European markets look set to plunge on the open this morning after Friday’s shock announcement by Greek Prime Minister Alexis Tsipras that he would put the latest deal from the creditors to a referendum of the Greek people. For a while now a number of German as well as other EU policy makers have suggested that a Greece exit from the euro could well be manageable and in some cases preferable, to the brinkmanship that has been going on for the last 5 months. This belief now looks like it could well be put to the test as investors absorb Greek Prime Minister Tsipras bombshell pledge after markets closed at the end of last week. In the process we could well also find out if this event turns out to be the equivalent of the butterfly flapping its wings in in New Mexico, going on to cause a hurricane in China. This belief that an apparently minor event could cause a significant seismic event elsewhere in the world is at the heart of chaos theory, and markets today and this week are likely to get a foretaste of this as Greece plunges head first into a referendum on its future in the euro. It can only be this perception that policymakers think that a potential break-up of the euro is containable, that can be behind the inexplicable decision by the Eurogroup not to let democracy take its course, call Tsipras’ bluff and let the referendum play out, given that recent opinion polls suggest that the Greek public is largely in favour of staying in the euro. By not extending the existing bailout program by a few more days beyond the 30th June, and withdrawing the deal on the table, in what can only be a fit of pique, they have set events on a course that can no longer be controlled, and opened up the prospect of a “no” vote, by way of reinforcing the narrative of an EU accountable to no-one but itself. That is not how democracy works and the EU has got form on this front from 2011, a fact that Greece, as well as other European countries know only too well. The weekend decision to impose capital controls, limit ATM withdrawals, and close the banks by the Greek government feeds into this narrative, after the weekend decision by the ECB to freeze the ELA program at its current ceiling, in what can only be a move to increase the pressure on the Greek government. As things stand the Greek government will certainly go into arrears with the IMF later this week to the tune of €1.5bn. And so this high stakes of poker goes on, or blind man’s bluff, whatever you want to call it as the blame game goes on. It is very easy to blame the Greek government for where we are now, but the creditors behaviour has also been lamentable, notably the IMF who bent their debt sustainability rules to keep the euro intact, instead of insisting on what was best for Greece and its economic recovery. It is all too easy to blame a borrower for going on a spending binge, and for sure that happened across Southern Europe, but lending banks also have a responsibility to lend properly, or allowed to go bust if they don’t. It appears this small fact has been forgotten in the fog of the last few years, and southern Europe is paying a heavy price. Whatever happens now Greece cannot be allowed to fail, otherwise it will be a stain on all of Europe. Over the weekend we also saw another easing move by Chinese authorities as they cut all their key lending rates, for the fourth time since November this time by 25 basis points, in an attempt to help avert a slowdown in the economy, at a time when their stock markets are swinging wildly and just dropped 20% from their recent highs. EURUSD – this morning’s plunge in Asia below 1.1000 and the 50 and 100 day MA has put the May lows at 1.0880 back in play, and this is the next support which could see a move back to 1.0650. The 1.1050 level should now act as resistance, given that it was solid support in the wake of the recent US jobs numbers. GBPUSD – tracking lower with support at the 1.5680 level, with a break targeting a move lower towards trend line support at 1.5440, from the 1.4565 lows. We need to get back through 1.5820 to stabilise. EURGBP – has made a marginal new multi-year low at 0.7008 overnight after gapping lower but has this far held above the 0.7000 level. Resistance can now be found at the 0.7080 level a break of which could see a move back towards the 0.7220 area. A break below 0.7000 could well open up the 0.6920, the November 2007 lows. USDJPY – after failing to overcome the recent highs at 124.35 we’ve seen a bit of a fall back. We need to push above 124.50 to suggest a return towards the 125.85 highs. A break below the recent lows at 122.60 argues for a stronger move towards 121.80. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The Greek butterfly looks set to cause a tornado in financial markets
20:00, 28 June 2015