The FTSE 100 is back above 7,000 points! Here are 2 reasons why it could keep on surging
Share market investors needed a boost after the washout in risk appetite which caused the FTSE 100 to fall by double-digit percentages in 2018, and boy have they received it in a spectacular start to 2019.
The worries that caused Britain’s biggest index to put in the worst performance for more than a decade — most pertinently chatter over further Federal Reserve rate hikes, and concerns over the impact of trade wars on the Chinese and US economies — remain no less important as we kick off the year. But news flow surrounding both issues has improved in recent days, and with the Footsie back above 7,000 points and the bit firmly between its teeth, I reckon it could be about to explode.
The Fed pitches in again
The FTSE 100’s charge in end-of-week trade was spurred by yet more dovish comments from Fed chair Jerome Powell late last night.
Talk from the central bank chief became a lot less hawkish in the latter months of 2018, surely manna to the ears of President Trump who has long criticised the domestic rate hikes in threatening to choke off economic growth.
And Powell’s comments have become even more soothing since then. During December, he touted the idea of two benchmark rate rises in 2019, but last week in Atlanta suggested that such hikes are by no means a given. He repeated his earlier claim that there is “no pre-set path” for monetary policy, and added that “with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
The bank chief showed his dovish side again last night in a statement to The Economic Club of Washington DC, Powell repeating his claim that the Fed can be “patient” before pressing the trigger on more rate rises. What really got investors excited, though, was his hypothesis that the Fed could “lower [its] rate path” and put those two planned rate increases to the sword.
Trade talk progress
But as I said, the possibility of looser-than-expected monetary policy this year has not been the only driver of share prices of late, signs of progress on the trade front between Washington and Beijing also supporting market appetite.
Mid-level discussions on future trade between the global superpowers went off without a hitch earlier this week, talks that the Chinese Ministry of Commerce described as “extensive, in-depth and detailed” and resulted in the country pledging to buy more American agricultural goods, energy and manufactured products.
The groundwork now seemingly having been laid, there is the possibility for much more progress in the coming weeks, with US Treasury Secretary Steve Mnuchin suggesting that Chinese Vice-Premier Liu He will meet American Trade Representative Robert Lighthizer in Washington on January 30 and 31.
The White House will be eager to get a breakthrough to give the stock market a boost following last year’s heavy sell-offs, while China will be desperate for a deal to give its struggling economy a shot in the arm. Economic and political considerations mean that a deal is far from a given, but signs of additional progress later this month could give share markets another significant shot in the arm.
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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.