European stocks opened the day deep in the red mainly due to the on-going uncertainty over Greece and the Chinese stock market turmoil, before bouncing off their worst levels as we approached mid-day. Yesterday, the IMF chief Lagarde had admitted that Greece exiting from euro zone was ‘a potential’, and that “It’s very unlikely that we will reach a comprehensive solution in the next few days.” There are serious question marks over Athens’ ability to pay back the IMF €300m next week and €1.5bn by 19 June. No one seems too sure whether the Greek government will be able to make these payments or not, and if it doesn’t would that necessarily mean a default and an exit from the euro zone? Making the matter more complicated is the fact that the ECB would be more likely not to discontinue its Emergency Liquidity Assistance to Greek banks in any event. Yet at the same time, hopes are still alive for deal to be reached soon. An EU spokesman reportedly said today that they are working only on a scenario that Grexit is avoided. On top of this, Jean-Claude Juncker, the President of the European Commission, said that the Greece issue will be resolved in the “coming days and weeks,” which sort of contradicted Lagarde’s remarks from yesterday. As a result, the European stock markets bounced off their lows but still remained in the red as we go to press.
As ever, the German DAX index remains highly sensitive to the situation in Greece. At the time of this writing, it was testing its bullish trend line for the umpteenth time. As we had warned previously, the index’s last significant bounce off this trend ended at just shy of 11930 earlier in the week; this level corresponds with the 61.8% Fibonacci retracement of the downswing from the April peak (12405). Thus while the index remains below this level, there is an increased chance for a potential breakdown of the bullish trend. This view would be invalidated however if and when the bulls manage to take out the Fibonacci level. But for the bullish trend to break, some sort of a stimulus such as an actual or expected “Grexit” would probably be required. Given that this scenario is still unlikely to happen, the bulls may step in and defend the trend line here. The immediate resistance level they will then need to tackle is at 11625. Thereafter is the 50-day moving average at just above 11800 and then the aforementioned Fibonacci level at 11930.