When Keith Skeoch, the chief executive of Standard Life Investments, predicted in August that the FTSE 100 would break the psychologically all important 6000 level by the end of the year, eyebrows were raised around the city. After all, the market had been in decline since mid-April, and while it had rebounded from the lows reached in early July, no one was forecasting much of a break out.
Indeed, the aftermath of the credit crunch continued to make its presence felt throughout the year. In April, the grim reality of a Greek bail-out triggered the start of the end of the market’s first prolonged run of the year, pulling it down from 5800 to 5060 in a matter of weeks.
Come November, Ireland’s bail-out woes together with further economic gloom around the eurozone had less of a detrimental effect on sentiment. Nevertheless, wider uncertainty among investors about the economic recovery caused enough turbulence to keep everyone guessing on whether or not the market would hit 6000.
December's trajectory has been more promising. With a buoyant run of late, but just three weeks to go, the FTSE 100 today clung close to 5800, offering little indication on which way it would finally move. Spread betting firm Finspreads was out this morning making a year end spread of 5807 – 5821, suggesting that the odds were still firmly against a breakout beyond 6000. In turn, bookies Paddy Power produced odds of 4/7 on the market reaching 6000 by the end of the year, with odds of 5/4 against.
Joshua Raymond, a market strategist at City Index, said:
Historically the month of December has been a good month for the FTSE 100, with the Index rallying nine times out of the last 10 years. Each of these nine times has seen the FTSE rally an average of 3% whilst the only down year in 2002 saw the market fall 5%. December can be a good month for stock indices as traders bet that the stocks could see high demand at the start of the year when funds managers size up their portfolios for the new year while traders start to invest their bonuses. This is why we refer to December as more of a Santa rally.
Raymond said the month had started in bullish form with the market up 5% and it seemed as if equity traders were putting any fears over the knock on effect on key UK banks from European sovereign debt problems to the back of their minds.
“Much of the recent bullish trend in the FTSE 100 has come from strong growth in China supplementing metal demand from key miners that make up the FTSE 100 Index,” Raymond noted. “That said, any more debt shocks similar to that of Ireland could well knock the markets and with low volumes expected over the holiday season, this can make the FTSE even more volatile.”
Angus Campbell, head of sales at City trading firm London Capital Group, said that with another 3.4% to go before the FTSE hits 6000, it was “by no means a dead cert” but considering the gains already seen this month, it remained a possibility, particularly given that December has historically been bullish for equity markets.
“There are key resistance levels the index has to overcome though with the 5890-5900 area being one of them,” Campbell said. “I think if we breach this then we could see 6000 by year end”.
With both the UK economy and the global macro-economic environment being in the weak state that they are, that really would be a Christmas surprise for investors to remember.
Disclosure: No position