Weak underling results at Royal Bank of Scotland and caution ahead of this afternoon’s all-important US non-farm payroll data weighed on the FTSE this morning.

Royal Bank of Scotland Group, which is 70% owned by the government, plunged 15% to 45.41p a share this morning, after its interim results unveiled a surge in bad debts. Unlike Lloyds Banking Group, which recently stated that its write-offs had peaked, RBS’s chief executive Stephen Hester told the BBC that there were no ‘miracle cures’ and that it was ‘difficult to know for certain’ if write-offs at his bank had peaked. He also said that the bank will incur restructuring charges over the next three years and warned that ‘overall results may not substantially improve until 2011 and a full recovery will take time.

‘There is every sign that our financial performance over the next two years, at a group level, will be poor due to the severe economic downturn in 2008 and 2009 and consequent impact on impairments and funding costs,’ Mr Stephen Hester said in a statement accompanying the bank’s interim results.

The bank today posted a first-half pre-tax profit of £15 million (excluding the write-down of goodwill and other intangible assets), but incurred a net loss of £1.04 billion from £827 million the year before after setting aside £7.52 billion to cover bad debts and declining asset vales. This was substantially worse than Bloomberg’s median analyst estimates for a net profit of £1.1 billion and a predicted £6.4 billion in bad debts.

Rival banks were struck by a bout of profit taking following RBS’s results, with Lloyds Banking Group plunging 7.2% to 97.21p, HSBC sliding 3.8% to 635.6p and Barclays 3.1% lower at 343p. Standard Chartered performed relatively better, down by only 1% to 1352p.

Miners also exerted pressure on the FTSE this morning after copper dropped, as investors speculated that the metal’s ascent may have outpaced the recovery in global demand. Nickel, lead, zinc and tin also declined. Shares in BHP Billiton, the world’s largest miner, retreated 2.3% to 1537.5p, Rio Tinto declined 3.4% to 2409p, and Kazakhmys slid 4.6% to 878.5p. Eurasian was the sector’s worst performer, down 7.5% to 813.5p.

Defensive shares, in the meantime, were in favour, as investors turned to assets perceived to be more resilient to downturns. Vodafone added nearly 2% to 126.8p, Imperial Tobacco rose 0.4% to 1654p, AstraZeneca climbed 1.4% to 2760p while BAE Systems rose nearly 1% to 319.5p.

IT services group Logica also managed to buck the negative trend dominating the FTSE this morning, after unveiling an 85% surge in the first-half profit and saying that its cost reduction programme will help it maintain its margins for the year. Its share climbed as much as 1.8% to 111p.

Elsewhere, the Office for National Statistics revealed that factory gate prices rose 0.3% in July but declined 1.3% on the year. This was the lowest annual rate since November 2001. Producer price input prices, meanwhile, fell by a bigger-than-expected 12.2% on the year, the biggest drop since September 1986, as a result of a drop in crude oil prices.

Today’s data shows that deflationary pressures are still a threat, which may help explain why the Bank of England yesterday extended its quantitative easing policy by £50 billion. The central bank is due to release its latest set of growth and inflation forecasts on Wednesday.

By around 10:30am (London time), the FTSE 100 was down by 45.89 points (-0.98%) to 4644.64, while the broader FTSE 250 was knocked 103.59 points (-1.24%) into the red at 8273.96. In the meantime, September Dow and S&P 500 futures were trading between 0.24% and 0.30% lower, indicating that Wall Street is set to open in negative territory.

It is also important to note that US labour market figures are scheduled for release at 1:30pm (London time) today. Bloomberg predicts that US non-farm payrolls will show that American employers shed 328,000 workers in July following a 467,000 cut the month before. The US unemployment rate, meanwhile, is expected to rise to 9.6% from 9.5% in June.

[1] Source: BBC News (7 August 2009)