DAX and euro enjoying a positive correlation, but for how long?

The Day So Far

Risk very much on so far across equity markets, with the Dax gapping higher from just below the 11,000 handle all the way to the 11,200 after details of the latest Greek proposal revealed some important concessions on the part of the Greek Government ahead of the critical talks this weekend. The proposal was similar to the one submitted to them by the EU Commission and subsequently rejected by the Greek voters via the referendum. This reflects the desperation of Tsipras to appease the creditors before the weekend, and to position himself in a favourable light domestically if, as still seems likely, the creditors reject the offer and a Grexit occurs he can claim that he did all he could to secure a deal and that Greece was let down by her creditors. On that note, it is worth bearing in mind comments from Merkel and Schauble this week, consistently stating that the Greek proposal would need to be even tougher than any discussed before the referendum because of the damage inflicted on the Greek economy as a result of the capital controls and the Syriza Government’s focus on battling with the creditors this year.

The negotiations will continue over the weekend, but first Tsipras has asked for the Greek parliament to vote on whether he can use this proposal as a basis for negotiations this weekend, so a counter proposal from the European Commission would therefore need to be voted on as well. The outcome of the weekend talks remains utterly unpredictable, although markets are rallying of the hope of a positive solution, with fixed income selling off sharply, the Bund gapping below the 152 handle.

We couldn’t complete the morning round-up without mentioning China; the Shanghai Composite has enjoyed its best two trading days since 2008, at least ending a turbulent week on positive footing.

The Afternoon View

No data of note this afternoon apart from US Wholesale Inventories, so Greece is likely to dominate sentiment once again. Although we are not anticipating any significant news flow today, traders should be prepared to react swiftly to any comments by the major players in the negotiations. In terms of correlations, it is interesting to note the positive correlation between the Dax and the euro, moving in lockstep today after enjoying an inverse relationship for much of the year following ECB QE. On positive news from Greece, expect this correlation to work initially, but expect it to break once traders focus on the next major risk. Our call for a range bound market in S&P this week has continued to be profitable, once again bouncing off 2035-2040 support last night. We are sellers at the top of the range around 2076.25. Clarity on Greece one way or another, and we should get some direction bias for the US equities, but for now, looking for the range to hold.