The past few years have seen one of the greatest stock market rallies of all time. The FTSE 100, along with other markets, has hit an all-time high and, on the whole, investors are upbeat about the market’s outlook.
However, it’s this kind of buoyant atmosphere that’s causing some market commentators to warn that a crash could be just around the corner. And it is easy to see why.
Multiple catalysts
Unfortunately, there are two key speed bumps coming up in the next six months that could derail the market’s rally.
The most pressing issue is the Greek crisis.
If you keep an eye on the markets, I’m sure you’ll be fed up of hearing about this…
The majority of lawmakers, central bankers and economists want to see an end to this crisis as soon as possible. Although, how the crisis finally ends could be a deciding factor in Europe’s future.
A Greek default could start a wave of panic selling across European markets. It’s likely that negative investor sentiment will also spill over into international markets.
But Greece isn’t the only catalyst that could spark a sell-off.
The US Federal Reserve is widely expected to raise interest rates later this year. While this is not usually a bad thing, there are concerns that a rate rise could spark a sell-off in corporate debt.
As corporate debt investors all rush for the exit at once, the market will become extremely volatile. Equity markets are unlikely to escape the pain.
Spill-over effects
Either of the two catalysts above could spark a global sell-off. If the sell-off reaches China, there could be huge implications.
You see, the Chinese equity market has been in bubble territory for some time. The rally has been driven by increased levels of borrowing. Chinese margin debt has reached the highest level ever recorded for any stock market.
Additionally, Chinese corporations are struggling with high levels of debt, and the country’s property market is showing signs of strain.
As a result, China’s financial market is extremely fragile. Even the slightest shock could hit the country hard.
For the FTSE 100, a Chinese crisis would be terrible news. As a global stock index (more than 70% of the FTSE 100’s profits come from outside the UK) the FTSE 100 is extremely sensitive to global shocks.
Moreover, around a fifth of the FTSE 100’s constituents are resource companies. A crisis in Asia would curb demand for key resources, hitting the profits of miners like BHP and Rio Tinto.
As an Asia-focused bank, HSBC, one of the FTSE 100’s largest constituents, would also take a hit. Together, miners and HSBC make up a sizable chunk of the FTSE 100, and if they start to fall, the index will be dragged down with them.