Overnight and In to the Open

First lets start with Goldman's short call on the market yesterday, besides being absolutely obvious that the market was not going to react well to the F_O_M_C (and we had already seen a pullback in the works before the F_O_M_C), it's also Goldman making the call. The last two calls were bullish at the  March top and bearish at the May-June lows; when a company that trades against their own clients offers free advice to retail, I would be a little more than suspicious of their motives, it's not like they are dispensing their wisdom for clients as only about 1% of the population qualifies to be their clients as accredited investors.

Furthermore to make matters worse, we received confirmation that manufacturing was in contraction on just about every major continent in the world.

As announced and expected, Moody's did downgrade 15 top banks

The credit ratings agency Moody's downgrades 15 banks and financial institutions including Royal Bank of Scotland, Barclays and HSBC.

The move could make it more difficult for the banks to borrow money, pushing up interest rates for investors.

In the US, Bank of America, Citigroup, Goldman Sachs and JP Morgan are among those marked down.

"All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," Moody's global banking managing director Greg Bauer said in the agency's statement.

The other institutions that have been downgraded are Credit Suisse, UBS, BNP Paribas, Credit Agricole, Societe Generale, Deutsche Bank, Royal Bank of Canada and Morgan Stanley.

Of the banks downgraded, four were cut by one notch on Moody's ranking scale, 10 by two notches and one, Credit Suisse, by three notches.

"The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for," said Mark Grant, managing director of Southwest Securities.

As reported yesterday, the EU is now ignoring Credit Rating Agencies and the ECB will rate banks/institutions themselves in an attempt to keep money flowing to banks that would otherwise be disqualified because of their credit rating. This will not stop Investment banks and funds from selling poorly rated assets, whether banks or sovereign bonds as that is part of their rules. The WSJ confirms what was first reported yesterday about the ECB creating their own ratings...

The European Central Bank is poised to relax its collateral rules for central-bank loans in a bid to ease strains on commercial banks in Spain and the rest of Southern Europe, according to people familiar with the matter.

ECB officials have broadly agreed to make more types of securities, including certain mortgage-backed and asset-backed securities, eligible as collateral at its lending facilities. Details of the plan still need to be finalized, but a decision is expected on Friday.

The move would likely spark renewed concerns about the safety of the central bank's balance sheet, which totals more than €3 trillion ($3.82 trillion), a record high. Germany's central bank, the Bundesbank, has repeatedly warned of the risks associated with the central bank's lending facilities.

There are two major take-aways from this, 1) the huge ECB balance sheet expansion as well as the deteriorating quality of collateral held (a trend that started with LTRO 2) and 2) the necessity to take such drastic actions clearly shows the bank funding stresses in the EU financial system and how little quality collateral these banks have.

Overnight the German IFO Business Climate Survey came in roughly at consensus, which was likely a relief after all of the economic misses of late.



Today we have a meeting between Merkel, Hollande, Monti and Rajoy in Rome to discuss the future of European growth; Monti in comments overnight said the EU has about a week left to save the Eurozone.

Today will also see a E.U Economic Finance Ministers' meeting in which they will discuss a European Financial Transaction Tax. German FM, Schaueble says he'll "push" the deal through today, but doesn't expect a final deal to be reached as the Dutch and UK still oppose the tax; the market will be watching both events today as there's no tier 1 economic data from the US today.

Other than that, the overnight session was pretty tame, especially compared to yesterday's.

As for ES and Euro-Dollar...

 ES after the US close was strangely quiet through the Asian session, remaining in a 2.5 point channel until the European open at the green arrow.

 Going in to the US open, we saw a negative divergence, a drop in ES followed by a positive divergence and a rise in ES that has been largely in line with only a minor negative divergence during the US regular hours a.m. trade.

 The EUR/USD since the 4 p.m. US close yesterday through present-Still below the major resistance level the Euro has toyed with over the last week.

The pair since the US open.

We are trading slightly up which is not surprising given yesterday's smack down.

Updates to follow.