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After months of deadlock, the news reported by the Greek authorities that pointed to a breakthrough appeared to be the decisive step to a solution. However, this advance was categorically denied by several European leaders, thus constituting an unexpected setback in this process. Apparently, the “triumphant” message of the Greek negotiators was reported in the press even before the start of the meeting with the European partners. According to CNBC, negotiations will resume on Sunday, date the Greek authorities said they would announce the agreement. These advances and setbacks can make the investors more skeptical in relation to real advances that negotiations can achieve.

In the pre-opening, European markets were trading with slight gains, benefiting from the positive closing of the Asian indices. Today will be published the final reading of the PMI index (Purchasing Managers Index), which should confirm that the eurozone economy is recovering at a solid but steady pace, based on the ECB’s action, the depreciation of the Euro, the price decrease of oil and revive domestic demand in some. In the coming days investors’ attention will remain focused on the Greek situation. The talks between the leaders of this country and its creditors resumed yesterday. According to the first reports, the talks began with the traditional Greek optimism and skepticism of its European partners. On Saturday, Interior Greek Minister, which did not participate in the meetings, said he believed an agreement will be reached before the June 5 repayment deadline of a IMF loan to Greece. The Greek Minister of Economy shares this optimism but warned that his country does not have a backup plan (or plan B). Yesterday, was scheduled a video conference between the Greek leaders, German and French, in order to facilitate the conclusion of an agreement through political means.

The Greek issue has caused a sharp increase in volatility and an intention to many fund managers to protect themselves from a possible negative surprise. In fact, the volatility of European indices May reached levels only recorded in January. This uncertainty with regard to Greece, which is causing the growth in volatility has also induced much fund managers to resort to buying puts (put options) to protect their portfolios. If hypothetically is not reached an agreement for Greece, most likely the European indices will fall, generating losses in the portfolios of investment funds. However, these losses would be offset by the increase in the value of the puts that were purchased.

In the beginning of the session the European markets traded with some gains. Continuing Greece as center stage of the current situation, it’s creditors will present today a final proposal. It was reported that the proposal should include reforms of the labor market and the pension system, privatization and changes in the functioning of the public system. The outline of this proposal should be submitted today to the Greek Prime Minister when he meets the President of the European Commission. This document represents a change compared to recent months as constituting a joint proposal from creditors, signaling that the differences between the IMF and European leaders were exceeded. This union increases pressure on Greece, whose authorities had indicated divisions among lenders as the main cause for the failure of negotiations that extend for months. A spokesman for Syriza said that if no agreement is reached until Friday his country will not repay the IMF. Today will take place the meeting of the ECB, a extraordinarily Wednesday. The ECB meetings are scheduled on Thursdays, a total of 8 meetings per year. Until last year, the meetings were held monthly and always at the first Thursday of the month. As tomorrow is a holiday in Germany (Corpus Christi) and the ECB is based in Frankfurt, the meeting was brought forward to today. At the press conference that integrates the meeting, Mario Draghi should not depart significantly from the general lines of the previous meeting, reaffirming economic forecasts and analyzing the first effects of the debt purchase program. During the press conference Mario Draghi will be questioned about the situation in Greece but will likely adopt a diplomatic stance.

Asian markets closed lower. The central theme of the session was the drop in Chinese equities. The Shanghai Composite was losing more than 5% before recovering part of the losses, devaluing about 3% by 7:00 a.m. (GMT). One reason for the decline was the news that one of the largest brokers in the country would reduce the amount of loans given to retail investors. Many of these investors fund to invest, depositing a collateral (margin) which is just a portion of that funding. Thus, exposure to the equity market is well above the capital of these investors, which exponentially increases the potential either gains or losses. The volatility of the Chinese stock market is typical of a market that has moved away from fundamental economic and moves almost solely due to the liquidity created by the central bank. Sometimes these situations lead to quite abrupt and sudden corrections.

European markets started the session slightly lower. Yesterday, Greece announced that it will not now repay 310 M.€ to the IMF, and also advance that can concentrate the payment of the remaining 1300 M.€ that has to be carried out during June at the end of the month. The Greek Prime Minister said that the proposal of creditors does not constitute a starting point for an understanding. This decision does not imply a breach or default. The infringement procedure is often long and complex. The first consequence of a failure to pay the IMF will suspend any additional funding to Greece. However, this institution provides the debtor a “grace period”, which extends to the end of month, during which debts can be settled. The issue regarding payment of today is not so much be considered a default or not but the signaling that is sent to financial markets.

After the opening, European markets negotiate without major fluctuations. The situation in Greece should continue to capture the attention of investors. An exchange of accusations between the European Commission President Juncker and Prime Minister Tsipras took place during the weekend. While the second set as “unacceptable” proposals of creditors, Jean-Claude Juncker argued that these proposals were distorted by the Athens authorities. The European indices will be influenced by the outcome of these negotiations (which are usually accompanied by news, rumors and denials), the Euro’s behavior and the evolution of yields. Technically, investors will observe the support zone in the DAX located between 11150/11170. If this level is broken, the medium-term situation for the German index may be compromised.

If the DAX doesn't recover soon to levels above 11150/11170, it's likely to occur a stronger correction than the ones observed in recent months.

Stock Market initiated a recovery from recent losses after Bloomberg reported Germany may be willing to offer a staggered deal to Greece.

The S & P yesterday lowered the rating of Greece from CCC + to CCC with a negative outlook, reflecting the impasse in negotiations. This agency also said that without a reform of the state and sustained economic growth, Greece’s debt is unsustainable.

European markets started the session trading in slight decline. Equities pared gains yesterday after the International Monetary Fund said that its team negotiating with Greece left Brussels after failing to make progress on a debt deal.
The IMF cited “major differences” for the withdrawal of its team, although it left the door open for further talks. The decision came amid increasing criticism from creditors at the Greek government’s refusal to bow to their demands, risking a default and ultimately an exit from the euro area. In addition, some European leaders demonstrated their concern regarding the time available for reaching an agreement. If no solution is found in the Eurogroup meeting next week, even if it can be reached later, the various parliaments would not have time to approve it before the end of the month, a key upcoming maturity of Athens’ debt, when Greece has to pay 1600 M.€ to the IMF. In short, the only certainty at this juncture is that markets will remain volatile, fluctuating according to news and rumors. The increased volatility can not be attributed only to Greece, as the actions of central banks in recent years, injecting an unprecedented liquidity in the global financial system, caused a sharp drop in volatility. Now, as some central banks (FED and Bank of England) withdraw this liquidity, volatility should gradually increase, returning to its historical average.

There is the hypothesis of the European partners adopt a ultimatum posture to Greece, similar to the one adopted two years ago to Cyprus

European stocks rose from an almost four-month low as Swiss equities rallied. Greek shares tumbled amid the country’s debt impasse. The situation in Greece continues to haunt equity markets. After negotiations between this country and its creditors were interrupted on Sunday, things have become considerably more tense. Yesterday, Tsipras Prime Minister said in Athens that his country will not stoop to their foreign creditors, referring to the condition imposed by its partners to reform the pension system, one of the most expensive in the eurozone. The position of Prime Minister was supported by almost all the members of his party. The European Commissioner Gunther Oettinger mentioned that before the Greek position the European Commission needs to have a plan B, or a contingency plan in case of default. Today, the Greek Prime Minister Tsipras had scheduled a three-day visit to Russia but given the urgency of the situation is possible that this trip is shortened. Yesterday, the Athens Executive had an emergency meeting to discuss the strategy for the coming days and the for Thursday meeting of the Eurogroup. In this context, the nervousness will continue to score investor sentiment.

Against this rather uncertain and threatening scenario, the performance of equity markets during yesterday’s session was quite interesting. After accumulating losses of about 1.50%, major European indexes embarked on a solid recovery, finishing the day with about 0.50% gains. This pattern may have various reasons but probably was due to the closing of selling positions by investors. If on one hand the longer pass the smaller the probability of an agreement (which has a negative impact on the market and therefore these positive selling positions) on the other hand there is always the possibility of a last minute solution, which has not been rare in recent years and which penalize the selling positions. So, considering that markets are crossing, “uncharted waters” investors’ caution is justified.

It is not excluded that the European countries present Greece a new proposal, which would probably be a temporary solution that would allow the country to receive a portion of the tranche that was suspended since February (7200 M €) in exchange for the adoption of certain measures. Thus, this hypothetical proposal would not aim at solving the structural problems of Greece but would be more an extension of the second ground plan and that would give more time for negotiators to reach a more lasting solution. Even not reached an agreement today, is not to rule out the possibility of being scheduled an extraordinary meeting, by the Eurogroup or by the European Council.

Today will take place the expiration of futures and options, known as quadruple witching. Quadruple witching happens when three related classes of options and futures contracts expire, along with the individual stock futures options. Quadruple witching days are usually accompanied by considerable volatility in stock and derivative prices, as well as increased trading volume, with the occurrence of erratic movements. The most most volatile time of day shall be 13h30 (open) and 18h00. Statistically, the sessions of quadruple witching are positive for the equity markets.

Asian indexes closed higher, with emphasis on Japanese equities. The Nikkei led the Asian session, basing its performance on the valuation of the financial system. The Chinese markets were closed. Last Friday recorded losses of more than 6%, exhibiting high volatility, which is a warning sign.

For Greece, quite a lot has been lost! Such a delay would only make sense if the deal got better.

Concerning the Greek issue, the current situation is characterized by reduced time available, which forces players to discuss frankly and directly and by a change of tone in the negotiations. Yesterday, the President of the Eurogroup, said the Greek proposal is a step in the right direction and that is inclusive and comprehensive, adding the possibility of an agreement later in the week. A detailed plan resulting from technical meetings must be approved by the Eurogroup before being proposed at the European Council on Thursday. The last phase shall provide for the adoption of the final proposal by some parliaments and it is not excluded that there may be some difficulties particularly in Greek and German parliaments. In Athens, some points of the proposal can not be well accepted by some wing of the ruling party, while in Berlin Chancellor Angela Merkel will have to convince some of her party members to approve a new plan to support Greece.

Investor fears does not relate to the relevance of Greece itself but with the impact of a hypothetical failure could have on financial markets. This scenario would be a negative factor in the global environment, characterized by the slowdown of the Chinese economy and the contraction of many emerging economies. Thus, the dependence of the US economy from domestic factors would increase.