In a recent article I spelled out why the FTSE 100 could recover from the washout of 2018 and hit record highs in the New Year, namely the support lent by a falling pound and a programme of lower-than-expected Federal Reserve rate hikes.
Itâs hard to see any significant rebound in the blue-chip index right now given the degree of investor nervousness. But I believe a stunning rise could indeed be in the offing, and particularly if this other important scenario plays out in 2019.
Could the trade wars settle down?
Along with concerns over aggressive monetary tightening from the US Federal Reserve next year, the other key driver behind falling stock markets of late has been speculation of painful and prolonged trade wars between the worldâs two biggest economies.
Tension over the issue has died back a bit more recently after the US proposed a 90-day break on tariffs with China. I mentioned in a previous article how a blowing-up of rhetoric between Presidents Trump and Xi could drive investor sentiment through the floor again in the coming year, but a thawing of relations could just as easily push the FTSE 100 and other major indices skywards again.
News flow, at least from the American side, has certainly been a little more encouraging of late. On his favoured medium of Twitter, Trump commented last week that âChina wants to make a big and very comprehensive deal,â adding that one could be just around the corner.
His tweets can often be taken with a pinch of salt but that latest statement on trade could be the precursor to something big. Just this week US Treasury Secretary Steve Mnuchin announced that American and Chinese officials would meet in January for fresh dialogue on finding a trade agreement.
The stakes are rising
These talks will prove highly complex politically, needless to say, and promise to have massive economic ramifications stretching possibly decades into the future. But thereâs plenty of incentive for both sides to hammer out a deal.
President Xi will be eager to help reduce the impact of the tariff wars on Chinaâs already slowing economy, particularly after disastrous economic data in recent days that showed industrial production in November rise at the slowest pace for three years, and retail sales expand at their slowest for 15 years.
And the pressure is rising for his counterpart in the White House to find a breakthrough in the coming weeks and months as rising tariff bills smack American businesses already damaged by tightening interest rates and increasing production and labour costs.
Neither side will want to be seen to be backing down, but given the economic risks to both nations if the issue is not resolved, an accord could well be just around the corner. If this does materialise, and Federal Reserve policy also reins in the number of rate rises next year as Iâve also hypothesised, I reckon the FTSE 100 could well pound above the 8,000-point barrier next year.