With the EU referendum now less than a month away, the polls are telling us one thing: it’s likely to be a relatively close result. This means there’s a real chance that in just a handful of weeks’ time, the UK will be preparing to no longer be a member of the EU and will seek to go it alone for the first time in a generation.
While this may be a considerable risk to the UK economy and to the FTSE 100 in the short run, it’s not the only risk which the FTSE 100 faces. In fact, investors in the UK face a much bigger threat which has the potential to cause significant volatility and a period of depressed share prices.
Interest rates
That risk is US interest rate rises. The first rate rise occurred in December and since then the S&P 500 and FTSE 100 have been hugely volatile. Furthermore, in the weeks and months following the rate hike of 0.25%, share prices came under such severe pressure that the Federal Reserve decided to delay further rate rises until the market was in a more settled state. And with it apparently being so at the present time, there seems to be a good chance that the Federal Reserve will raise rates next month.
Although the impact of the next rate rise may not be as significant as the first, it’s still likely to change investors’ perceptions of the outlook for the US and global economy. While the US economy is continuing to post strong economic data on the whole, there’s a real risk that a tighter monetary policy will act as a brake on further progress. And even though the Federal Reserve is at pains to point out to investors that it’s not seeking to raise rates any faster than they need to, such rises still bring a huge amount of uncertainty to global stock markets.
A key reason for this is that it could be argued the bull run that has occurred since the credit crunch has largely been due to the availability of cheap money. In other words, the US economy hasn’t been forced to exist in more ‘normal’ economic times for a number of years, since an interest rate of near-zero encourages spending, borrowing and investing. However, all those things are set to gradually become less attractive and this should naturally cause at least a degree of pressure on the economic outlook.
Certainly, Brexit has the potential to hurt investor sentiment in the short run as it brings uncertainty. This doesn’t mean it’s necessarily a bad thing in the long run, but because it’s an unprecedented event it’s likely to make the investment world somewhat nervous. But the real danger to investors’ portfolios could turn out to be US monetary policy, even though Brexit, not a more hawkish Federal Reserve, seems to be dominating the financial news headlines.