Back in August and early September, it was taken for granted by many investors that the FTSE 100 would hit 7,000 points in 2014. Since then, however, fears surrounding the impact of ebola, a weak Eurozone and a US economy that is ending its monthly asset repurchase programme have all weighed heavily on the index. As a result, it now stands at 6,600 points.
However, a gain of just 6.1% would be enough to push it past the psychological level of 7,000. Here’s why I think that will happen before Christmas.
All-Time Highs
Although the US stock market also wobbled in September and October, it has bounced back much more strongly that the FTSE 100. Indeed, it made all-time highs just yesterday, with the S&P 500 and Dow Jones indices closing at record levels. And, with the FTSE 100 still being very highly correlated with its larger peer across the pond, it seems more likely than not that we will have our own record high to cheer about in the near future.
ECB Action
While the Bank of England and Federal Reserve have pumped £billions into their respective economies in recent years, the ECB has done relatively little to boost the economic performance of the Eurozone. However, that’s all about to change, since inflation of just 0.3% last month seems to have caused appetite for QE to increase and the ECB will now go ahead with their own asset repurchase programme.
Of course, it will take time to have an impact on the Eurozone economy and it does little to correct the economic imbalances that still exist between the north and the south of the region. However, it should continue to boost sentiment among investors and could prove to be a major reason why the FTSE 100 finally moves above 7,000 points.
Ebola
While Ebola remains a serious threat to West Africa and to the rest of the world, investor perceptions of the disease seem to have changed somewhat. Indeed, fears surrounding Ebola seem to have lessened and, while it is still on investors’ radars, the market does not seem to believe that it will cause a severe slowdown in global economic performance in the short term. That’s not to say that it isn’t still a major threat, but that it is no longer holding sentiment back to the same extent as it was. This should make it easier for the FTSE 100 to move upwards in future months.
More QE?
Of course, a potential catalyst for the FTSE 100 could be more QE from the Bank of England. This may seem rather unlikely, with the UK economy being the fastest growing economy in the developed world. However, with inflation being just 1.2% last month and on a downward trend, it could give the Bank of England license to restart its asset repurchase programme. In other words, with deflation being quite possibly the biggest fear of central bankers, more QE may be necessary to stave off this risk.
While this may not happen before Christmas, investors may anticipate the move and begin to price in more QE. In turn, this could push the FTSE 100 beyond 7,000 points before Christmas.
