Europe Coming Back In To Focus

There were quite a few events today from China to the US that were hot and cold, or negative and then positive. I'll cover the basics of what was important in a subsequent post, there are reasons things happened today the way they did to some degree.

In any case, as we've been slowly seeing the last two days with 3C and with dominant Price/Volume relationships as well as price action itself, the market has been putting itself in an area in which it first stabilized from the downdraft and then created some space to make a move (bounce) higher.

However, whether coincidentally or not, when the market starts focussing on Europe, bad things tend to happen. As Greece is pretty much a footnote in the history of the EU at this point, the dominant players are the ECB, Germany and Spain, today Spain came in to focus.

Spain presented their 2013 budget and on the whole it was well received by most, not by all.

The push of the 2013 budget could be summed up as budget cuts, however there were some plans that likely won't sit well with Spaniards who are already stirred up, one is the use of the pension fund to make up for shortfalls as well as an overhaul that won't be taken well by citizens.

The budget was also not taken well by one of the few credible rating agencies out there, Egan Jones who cut Spain from CC+ to CC with an outlook of C, or said another way, they just cut Spain to JUNK. The trade today was interesting and for sake of brevity, I'll simply use the NASDAQ and S&P futures as they lead the market any way.

ES... (S&P E-mini Futures) 

 We see a late  morning positive divergence in ES and I can just about guarantee that was on the Spanish Budget presentation, but as ES moved higher 3C didn't confirm the move, but instead went negative and if you could see a Rate of Change on price you can see clearly that ES lost all momentum as that negative divergence developed (see the yellow area).

 On a 5 min ES / 3C chart 3C also failed to confirm the move today. It's difficult to say whether this was "Sell any strength", which I don't think it was as there's enough room carved out for a larger move up; or if this was related to Spain as the details were digested and perhaps even on early information that Egan Jones would be cutting their rating about 25 minutes before the close.

 ES moving along its daily VWAP's upper standard deviation.

 ES just hitting the weekly VWAP.

NASDAQ E-mini Futures (NQ)...

 As shown today, the NASDAQ 100 was easily the strongest average today in both underlying trade and performance. This 5 min NQ chart shows a positive divergence in overnight trade where volume is very light, during regular hours there's a small leading negative divergence, this isn't to suggest a collapse in the NASDAQ, it's just shown as an example of the failure to confirm which means it's likely strength was being sold today for whichever reason (as mentioned above).

 The NQ 1 min chart definitely lost momentum on the first relative negative divergence (the weaker divergence), but at the leading negative (stronger divergence), the NQ went flat with some downside bias.

 Here's NQ today at the daily VWAP upper standard deviation.

And like ES, NQ at the weekly VWAP nearly perfectly as it pulled back to the VWAP near on the close.

For Egan-Jones' part, here's what moved them to cut Spain to junk on a day in which many praised Spain for its 2013 budget and plans.

Spain's unemployment rate is 25% (50% for youth unemployment), E.J. doesn't think it makes sense to propose tax increases when unemployment is so high. Also Spain's planned use of their pension fund to fill budgetary gaps didn't sit well.

What the market may not like is Egan Jones' take that bond holders will likely face a Greek Style haircut, so much for all the promises that it was a one time event. Also Corporate bond holders in the banking sector are likely to take deep losses on the weak banks, while amazingly, the assets of Spain's two largest banks exceed that of Spain's GDP and with some other details, on that note they cut.

One has to wonder whether sovereign yields and credit in Europe this week which was weak, anticipated or got wind of the 2013 budget. As is usually the case, it will take the market several days at least to take all of this in and render an opinion, the sovereign debt markets/bond markets will react much quicker.