Today I’m counting down the three main threats facing the FTSE 100 (INDEXFTSE: UKX) in the near-term and beyond.
3) States slowing?
Economic data from the world’s largest economy, the USA, naturally commands much attention from financial markets.
So news that the Federal Reserve has once again trimmed its growth forecasts came as a major concern. The bank now expects the US economy to grow 2% in 2016, it advised last week, down from March’s projection of 2.2%.
The Fed noted that “the pace of improvement in the labor market has slowed,” adding that “although the unemployment rate has declined, job gains have diminished.” The US economy created just 38,000 jobs in May, the worst reading since 2010.
2) China slides
And America isn’t alone in battling a cooling economy.
Indeed, the latest Caixin manufacturing PMI survey from China came in at 49.2 for May, marking the 15th straight month below the expansionary/contractionary watermark of 50.
The continued intervention of the People’s Bank of China has failed to stimulate domestic consumption to the levels it had hoped for, while exports also continue to toil. These fell 4.1% year-on-year on a dollar-denominated basis in May.
China of course means a huge deal to the commodities sector, so predictions of further weakness for the economy bode ill for the FTSE 100 thanks to its heavy weighting towards raw materials giants like BHP Billiton and Rio Tinto.
1) Brexit beckons?
But without doubt, the number one fear striking at the heart of investor confidence is the prospect of Britain slipping out of the European Union later this week.
The possibility of the UK separating itself from the rest of Europe was favoured by a minority just a few years back. But the leave campaign has steadily gained ground since the start of 2016, and a number of pollsters have suggested the majority of Britons are erring on the side of exit.
However, as last year’s British general election showed, there can often be a variance between what polling data suggests and what the day after the booths close actually presents. Plus, since last week’s senseless murder of MP Jo Cox polls are showing opinion tilting slightly back towards remain.
Still, the upheaval created by a withdrawal could cause huge ramifications for the domestic economy. Rolls-Royce told its employees last week that “uncertainty created by Brexit puts a lot of [investment] decisions on hold and that pause is something that our US competitors don’t have to cope with.”
It would take around two years for Britain to successfully separate from the rest of the EU, it has been estimated, a period that could keep the country’s blue chip companies on tenterhooks. And of course, the long-term economic ramifications of a leave vote could significantly damage their earnings performance.
Broker Investec advised that UK equity funds endured $1.1bn worth of outflows last week, the second-highest level during the last decade. And I believe selling activity could pick up should Britain vote to leave the EU on Thursday.