It’s a scary time to be a FTSE 100 investor right now. Britain’s foremost index is now down 12% since the start of 2018 and it came within a whisker of closing below 6,700 points just yesterday. And there are plenty of reasons why the Footsie could extend its painful late-year slide into 2019.
That said, there are plenty of glass-half-full investors out there who argue that some of the fears surrounding share markets have been overplayed and that the FTSE 100 could charge higher soon, possibly to fresh all-time peaks above the current record around 7,878 points.
Could a hard Brexit happen?
One of the reasons for such bullishness is the possibility that a disorderly Brexit in March could cause sterling, which has been tracking lower against the dollar again during these final months of the year, to collapse through the floor. This would help the Footsie to climb as those firms that report in foreign currencies — firms that form a huge proportion of the index — receive profits boosts from any fall in the pound.
The situation surrounding our withdrawal from the European Union remains extremely fluid and a range of options remain possible, from a no-deal Brexit to a Norway-style trade agreement, to the possibility of no exit at all in the event of a second referendum.
But the chances of a catastrophic departure have risen following the government’s decision to step up no-deal planning on Tuesday, a programme that has prompted the EU to announce reciprocal measures today. In this highly-charged game of chicken the possibility of Britain falling off that dreaded cliff-edge no longer appears the stuff of fantasy.
Needless to say that City consensus sees there being plenty of scope for sterling to bleed out in the coming months. Should a no-deal Brexit indeed transpire then the pound could fall 5% to 10%, according to money manager Russell Silberston of Investec Asset Management for one. And the economic consequences of a disorderly withdrawal in March could keep sterling under pressure for many years to come.
A more doveish Fed?
One of the biggest fears hitting all the world’s share markets has been related to the Federal Reserve and its programme of interest rate hikes.
The central bank has raised the benchmark rate three times during the past nine months, and given the strength of the North American economy it’s quite possible that extra increases are just around the corner (possibly as soon as later today), something which threatens economic growth in the US and further afield.
However, with concerns over a sharp cooling in the global economy growing as Europe falters and China slows, and financial market volatility picking up, financial commentators have been scaling back their bets on how many times the Fed will indeed tighten monetary policy in 2019.
Indeed, there’s been an influx of bets on just one hike occurring next year, with speculation rising after Fed head Jeff Powell said in late November that rates were just below levels at which further rises would be necessary. Such a scenario could provide the FTSE 100, along with the rest of the world’s stock markets, with a hefty dose of jet fuel in the New Year.
