(MENAFN- ProactiveInvestors) Equities shrugged off the latest eruption of geopolitical concerns in the Middle East and the S&P 500 traded within 2% of its record close as traders absorbed confirmation of a $160 billion merger in the healthcare sector. The Turkish Air Force shot down a Russian plane after it violated Turkish airspace yet Moscow maintained the plane was over Syria for the entire flight. Despite Vladimir Putin saying the incident would bring 'serious consequences' markets were calmed by constructive comments from Western leaders and the market's reaction echoed what was seen during the recent Paris attacks. The latest US economic releases sent the dollar back towards a 12-year high as the futures market priced in a 74% probability of an interest rate hike following next month's Federal Reserve meeting on 16th December. Gross domestic product expanded at a 2.1% annualised pace better than previously estimated fuelled by improved consumer spending. Meanwhile labour market figures and home price data painted more positive and brighter pictures. Commodity prices however slid to multi-year lows as a strong dollar exacerbated oversupply fears amid concerns about weak demand from China pressuring shares in resource groups. Copper fell to a six-year low while nickel hit a 12-year trough and iron-ore spot prices were around the lowest since records began in 2008. Even gold a traditional bolt-hole in times of geopolitical disruption hit its lowest price since February 2010. European markets remained dominated by expectations that the European Central Bank would ease policy aggressively at its next policy meeting on 3rd December. A report from the Euro zone highlighted the risks to the region from struggling emerging markets prompting speculation that the ECB would widen its bond buying programme and cut rates further to combat deflationary pressures across the continent. On a domestic front equities reacted positively to the Autumn Statement after George Osborne announced measures to support the housing sector. In what's been called the largest housebuilding investment since the 1970s the Chancellor's measures included a £2.3 billion funding pledge and reform of the planning laws towards delivering 400000 affordable housing starts by 2020-21 plus an extension of the Help-to-Buy and shared ownership schemes and a new London Help-to-Buy scheme. Technical analysis of the FTSE 100 shows that despite slipping back to 6000 on 15th November the index is back within its recent trading range between 6270 and 6460. The oscillators suggest there is enough momentum to re-test the recent highs although bearish divergence evident from the stochastic indicates a breakout may not occur on first attempt. Support is seen at 6320 6270 and 6000 while a close above 6460 could trigger a move back up to 6600. In conclusion investors' ability to shrug off recent geopolitical tensions illustrates the underlying support for equities and next week's highly anticipated ECB meeting is likely to provide a further near-term catalyst. Thereafter however I remain cautious as attention turns to the US Federal Reserve policy tightening and how quickly that could evolve in 2016. George Osborne also made reference to the findings of the recent Strategic Defence and Security Review which has committed to spending 2% of the UK's income on new equipment and new capabilities. The defence budget will rise from £34 billion to £40 billion by 2020-21 sending defence related shares sharply higher with engine-maker Rolls Royce (Epic: RR.) benefitting from the improved sentiment. In an interim management statement on 12th November the aerospace group said its profits next year will be hit by "headwinds" amounting to £650 million resulting from "sharply weaker demand" more than double the £300 million it outlined just four months ago. Rolls Royce has warned on profits five times since the start of 2014 reflecting reduced spending by defence customers macroeconomic uncertainty geopolitical events outdated engines and falling commodity prices especially the downturn in the offshore oil and gas industry. At the start of this year Rolls Royce expected pre-tax profits in 2016 would be in line with last year at circa £1.35 billion but in July that fell to £1.1 billion and investors are now looking at around £750 million. Yet uncertainty remains after CEO Warren East said earlier this week that visibility on the near-term performance of the company remained poor and a sixth profit warning in less than two years was possible. 'The ground is not as solid as I would like it to be' he added. On Tuesday Mr East unveiled a major restructuring plan that aimed to simplify the organisation streamline senior management reduce fixed costs and add greater pace and accountability to decision making. The strategy however lacked detail and the cost savings were not as aggressive as many had hoped with cut-backs of between £150m and £200m per year from 2017. Rolls Royce currently trades on 11.1x earnings but with earnings per share anticipated to fall from about 54 pence per share this year to about 30 pence next year this puts the company on 20x projected earnings. The current yield is 3.5% but cash is getting tight and management has already warned the dividend payment is under 'review'. Based on the historical earnings cover at Rolls Royce many analysts expect the dividend to be halved to 12p (a 2% yield) although it could be lower if conditions deteriorate further. The chart of Rolls Royce captures the downtrend experienced since May with the trend line and 50-day moving average providing strong resistance to any relief rally. The stochastic appears to be rolling over indicating fading momentum while the bearish divergence suggests there is little conviction behind this recent upturn. The outlook for Rolls Royce remains uncertain and the dividend faces the chop so I believe this week's strength due to the Autumn Statement and Mr East's underwhelming turnaround strategy offers another opportunity to short-sell the shares. At the time of writing the share price is 600.5p but if traders are able to short the shares at 639p a tight stop-loss above resistance at 665p offers an attractive risk / reward bias with targets seen at 607p 581p and 509p. This report was written by Mark Allen equity and derivative specialist. The writer does not hold a position in Rolls Royce but client accounts may. The material in this report has come from web-based data sources and Rolls Royce's corporate website.
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