Last night moments after the US close Moodys downgraded French debt from Aaa to Aa1. The biggest reaction to this was in the EUR/USD rate, which slipped from 18.15 to 1.2765 in minutes. However, the Euro completely recovered as soon as European markets opened for the day and is now sitting at 1.2800. European markets are basically unchanged this morning, along with US stock futures. Housing starts were reported at 0.894M this morning, beating consensus estimates of 0.836M.

Yesterday Wall Street was in rally mode as traders snapped up “risk-on” positions. We noticed unusual options activity in EWZ, the iShares MSCI Brazil Index. One trader bought 40,000 March 53/55 call spreads for $0.77 and also sold 20,000 March 48 puts for $1.54 with the ETF at 51.68. This is a bullish bet that will profit if EWZ is above 55 at March expiration. That would require a 6.4% move over the next 115 days. If EWZ sells off and is below 48 at expiration, the trader will be put to 2 million shares there. By selling this put the trader is indicating they he is willing to buy the stock at that level, which coincides with the ETF’s 52-week low.

The Brazil ETF is down 9.3% year to date on slowing growth in the Brazilian economy. Brazilian GDP growth has slid from a high of 9.3% in Q1 2010 to 0.5% last quarter. The Brazilian government has tried to stimulate growth by lowering interest rates and cutting taxes, but it has yet to be enough. However, if there is a rebound in global trade and growth EWZ is likely to bounce back more rapidly than the developed economies of the US and Europe. This trade will be a winner if the global economy shows signs of improvement. Stronger growth out of China, a resolution to the fiscal cliff in the US, and a solution to Europe’s debt problems would give investors the confidence to move money in more lucrative markets like Brazil. However, that scenario remains in the distant future. Despite yesterday’s pop in the S&P 500 French debt was downgraded yesterday and US industrial production numbers plummeted to multi-year lows last week. Until the data shows a rebound in the global economy my portfolio will be on the defensive side.