The FTSE 100 index declined for the second straight day as the market remained concerned about the health of UK companies. The biggest corporate news was that Rolls Royce, the engine manufacturer, which announced its biggest job cuts. The market is also concerned about the rise of fallen angels in the UK.
Rolls Royce share price falls after job cuts
Rolls Royce share price was among the top losers in the FTSE 100 today. The shares declined by more than 30 basis points after the company announced fresh job cuts as it battles the coronavirus pandemic. The company will slash more than 9,000, most of which are in the United Kingdom, where it employs more than 52,000 people.
Rolls Royce share price declined by more than 2.50%.
Rolls Royce is facing two problems at the same time. First, its old problem of Trent 1000 engine remains. The problem started a few years ago, when airlines started to report cracks in this engine. This started a multi-month investigation, which cost millions of dollars to rectify.
Second, the coronavirus pandemic has brought global travel to a halt. As transport has declined, many airlines have found themselves in trouble. The South African airlines, Virgin Australia, and other airlines have gone out of business. Emirates, one of the biggest customers of Rolls Royce is thinking of idling some of its planes. This means that the company could lose most of its orders.
The decline in air transport is important for Rolls Royce share price because it derives more than 50% of its revenue from the civil aviation business. Other revenue comes from the defense sector and other engines business. At the same time, the movement of the company tends to affect the FTSE 100.
Contrary to popular belief, Rolls Royce does not make money by selling engines. In fact, it sells most of its engines at a loss. Instead, it makes money by getting into long-term contracts by airlines to maintain the engines it sells them.
FTSE 100 falls as more fallen angels expected
Another reason why the FTSE 100 is falling is that more companies are expected to move into the fallen angel category. A fallen angel is a company whose bonds are in junk status. According to S&P Global, hundreds of companies in the junk territory is at a record level of 111. This risks debt worth more than $444 billion. The company named several companies in the FTSE 100 as potential targets. Some of these are Marks and Spencer, Carnival, and Virgin Money.
Top movers in the FTSE 100 today
The top movers in the FTSE 100 were Carnival, the troubled cruise liner. The stock declined by more than 3%. It was followed by Melrose Industries, RBS, Lloyds, and Standard Chartered. The best performers were Experian, AstraZeneca, and Hikma Pharmaceuticals.
The FTSE 100 is trading at £5,940, which is lower than yesterday’s high of £6,104. On the daily chart, this price is slightly above the 50% Fibonacci retracement level. It is also along the 50% exponential moving average. A close above the yesterday’s high will mean that there are still more buyers in the market, who will push the price higher.
On the flip side, a move below £5,644, will invalidate the bull thesis because it will signal that there are still more sellers in the market.