Spain Downgrade

For as long as there has been the acronym, "PIIGS" for: Portugal, Ireland, Italy, Greece and Spain, we have all known that Spain was the one infectious sovereign that could not be allowed to fail, thus it becomes the last domino even with the ESM activated this week, there just won't be enough money to save Spain especially as Italy follows it.

If you've been watching after hours trade you may have seen some unusual action that is stemming from the Euro actually, but that comes from a S&P downgrade of Spain to BBB(-) with a negative outlook. You may remember a couple of weeks ago the only legitimate rating agency in my view, Egan Jones, cut Spain to junk at CC.

The S&P cut isn't big, but it's the threat of further cuts, the actual cut was only from BBB+ to BBB-, however if Spain fails to keep debt to GDP below 100 through 2014 or if political support for austerity actions falls, then the S&P will follow through with a deeper cut.

And the reaction...

 Here's the EUR/USD or basically the Euro on the ratings action.

 Here's a closer look...

 ES didn't seem to get hit as hard as the Euro did, although direct comparisons are difficult because the Euro was already trending up by the US close and actually well before and ES hadn't started a similar move. However the purple is the EUR/USD vs ES above it and below in red is the Euro to ES correlation, a correlation of 1 means that the two are moving together in perfect sync, during the day we see several times where the correlation falls below zero to negative, which just means they are trading in opposite directions. As the news came out, the correlation saw the biggest non-correlation of the day with several areas trading well below zero which would indicate while the Euro was moving down ES was either moving up that bar or sideways.

Here's today's divergence between the Euro and the SPX, this is what I meant in that the Euro was already outperforming the SPX based on the historical currency/legacy arbitrage correlation. There are a few areas I highlighted where they trade in different directions, this is where correlation on the chart above falls.