FTSE 100 overcomes latest political shock

The FTSE 100 is a peculiar beast. Regularly written off in 2016, the index has defied the consensus view each time and rallied hard. It surged almost 1,000 points after the February crash, over 1,300 following the apocalyptic EU referendum, and avoided the abyss even after Donald Trump won the US presidency.

Now, with the Italian banking system in jeopardy after Italy rejected economic change, yes, you've guessed it, the FTSE 100 is deep in the blue Monday.

Down 33 points seconds after the opening bell, the blue-chip index peaked at a whisker under 6,800 less than an hour later, up 69. It's down a bit since, but there are forces at work here that clearly believe there's value in the UK market. It was the same with both the FTSE 250 and All-Share indices.

Clearly, predicting where stockmarkets are heading next has become an impossible task, certainly over shorter timeframes.

What is clear, however, is that investors are not put off by political shocks, or perceived negative outcomes like in Sunday's Italian referendum.

Sunday's outcome makes it more difficult for Italy's ailing banking system to recapitalise itselfItaly's stagnant economy is in desperate need of lift, which prime minister Matteo Renzi argued his proposed reforms would deliver.

But the electoral shake-up needed to make it happen was clearly too much for voters, who rejected it by an overwhelming majority of 60:40. Fear now is that they'll get another trip to the polls soon, this time to vote on membership of the EU.

"In the medium term Sunday's outcome will make it increasingly difficult for Italy's ailing banking system to recapitalise itself," argues Stefan Isaacs, deputy head of retail fixed interest at M&G.

"This will in turn continue to weigh on economic growth and continue to raise doubts about the long-run sustainability of Italy with the current EU framework.

"We do not believe current valuations adequately compensate investors for the risks involved and therefore remain cautiously positioned."

Concerns brushed off

Concerns about a potential run on the banks were brushed off in London, however. All our domestic-focused banks are higher Monday, and there's a feeling that weakness heading into this referendum was overdone.

Remember, too, Austrian voters rejected far-right candidate Norbert Hofer in presidential elections there over the weekend. That's certainly a plus for the single market.

Traders are also dumping defensive stocks with gusto. Gold miners Fresnillo, Randgold and Polymetal are down 3-4%, followed closely by Severn Trent and United Utilities.

Old reliables like Unilever and Reckitt Benckiser are back in favour after falling heavily the past few months. Supermarkets Tesco, Morrisons and Sainsbury's are in demand as Christmas takes hold, while investors chase high-yielding insurers Legal & General, Prudential and Direct Line.

"These days it seems that the 'buy the dip' mentality is so ingrained, that sometimes investors don't bother waiting for the dip," quips Olly Russ, a fund manager at Liontrust.

Next week, the Fed will almost certainly raise US interest rates for the first time since December 2015A look at the UK charts does not fill you with confidence, however, and further volatility this month is inevitable.

Today, a landmark legal hearing begins at the Supreme Court to decide whether the government needs Parliament's consent before triggering Article 50. It will run until Thursday afternoon.

Also on Thursday, we'll hear the European Central Bank's (ECB) decision on monetary stimulus. Expect a six-month extension of the current €80 billion (£67.3 billion) per month quantitative easing programme from March 2017 to September, says Deutsche Bank.

Then, next week, the US Federal Reserve will almost certainly raise interest rates for the first time since December 2015 and only the second time in over a decade.

Last year, the FTSE 100 rallied around 250 points after the Fed decision, although it had fallen sharply ahead of the rate meeting. Jury's still out on a Santa rally in 2016.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.