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2 reasons why the FTSE 100 could plunge in 2020!

After what had already proved to be a solid year for the FTSE 100, a Santa Rally in the run-up to the festive break has put the cherry on the cake.

Fresh gains in Monday trading mean that Britain’s blue-chip index is up 12% since the start of January, with current levels above 7,500 points being the highest since the sunny days of early August.

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Not meaning to sound the (Christmas) party pooper but I’d advise investors not to get too giddy.  There are several reasons why the Footsie could find itself backsliding in 2020, so be careful out there!

Trade tensions

The FTSE 100’s end-of-year ascent has been (largely) down to hopes that Presidents Trump and Xi will draw a line under recent trade tensions that have rocked global growth. US-Chinese trade issues have plagued industry for almost 18 months now. So news that lawmakers were on the verge of signing off a ‘phase one’ deal has given rise to hopes of supercharging global investment once more to get growth moving again.

This is the closest point that North American and Asian trade negotiators have reached since mid-2018, but it’s critical to remember that this phase of negotiations still hasn’t been officially signed off. The exact nature of those critical “structural reforms and other changes” that China has pledged to make to its economic and trade regime remain elusive and there’s still plenty of scope for a gigantic spanner to be thrown in the works. What’s more, the terms of the accord may have been agreed but the legal wording still has to be finalised.

Pound pressure

Footsie investors also need to be on their guard against a possible surge in the value of the pound in 2020. Any rise in sterling provides a headwind for those companies that report in foreign currencies, of which there are a great many on the UK’s premier share index.

The British currency galloped following the Conservatives’ victory at last week’s general election, their thumping majority paving the way for Prime Minister Johnson’s EU withdrawal agreement to be signed off next month. Fortunately, those hopes over trade talks have helped to mask the impact of the sailing pound.

As I’ve explained before, the possibility of an economically-damaging no-deal Brexit remains alive for the end of 2020. That’s the date by which a trade deal between UK and European Union lawmakers has to be reached, or at least that’s according to those in London. But the scale of the work that needs to be undertaken, and with less than a year to be completed, would suggest otherwise.

I wouldn’t be surprised to see that deadline being kicked into the long grass soon into the new government’s tenure, however, something which could give sterling an extra bounce. Johnson is no stranger to postponing supposedly-concrete deadlines, after all — see the previous Brexit deadline of October 2019 for evidence of this — and he now has the numbers in the Commons to do just as he likes.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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