Rolls-Royce shares dive on profits warning

There was no clear trend in London's stock market yesterday as the recent contrasting performances of the massively influential sectors - the oils and telecoms - were reversed and as financial stocks fell back.

There were also shocks from two of the FTSE 100 constituents Rolls-Royce and Hilton Group which did nothing to bolster confidence.

The international background remained reasonably encouraging. Wall Street's performance on Wednesday caused no problems, with the Dow Jones Industrial Average up five points at the close and the Nasdaq Composite up more than 50 points. And US markets gave no cause for concern yesterday, either, with the Dow looking comfortable and up 20 points and the Nasdaq up the same as London trading drew to a close.

Sentiment on Wall Street was boosted by news that US durable goods orders fell 12.4 per cent in July, the biggest monthly fall on record.

The day's biggest story was the profits warning accompanying Rolls-Royce's interims, which saw shares plummet more than 22 per cent, amid some of the heaviest trading on record.

At the finish of a session featured by a sharp increase in market turnover, the FTSE 100 was left with a 9.2 decline at 6,557.0. At its best, in mid-morning, the index was up almost 40 points, as telecoms stocks raced higher after their recent bout of underperformance.

Although the 100 index remained in positive territory until the mid-afternoon, sentiment was always fragile and seen as likely to crumple in the face of any concerted selling efforts in some of the heaviest weighted sectors.

It was a different matter outside of the top 100 stocks. The FTSE 250, SmallCap and Techmark 100 indices all made good progress.

Dealers said that outside of the frontline areas of the market - the telecoms, oils and banks, which are subject to specific stresses - the overall market continued to feel reasonably secure. "The interest rate outlook seems benign and one has to feel optimistic as August, the prime holiday month, draws to a close. There is a real hope that September will bring a resurgence of buying interest," said one.

In an asset allocation analysis published this week the strategy team at Deutsche Bank said: "The UK equity market comes out poorly. We see no strong positive reasons to buy the market and the negatives lurk in the background. In our opinion there is still a risk that interest rates will rise, the outlook for profits growth is less exciting than elsewhere, and the readings on sentiment and liquidity are uninspiring."