Euro Weakened; US Stocks Dip
The euro has weakened as Fitch has placed Belgium, Spain, Slovenia, Italy Ireland and Cyprus on rating watch negative, but the markets were weaker before this announcement.
Importantly, Fitch "has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach."
Separately, Fitch affirmed France's AAA rating but revised that country's outlook to negative, saying "the commitments made by leaders at the EU Summit on 9-10 December and by the ECB were not sufficient to put in place a fully credible financial firewall" and "France is in Fitch's judgement the most exposed to a further intensification of the crisis."
But stocks have been fading since mid-morning, prior to this announcement. There have been vague rumors all morning that the long-awaited downgrade of European sovereign debt by Standard and Poor's may be imminent. S&P put 6 euro zone countries on a downgrade watch on Monday, December 5.
Unlike many trading desk rumors, this one has a strong chance of being right.
S&P implied that they would decide on any downgrades shortly after the conclusion of the EU Summit, which was last week. Traders have been waiting all week for an announcement. The vast majority believe that downgrades are indeed coming.
Remember, S&P downgraded U.S. debt on Friday, August 5, after the market close. Rumors of a downgrade had been circulating since early that morning.
Also bear in mind that this was a quadruple witching expiration (quarterly expiration of stock and index futures, and stock and index options); we did 400,000 shares just on the floor right around the open. A lot of traders — to be blunt — left by 11am ET.
Be careful on reading the VIX. A number of traders on our air are insisting that the CBOE Volatility Index (VIX), now hovering around 25, is flashing an "all-clear" signal.
That is a poor way to read the VIX: due to seasonality factors, the VIX is artificially low. The VIX measures implied volatility in S&P options 30 calendar days out; there are a large number of days when the market is not trading in the next 30 days, which reduces implied volatility.
Need more proof: look further out on the VIX curve. January VIX options are trading at 28.90, March at 30.40, and May at 31.07.
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