FTSE 100 futures opened sharply lower last night following the terrorist attack in Paris, but the index failed to break below 6000. The FTSE is bouncing back which is a positive sign. I did not expect a crash but a pullback. If the index can stay near current levels this afternoon I would say a bottom is in place.
Before going long I would like to see what the S&P 500 will do after 2.30pm. Why could stock markets around the globe be affected? Because we face a new terror threat globally. It's not just France against ISIS, it's the world against them. Recent terrorist attacks in Australia, Egypt, Turkey and Lebanon are the work of the extremists. France is now at war with ISIS. French fighter aircraft launched strikes on Syria during the night, is this the start of a global conflict that some are already calling the third world war? Remember the US, UK and Russia are also involved.
I have always wondered what would cause a long and painful bear market in stocks, there are many causes and one of them is war. The attack in France came at a critical time, when the global economy is recovering from the financial crisis of 2008. There are now fears more terror attacks will hit the fragile recovery and the stock market will go down.
Let's not forget that coalition forces against ISIS include many Arabic countries like Saudi Arabia, Jordan, Bahrain, Qatar and United Arab Emirates. The fear is that the conflict will intensify with more countries joining coalition forces in Syria and Iraq. In France the far right will become stronger. The Front National is already a powerful party opposed to immigration. Marine Le Pen has called for the authorities to close the borders. At the moment the Front National are second in the polls for the presidential elections. The attack in Paris will increase their popularity and there is a good chance they will win the next presidential election. The fear is that if they come to power they will make things worse between French citizens and the Muslim community. They will be tougher with the extremists, introduce stricter border controls and increase military spending.
As we enter a new phase in the stock market, it is now even more unlikely that the FTSE will rally significantly from current levels. There is a risk the bear market will resume earlier. Yet we cannot rule out a rally to 6550 based on the Elliott wave pattern. My guess is that the rally will be the last one near previous high, then we can expect a long and painful decline. One positive development for stocks is that the ECB will probably accelerate its quantitative easing programme next month, in response to weak growth. Seasonal influence is also positive, for that reason odds still favour a rally in the short / medium term.
