(MENAFN- ProactiveInvestors)A glance at the above chart of the FTSE 100 illustrates the sell-off in equities this week as the spectre of a slowdown in China's economic growth and a US interest rate hike have weighed on sentiment. China dominated the headlines following renminbi devaluation with heightened volatility in their equity markets after a series of disappointing data releases last week. Even an encouraging report on the Chinese housing market perversely failed to offer support as it appeared to fuel concerns that more government stimulus measures might not be forthcoming. House prices rose in July in more Chinese cities than declined for the first time in 16 months. Chinese concerns and a strong US dollar once again provided a poor backdrop for industrial commodities weighing heavily on the resource-heavy FTSE 100. Copper slipped to a six year low of $4976 a tonne while aluminium also hit its lowest level for six years. Oil prices remained under pressure with news of an unexpected jump in US crude inventories heightening concerns about global growth oversupply. Brent crude fell to $46.7 its lowest since trading at $45.1 in January marking a decline of over 30% since May 2015. US manufacturers also suffered from the strong dollar as a reading of manufacturing conditions in the New York region fell sharply in August. The Empire State general business conditions index sank to a reading of -14.9 from +3.9 in July marking the worst level since April 2009. The index on a scale where any positive number indicates improving conditions was far worse than the +4.5 forecast by economists. Offsetting the manufacturing data was a better survey of homebuilder sentiment as the National Association of Home Builders' sentiment index marked a post-recession high. Meanwhile housing starts rose to an eight-year peak in July indicating the housing recovery remained on a firm footing although building permits seen as guide to future market conditions fell 16.3% in July. Many investors and economists expect the Federal Reserve to make its first interest hike in nearly a decade next month although minutes of the Fed's policy meeting last month were more dovish than expected. The US central bank expressed concerns about low inflation risks posed by a stronger dollar and a weak global economy prompting many analysts to push back their expectations of a hike until December. UK and US consumer prices both ticked up 0.1% in July although many expect the headline rate to prove temporary. Renewed weakness in oil prices and a 5% cut in gas prices by British Gas later this month indicates a dip back into negative territory remains more likely than not. UK retail sales excluding auto fuel rose in July as low inflation and faster wage growth along with a booming housing market helped support consumer spending. Sales rose 0.4% from June matching the forecast of economists in a Bloomberg survey. Technical analysis of the FTSE 100 depicts the recent weakness after failing to break through resistance at 6760 with the index briefly testing 2014 support at 6200. As a result the oscillators have slid back into acutely oversold territory although the bullish divergence evident from the MACD implies a lack of momentum behind the recent selling. As trading volumes improve I expect to see a recovery in stocks with targets at 6600 and 6760. In conclusion the blue-chip index has fallen over 10% which is a surprising move given the positive outlook. Employment and wages are improving while business confidence and growth are gathering pace. The Greek crisis has been put to bed (at least near-term) and any hike in interest rates is likely to be gradual given the outlook for inflation. China remains a concern although policymakers remain determined to avoid a hard landing and recent data has shown signs of improvement. Rolls-Royce (LON:RR.) the maker of jetliner engines for Boeing Co and Airbus Group SE has glided lower with the general market despite signs of a turnaround at the Derby-based company. The FTSE 100-listed group is still predominantly an aircraft engine maker with about 70% of revenue and profit from the civilian and defence aerospace market. Having been one of the best performers on the market since the financial crisis Rolls-Royce has had a troubled year and a half announcing its first profit warning in a decade in early 2014 which was then followed by a string of downgrades and two further warnings. Oversights include a wasteful £1 billion stock buyback diversification into industries where the company has little experience and a slow transition to new product lines. A new management team led by former ARM Holdings CEO Warren East are in place and Rolls-Royce has already cut job numbers at its aerospace and marine arms in response to the slowdown. On just his fourth day as chief executive Mr East downgraded profit expectations as a result of an ongoing review of the FTSE 100 group while the company's restructuring plan is expected to be announced before the end of 2015. Recent results on 30th July saw profits slump by more than 30% in the first half of the year but the shares bounced as the fall was slightly better than previously expected and the company maintained its full-year outlook. Gross profit came in at £1.27 billion a 6% decline on the corresponding period in 2014 better than guidance of between £395 million and £437 million. Over the first half of this year Rolls-Royce's order book rose by £2.8 billion taking the amount of work the company has in hand to £76.5 billion reflecting six years of sales. The dividend was raised by 3% to 9.27p a share representing a 3.1% twice covered yield in what Mr East said was a 'sign of confidence amid a positive second half outlook'. Mr East subsequently bought £50000 worth of shares at 746p and said: "The continued growth in our order book demonstrates the long-term demand for our innovative products and services and underpins my confidence in the fundamental strength of our business." There has been interest in the engineering sector from several institutional investors and an increasingly influential US hedge fund has been building a stake in Rolls-Royce with a 5.4% holding. Value-Act is well-regarded for the key role it played in shaking up Microsoft Corp's management and touts itself as an investor that works constructively with management to maximise shareholder returns. In the US Warren Buffett's Berkshire Hathaway agreed to acquire aerospace equipment maker Precision Castparts Corp for $37.2 billion Berkshire's largest ever deal. In the near term Rolls-Royce is managing a significant transition from mature engines to newer more fuel efficient ones and remains in talks with Airbus about new projects. Most of the deals to achieve full-year targets have already been booked and the shares are hardly expensive on 14.5x earnings. The chart of Rolls-Royce illustrates the 40% slide since the start of 2014 with recent weakness in the wider market weighing on the improved sentiment towards the company since results. The bullish divergence seen from the relative strength index captures the lack of sales momentum while the recent lows are likely to offer support. Rolls-Royce has a world-leading reputation a strong order book and a new management team to support the turnaround. At the time of writing the share price is 757p which I believe is a good entry level for medium-term investors. Targets are seen at 818p 870p and 946p while traders might consider a stop-loss below the recent low at 715p to minimise risk. This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in Rolls-Royce but client accounts may. The material in this report has come from SI Capital's internal data sources and Rolls-Royce's corporate website.
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