The relatively high degree of volatility seen in the last few months of 2014 has continued into 2015, with the FTSE 100 being down over 3% already this year. Key reasons for this fall are a continuing decline in the price of oil, further uncertainty with regard to the performance of the Russian economy, as well as fears surrounding the outcome of the upcoming Greek election.
Clearly, there are significant risks ahead for the FTSE 100 that could easily cause it to move to below 6,000 points from its current level of 6340. Were it to do so, it would be the first time this has taken place for over two years. However, there is also a major catalyst that could push it to 7,000 for the first time ever: quantitative easing (QE).
ECB Action
While its Central Banking peers in the US, Japan and the UK have undertaken vast QE programmes in recent years, the ECB has instead done comparatively little to try and improve the outlook for the Eurozone. Certainly, it has now ‘caught up’ with regard to interest rate cuts, with the Eurozone rate being just 0.15%, and the ECB has been active in terms of various programmes designed to ease liquidity within the banking sector. However, until now, the prospect of QE has seemed to be decidedly off the table.
The main difference today, though, is that the Eurozone is facing a very real threat of deflation. This seems to have sprung the ECB into action, with it apparently on the brink of launching a considerable QE programme of its own. This could be announced as soon as this week, with the Eurozone’s inflation figures being released on 7 January and having the potential to show that price levels within the single currency region are in decline.
The Effect On The FTSE 100
Clearly, a QE programme in Europe may or may not work and, even if it does work, will take time to have the desired effect. However, the mere announcement of it could lift investor sentiment to such a degree that the FTSE 100 makes significant short-term gains and reaches record highs over the next handful of weeks.
Of course, the lack of an announcement could have the opposite effect – especially if inflation figures for the Eurozone do disappoint. This possibility, alongside the potential for a change in government in Greece when it holds a snap election on 25 January and further declines in the oil price and Russian economy, mean that the FTSE 100 could also fall heavily in the short term, too.
