £2 billion via disposals after recording a major half-year loss in August.

Rolls-Royce reported a pre-tax loss of £5.3 billion in the six months to June 30, including £1.1 billion in write-offs and impairments, a £2.6 billion loss on foreign exchange hedging contracts, along with restructuring costs of £366 million.

‘The Covid-19 pandemic has significantly affected our 2020 performance, with an unprecedented impact on the civil aviation sector with flights grounded across the world,’ Rolls-Royce CEO Warren East said in a statement.

To make matters worse, analysts at JP Morgan downgraded their price target for the stock from 90p to 80p per share, implying a potential downside of -62%.

The US-based investment bank blamed the price target cut on the engine maker’s cash flow coming under renewed pressure, prompting the company to downgrade their 2021 free cash flow guidance by €300 million to €1 billion.

Analysts at JP Morgan also expressed concerns about Rolls-Royce's ability to continue operating due to the severely challenging market conditions and that sentiment seems to be shared by some of the company’s key shareholders, with activist investor ValueAct disposing of its shares.

Rolls-Royce closed at 210p per share on Tuesday.

GBP/USD trending higher as we hit multi-month highs

GBP/USD has similarly been on the rise, with the price trading at eight-month highs. Crucially, we are approaching the critical $1.3515 resistance level, where a break above that point would bring about a two-year high, according to Josh Mahony, senior market analyst at IG.

‘With the price back at trendline resistance, we could see some weakness come into play over the short term,’ he said.

‘However, whether we see a short-term pullback or not, a bullish outlook is in play unless the price breaks below the $1.3356 swing low.’

FTSE 100: technical analysis

After declining throughout last week, the FTSE 100 finds itself back at the 5950 area that marked support at the end of July, according to Chris Beauchamp, chief market analyst at IG.

‘This rather critical area has seen buyers step up in the past, but a close below 5900 would likely open the way to more downside, with 5727 and 5497 as first-line targets,’ he said.

‘The past five sessions have seen a series of higher lows on the intraday chart, and until that changes, perhaps with a move above 5980 then the overall bearish impression remains in place.’

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