Markets Lower on Continued Greek EU Exit Speculation; DAX Seen Grinding through 6350

By Richard Cox
Richard Cox
Richard Cox
July 25, 2014 Updated: April 23, 2016

Equity markets in the US are continuing to post declines and the latest moves have now made May the worst performance month for stock markets this year. Most of the activity is being driven by the continued speculation that Greece will be the first EU member nation to abandon the Euro currency. The negative sentiment is also being enhanced by the Spanish bank story as default risks are accumulating while commercial lenders are attempting to recapitalize their assets as a means for avoiding bankruptcy. The S&P 500 failed at critical resistance levels, dropping to lows near 1320, giving the index a total performance of -5.4 percent for the month of May.

Based on this unending downtrend it appears as though investors are becoming increasingly unconvinced that the leadership in the EU finance ministry has the tools necessary to fix the region’s debt problems and avoid credit defaults.

While there is a clear possibility that this is an extreme view, it is relatively certain that Greece will be required to adopt a greater level of flexibility with respect to its current austerity plan and this will likely require the election of a cohesive majority government in order to put this into place. Public opinion polls in Greece are showing that a majority of the population is unhappy with the budget requirements that were established by the EU finance ministry, which only adds to the uncertainty factor.

Stock markets in all regions were lower on the day, with the treasury yields in the 10 year note in the US dropping to record levels. The Euro was one of the biggest losers on the day and is now seen at its lowest levels since 2010.

Looking at the latest economic data out of the US, Pending Home Sales came in much worse than expected at -5.5 percent against market expectations of -2 percent. This is a massive drop from the +3.8 percent reading that was established during the previous month and puts a potentially dark cast on the macro data that will follow. Looking ahead, we have the GfK Consumer Confidence reading out of the UK, NBNZ Business Confidence out of New Zealand, and Building Approvals out of Australia.

Technical Analysis:

Epoch Times Photo

The EUR/JPY is approaching some major long term support levels, with 96.90 now the next area of focus for the pair. This is a weekly support level, so a break here turns the bias to negative for the remainder of the year. A downside break makes support below very scarce, with the next level to watch coming in at 88.40. Indicator readings are supportive of a continued downtrend, with MACD in negative territory and RSI with plenty of room to extend to the downside.

Epoch Times Photo

The DAX is attempting to stabilize near Fibonacci support at 6350 but we have technically seen a break here and the lower highs are consistent with a longer term downtrend. Historical support is thin below this, so the next Fibonacci level to watch can be found at 5840. Longer term, this is the first buy zone with choppy conditions expected until then.