The last seven trading sessions have seen the FTSE 100 make gains of 2.5%, as investor sentiment has improved dramatically following a fall of almost 7% in the previous few weeks.
Indeed, it seems as though investors have significantly changed their views on the potential challenges that face the global economy in little over a week.
However, those problems are very much on the horizon and, although other news has replaced many of them on our front pages, they remain a threat to the short-term performance of the FTSE 100. Heres why.
While bank stress testing dominates headlines right now, it does not change the fact that the Eurozone is seemingly on a path to deflation. Indeed, inflation in the slowest growing region in the world was just 0.3% last month and, with the ECB seemingly incapable of conducting a sizeable asset repurchase programme, it seems fairly likely that deflation will strike.
In addition, the biggest and most important economy in the region, Germany, remains on the brink of recession. If it does deliver a second quarter of negative growth then confidence in the Eurozone is likely to weaken significantly and could cause the FTSE 100 to fall.
The Federal Reserve
While the Feds monthly asset repurchase programme was never going to last forever, this months end to what amounted to economic life support means we are now in unchartered territory. Clearly, the financial crisis would have been far, far worse had it not been for the $85 billion per month programme and, it must be said, the FTSE 100 would not be sat at over 6,000 points right now if it had not been undertaken.
While the US and global economy is performing relatively well at present, we simply do not know how much of this is due to the actions of the Fed. If economic data does start to disappoint, it could hurt confidence significantly and cause the FTSE 100 to fall.
Although we have heard relatively little regarding Chinas soft landing in 2014, the worlds second largest economy is certainly struggling to meet expectations. This can be seen most evidently in demand for luxury goods, which has dropped significantly during 2014. Although there are bound to be lumps and bumps along the road to developed status, further weakness from China could hurt earnings numbers for FTSE 100 firms and send the index lower.
While the long-term future of the FTSE 100 remains bright, recent gains do not mean that the FTSE 100 is out of the danger zone, since the aforementioned problems still remain.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.