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Why The FTSE 100 Is A Binary Trade Right Now

It’s perhaps inevitable that the Eurozone and Greece have reached the current state of affairs. After all, history tells us that austerity in the extreme rarely works and that, eventually, the country turns to a party that promises to end the harsh financial penalties placed upon it.

So, with Greece’s unemployment rate being stuck at around 25% and youth unemployment being an incredible 50%, it is little wonder that Syriza has been voted in and is now seeking a new deal with Greece’s lenders.

The Eurozone

Clearly, the outcome of the talks are going to have a major impact upon the futures of the Eurozone and of Greece. If the result is viewed as being too kind on Greece by the rest of the Eurozone, then other countries facing a decade of austerity are likely to seek to renegotiate the terms of their repayments, thereby causing further turmoil in the region. However, if the result is too harsh on Greece then it is likely to mean that, at some point further down the line, another round of negotiations will take place, as the Greek electorate seek real change.

The FTSE 100

While the FTSE 100 is sitting near to its all-time high, it is unlikely to remain there for too much longer. Certainly, it has very bright long-term prospects as the global economy continues to make encouraging progress, but the outcome of the Greek debt talks is likely to impact severely on the UK’s main index in the short run.

In fact, if the talks end without a deal and Greece leaves the Eurozone, this could easily wipe hundreds of points off the FTSE 100’s price level. Similarly, a deal that is viewed as acceptable to all sides could spur the FTSE 100 on so that is gains hundreds of points and surpasses 7,000 for the first time in its history. In other words, the FTSE 100 is akin to a binary trade at the present time: it could move very sharply in either direction in a very short space of time.

Looking Ahead

Clearly, all investors would love to know which direction is most likely, but the reality is that it is impossible to predict. We are in unchartered territory and simply cannot gauge the outcome of the talks until it is announced to the wider world.

However, investors can react as they always should in terms of assessing whether there is a sufficient margin of safety on offer given the present outlook. In my view, the FTSE 100 still looks very cheap and there are a number of high-quality companies trading at very reasonable prices, with strong growth and income prospects on offer.

So, while the short run could either be hit or miss for the FTSE 100, its long term future remains very bright and, while other asset classes have had a buoyant period in recent years, shares still seem to offer the best opportunity to make stunning gains.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.