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3 reasons why the FTSE 100 could enjoy a Santa Rally!

Royston Wild
Little girl kissing her granddad at christmastime

With the FTSE 100 sinking through the floor, there’s clearly reason for share pickers to be careful as we close out 2019.

The UK’s prime share bourse is now trading at its lowest since mid-October and it’s possible that, as tensions over US-led tariff wars heat up, a fall below the critical 7,000-point marker could be just around the corner. Drop through this level and all bets are off as to how low the Footsie could go.

Trump talks

However, it’s not all doom and gloom. There are a number of factors that could help the Footsie extend its year-to-date gains in December (it’s already up around 7% since the start of January).

In a last piece, I explained in some depth why US President Trump’s ongoing trade fight with the Chinese, his decision to put new tariffs on some South American metal imports, and his threat to whack new costs on European goods has smacked the FTSE 100 and other global bourses more recently. And it looks as if these issues are set to dominate investor thinking as we move into 2020 too.

However, if experience has taught us anything it’s that the current White House resident is nothing but impossible to predict. It’s not outside the realms of possibility, then, he could row back on some of the tough talk with the US’s major trading partners. And this would give global share bourses a welcome pre-Christmas gift.

No Tory majority

In that article mentioned above, I also explained why the FTSE 100 could fall in the event of the Conservatives securing a parliamentary majority following December 12’s general election. Why? The subsequent surge in the pound that would likely take hold, one that would harm earnings for all of the index’s firms which do their accounting in overseas currencies.

Of course then, it’s logical to expect the opposite to occur and for the pound to sink should the British public return another hung parliament and thus prolong the Brexit uncertainty for 2020, and possibly much longer. Indeed, analyst Michael Cahill of Goldman Sachs estimates sterling will reverse to $1.25 should Prime Minister Johnson fail to get control of the Commons, down from recent levels around $1.30.

Signs of Fed rate cuts

Upcoming comments from the Federal Reserve concerning future rate cuts is another possible driver for the FTSE 100 in end-of-year trade.

Latest comments from central bank lawmakers suggested they will adopt a ‘wait and see’ approach before adding to the three benchmark rate cuts it’s enacted so far in 2019.

Another reduction at this month’s meeting is unlikely then, but with patchy economic data still coming in (like ISM manufacturing PMI and construction spending surveys just yesterday) and trade wars rumbling on, it’s possible Fed chair Jerome Powell could be a lot more accommodative in his next set of comments. And this would give the FTSE 100 a welcome boost in end-of-year business.

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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.

Motley Fool UK 2019