After a series of disappointing manufacturing reports in China, Europe and the US and a sharp drop in Chinese stocks, today geopolitical tensions are on the rise after North Korea announced it conducted successful hydrogen bomb test. Furthermore another weak economic report from China is weighing on stocks this morning. The Caixin services PMI came in at 50.2 and below the 52.3 predicted by analysts. There are also worries that China's central bank is guiding the Yuan lower, such a move would bring back memories of August 2015 when investors feared China had started a currency war.
I don't think the North Korea news will have a long lasting effect on markets, the deteriorating Chinese economy and stock market collapse are far more important, they have the potential to bring down our stock market. Chinese stocks are on the brink of a significant decline, they dropped 7% on New Year day. The chart looks bearish after the completion of a counter trend rally from August to December. The latest break below the November low is a signal the long term decline has resumed.
In the UK the FTSE declined to 6071 on Monday, so far this level remains intact, the index is bouncing back but the bounce is weak. We can't blame investors, the newsflow has not been favourable since the New Year. This decline is part of a long term decline, basically I believe that the rebound seen in September-October last year is over. The bear market has resumed. In the next few days however there is potential for a rally to 6200-6220 based on the Elliott wave pattern.
But the index is weak and we will need the help from the S&P 500 to push it above the 6200 level. The risk is that the stock market will collapse without a bounce, the main trend is down and there is enough negative news coming through to bring the stock market down.
