Global equity markets sold off on Tuesday, led by financial stocks, after Standard & Poor's Ratings Services cut sovereign debt ratings on both Greece and Portugal, citing deteriorating fiscal and political conditions in both European countries.

The New York-based credit rating agency downgraded Greece’s sovereign debt to junk status, while its lowered ratings on Portugal remained in the investment-grade category. It said its outlook was negative on both countries.

Financial stocks led the way down in the U.S., shedding 3.4 percent, while the broader market fell 1.6 percent, according to Paul Weisbruch, vice president of ETF/Index Sales and Trading at Street One Financial, a King of Prussia, Pa.-based firm that specializes in ETF trading.

“People have been short, and when they see macro events like today, they just load up on the bet,” Weisbruch said in a telephone interview. He noted he’s been seeing flows of put buying in the past two weeks on the Financial Select SPDR ETF (NYSEArca: XLF), and the sovereign debt downgrades helped to start making those trades successful. The ETF lost 3.4 percent, to close at $15.96 a share.

“The smart money has been buying put options,” Weisbruch said.

Among other option strategies catching his attention was put buying in the CurrencyShares Euro Trust ETF (NYSEArca: FXE), and purchases of calls on the SPDR Gold Shares ETF (NYSEArca: GLD). FXE lost 1.4 percent to settle at 131.43, while GLD added 1.7 percent to end the U.S. trading session at 114.63.

The Downgrades

S&P lowered its long- and short-term sovereign credit ratings on Greece to “BB+” and “B,” respectively, from “BBB+” and “A-2.” S&P also assigned a recovery rating of “4” to Greece's debt issues, indicating it would expect a 30 to 50 percent recovery for debtholders in the event of a debt restructuring or payment default. It said the “AAA” transfer and convertibility assessment is unchanged.

S&P meanwhile lowered its long-term ratings on Portugal to “A-” from “A+” and its ratings on short-term debt to “A-2” from “A-1.”

It said the negative outlooks it assigned to both countries reflect the possibilities of subsequent downgrades should the fiscal situations in both countries deteriorate further.

The broad-based SPDR S&P 500 ETF (NYSEArca: SPY) fell 2.4 percent, ending the day at $115.48.