DAX Enters Correction as Greek Talks Drag On

European indices are expected to open lower again on Tuesday as they look the extend their three day losing streak, with many of them having broken below technical support levels at the start of the week.

The fact that we’re seeing technical support levels being broken and indices trading at multi-month lows having already recorded more than 5% losses in the last couple of weeks doesn’t bode well. The DAX is currently down more than 7% in the last two weeks, 10.7% since reaching its highs on 10 April putting it in technical correction territory and it doesn’t appear to be losing any momentum.

Moreover, the index is technically back in a downtrend having made lower lows yesterday. If 11,000 is broken today, then 10,550 becomes a very important support level. The loss of this could signify much bigger losses to come.

The cause of this correction has been attributed to a number of factors, bond market volatility spurred by rising inflation, uncertainty surrounding the Greek negotiations and the rising risk of a Grexit, even the stronger euro which has come as a result of those rising bond yields.

While the sell-off may not be easing up right now, I do think that any significant progress in Greek talks this week could bring an end to the sell-off for now as a deal would remove an enormous amount of uncertainty. Numerous deadlines have been set for when a deal between Greece and its creditors needs to be done and the latest is the middle of this month giving Greece around a week to come to an agreement or prepare for default.

One thing we’ve learned over the years is that leaders love an 11th hour deal so this deadline is hardly set in stone but it is based on the logic that Greece’s current bailout expires at the end of this month at which point it needs to pay €1.6 billion to the International Monetary Fund and €1.5 billion in wages and pensions, which it apparently doesn’t have. Given that it will take a couple of weeks for any deal to be passed through the respective parliaments, that creates an unofficial deadline of next week. That said, we don’t appear close to a deal and we heard of no progress yesterday so I’m not optimistic that this deadline will be reached any more than the others were.

It’s looking a little quiet on the data front today. U.K. trade figures will be released shortly after the open and are expected to show the deficit falling to £9.85 billion in April. Eurozone first quarter GDP will be released shortly after and is expected to be unrevised at 0.4%.

The majority of the major releases this week will come from Asia. Overnight, Chinese CPI data showed inflation slipping again in May to 1.2% compared to last year. This is well below the country’s 3% target and along with yesterday’s imports figure points to a worrying lack of domestic demand in the economy. We’ve seen numerous stimulus efforts from the People’s Bank of China this year and it has been suggested that this data should prompt more but surely at some point they’ll have to just give their current efforts a chance to work. There’s been a massive change in stance from the PBOC this year as it is.

The FTSE is expected to open 13 points lower, the CAC 20 points lower and the DAX 53 points lower.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.