(MENAFN- ProactiveInvestors)Equities lost ground as the energy and basic materials sectors were weighed down by the strong dollar and concerns about the health of the Chinese economy. Commodity prices came under pressure after manufacturing data from China and the US disappointed. The final reading of the Caixin/Markit purchasing managers' index showed China's manufacturing sector shrinking by more than previously thought a fifth successive month of contraction. New orders output and raw material inventory lost steam indicating the economy is struggling to turn around despite recent policy support. Brent crude tumbled to a six month trough of $49 a barrel while copper dropped to its lowest level since July 2009. Commodity related currencies also came under pressure with the Canadian and Australian dollars easing to multi-month lows. Strong US data and comments from a Federal Reserve policymaker reignited speculation that a rise in interest rates was drawing closer driving the dollar higher. Dennis Lockhart the president of the Atlanta Fed and a voter on the Federal Open Market Committee was quoted as saying he was ready to support a September increase barring deterioration in economic activity. The US service sector in July expanded at its fastest rate since the recession reinforcing evidence that the economy is on a strong footing. The ISM's non-manufacturing purchasing managers' index rose to 60.3 from 56.0 in June the highest level since its inception in January 2008. Key components of the index also improved including new orders and employment suggesting growth will accelerate in the second half of the year. Employment figures due for release on Friday are expected to show the US economy created 220000 new jobs in July according to economists polled by Reuters down from 223000 in June. The unemployment rate is expected to hold steady at 5.3%. The Greek stock market tumbled after it reopened following a five-week shutdown although robust corporate earnings and economic data from the rest of Europe supported stocks. Markit's July PMI for the Eurozone reached 53.9 ahead of expectations marking over two years of expansion for the region. On a domestic front disappointing services data implied Britain's economic recovery may have slowed a touch at the start of the second half of this year. The Markit/CIPS services purchasing managers' index fell to 57.4 last month from 58.5 in June but its expansion still remains the second-fastest among major European economies. Taken together with manufacturing and construction surveys earlier this week the PMI pointed to economic growth of around 0.6% per quarter slightly slower than the 0.7% officially reported in the second quarter of 2015. Fears that the Bank of England is poised to start raising interest rates have receded following news that just one of the nine members of its policy committee voted to increase borrowing costs from their record low of 0.5% this month. On a day dubbed 'Super Thursday' the Bank broke with tradition to publish the MPC's August rates decision the minutes of the meeting and its quarterly inflation report. Technical analysis of the FTSE 100 illustrates support for the index this week despite commodity related weakness. The rising oscillators suggest momentum is building and a move above 6815 would confirm a new uptrend from the July low is underway. Support is seen at 6650 6620 and 6560. In conclusion the FTSE 100 held up relatively well this week given its heavy exposure to the waning commodity sector. While Chinese growth concerns and deflationary pressures weigh on oils and miners other stocks benefitted as it may delay major central banks raising interest rates from historical lows. Technically a move above 6815 would indicate the index has formed a new upward trend although US economic data will be closely observed over the coming weeks. As the first of Australia's major London-listed resource stocks out with earnings Rio Tinto (Epic: RIO) beat analysts oppressed expectations. A drop in commodity prices caused its earnings to drop by around $3.6 billion in the first six months of 2015 yet cost cuts and a hike in the dividend beat forecasts. The company reported a pre-tax profit of $1.74 billion in the first half of 2015 less than a third of the $6.09 billion profit made a year earlier as revenue fell to $17.98 billion from $24.33 billion. Pre-tax profit before finance costs came in at $3.66 billion also considerably down from the $5.88 billion profit a year earlier. Earnings before exceptional items fell to $2.92 billion in the first half of 2015 compared to $5.11 billion although that beat analyst expectations which had earnings coming in around $2.43 billion. Rio Tinto said the fall in commodity prices in the first half of 2015 decreased its earnings before exceptional items by $3.62 billion compared to a year earlier mainly caused by average iron ore prices falling by 46% year-on-year in the first half compounded by lower coal copper and gold prices. The fall in earnings was partially offset by production increases which enhanced earnings by $79 million in the first half and an $847 million benefit from exchange rates. Lower energy costs also enhanced earnings by around $396 million mainly due to the fall in oil prices. The FTSE 100 listed miner also continued to slash costs cutting its capital expenditure budget in 2015 and 2016 alongside increasing its cost-saving target by $250 million for the 2015 full year. Despite the dramatic fall in earnings investors were encouraged that Rio Tinto stuck with its progressive dividend policy increasing the interim dividend by a higher than expected 12% to 107.5 cents per share from 96.0 cents per share. The company also said it will progress with its share buy-back programme originally announced in February and said it will purchase $1.0 billion of shares in the second half of 2015. Chief financial officer Chris Lynch was keen to defend the company's financial position saying the company's net operating cash flow of $4.4 billion in the half was enough to cover stay in business capital expenditure of $1.2 billion and dividend payments of $2.2 billion. Rio Tinto also said it will progress with its share buy-back programme originally announced in February and said it will purchase $1.0 billion of shares in the second half of 2015. Yet many questioned the viability of this strategy as further weakness in commodities impacts earnings leaving the dividend cover exceedingly thin. These results were made up to 30th June 2015 which doesn't capture the latest plunge in material prices. Iron ore has subsequently fallen a further 15% copper 10% Brent crude over 20% gold 7.5% and aluminium 6.5%. At the end of June net debt stood at $13.68 billion a 10% rise from the $12.49 billion at the end of June 2014 pushing the company's gearing ratio up to 21% from 19%. Despite the falling share price Rio Tinto still trades on 13.5x with an uncovered dividend this year. At this stage earnings are expected to grow by 15% next year yet given further deterioration in commodity prices the company may face earnings downgrades. The chart of Rio Tinto captures the weakness over the past year a trend that has actually been in place since May 2008. Recent strength has pushed the oscillators towards overbought territory while the bearish divergence indicates limited momentum behind the latest spike. Resistance is likely from the July high and 50-day moving average at 2650p. Rio Tinto's first half results were not as bad as feared yet they didn't capture the latest downturn in commodity prices. Short-term earnings forecasts may come under further pressure putting strain on the balance sheet leaving the dividend uncovered. Pressure from the strong dollar and Chinese growth concerns show no signs of abating leaving the downtrend looking set to continue for the time being. At the time of writing the share price is 2585.5p and I believe a short-trade with a tight stop-loss above the recent high at 2668p offers an attractive risk/reward bias. Near-term targets are seen at 2460p 2382p and 2318p. This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in Rio Tinto but client accounts may. The material in this report has come from SI Capital's internal data sources and Rio Tinto's corporate website.
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