Last week stock market sell off came amid concerns the stock market slide together with the slowdown in China will cause more capital outflows. Faced with a falling stock market and growing pessimism about the economy, investors are moving money out of China and into countries with better returns. This is putting pressure on the Yuan. The Yuan will continue to fall and this process will cause an even greater number of people to move money out of China. It's like a vicious circle with no end in sight. The risk is a collapse in the Yuan. This would dent earnings at UK and US exporters.
Yet yesterday and despite a 6% slide in Chinese stocks, The FTSE 100 and the S&P 500 closed higher. It seems investors were focusing on a different matter or perhaps they are no longer concerned by what is going on in China. They should be concerned, Apple (O:AAPL)'s sales are slowing in line with the slowdown in China. The company said that the iPhone would see its first ever decline in sales in the March quarter.
Investors are focusing on the Fed, they hope the Fed will leave rates unchanged tonight. The FOMC statement due at 7pm will shed more light on the Fed's intentions. It's impossible to predict how the market will react to the FOMC statement but investors could be disappointed if the Fed starts thinking about lowering interest rates. This would create panic among those who believe in the economic recovery. A no change would be bullish. The interest rate rise in December was seen as positive for stocks, it showed the Fed's confidence in the US economy. If the situation in China deteriorates, the Fed will have no option but to lower interest rates. This would be a u-turn and would greatly damage the Fed's credibility. The stock market would sell off as investors would no longer trust the Fed.
Meanwhile the market is rallying on technical factors and on the recovering price of oil. An Elliott wave pattern was complete at last week's low, this move is wave i (circle). In a bear market declines are in five waves, here we have multiple subdivisions which means the decline is far from over. Wave (3) should be in five waves [1,2,3,4,5] and wave 3 should be in five waves [i,ii,iii,iv,v (circle)]. An indicator measuring extreme in sentiment, the 34-day BTI, is oversold. This suggests the FTSE is near the start of a multi-week rally. This rally may have started on January 20th after the FTSE touched 5640, in which case the current rally has further to go. This rally is wave ii (circle), therefore the bear market will resume from an area above 6000.
