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Shades of 2008: World Markets on Edge Ahead of Monday’s U.S. Open

·Editor in Chief

Welcome to the new era.

Monday marks the first day of U.S. trading since America lost its coveted triple-A rating and traders are braced for everything from a genuine market crash to an early sell-off followed by a robust rally. (See: After S&P Downgrade, 'Sunday Night, Pray' and Other Thoughts From Traders)

U.S. futures are pointing to steep declines following a global sell-off as international markets reacted violently to S&P's Friday evening downgrade:

  • Oil futures are sharply lower while gold surged to a new record near $1700 per ounce.

  • In Europe, the FTSE and DAX are trading down 1.6% and 2.3%, respectively.

  • Asian markets tumbled overnight with Japan's Nikkei 225 and the Hang Seng each falling 2.2%.

  • Middle Eastern markets tumbled overnight Sunday, with Israel's benchmark TA-25 index falling 7%, its worst drop since October 2000.

As if the historic downgrade of America's credit rating weren't enough, traders are also closely watching developments in Europe, where interest rates on Spanish and Italian bonds plummeted after the ECB announced it would use the European Financial Stability Facility to buy debt of those countries in the secondary markets. The debt purchases will be made in exchange for promises of what the ECB calls "decisive and swift implementation by both governments" of measures designed to reduce debt-to-GDP levels. (Update: Italian and Spanish debt yields fell Monday in reaction to the ECB's pledge but the euro struggled to maintain its initial bounce vs. the dollar while the price of French credit default swaps rose and the main Greek stock index tumbled 4%.)

In a separate but related development, the G7 issued a statement Sunday evening saying it is "ready to take action to ensure stability and liquidity in financial markets." That's code for a potential intervention in the currency markets, where the dollar was trading at a record low vs. the Swiss franc.

Following last week's rout in global equities, the debts of Europe's PIIGs and other so-called risk assets, the Sunday night announcements by the ECB and G7 recall the summer of 2008, when global policymakers struggled to contain the bursting of the subprime bubble. Talk of "bazookas" filling the airwaves on the financial news networks serves as another reminder of August 2008.

It wasn't that long ago, but many observers seem to have forgotten the lessons of those thrilling days of yesteryear, including that debt matters far more than equities and the law of diminishing returns appears to apply to government bailouts. Oh, and that the global economy is only as strong as the banking system, which is built on a very shaky foundation of trust, confidence and derivatives contracts that nobody really understands.

Policymakers have presumably learned some lessons from the experience of 2008, but the reality is they've also spent a lot of bullets and lost a lot of credibility in the process.

Nobody knows what Monday will bring but, almost certainly, this latest chapter of the financial crisis isn't over yet.

Weekend Warriors

As you might expect, the Sunday morning talk shows (and evening financial news networks) were chock-full of heavy hitters and A-list guests opining about S&P's downgrade, Europe's crisis or some combination thereof. Here's some highlights:

Treasury Secretary Tim Geithner told CNBC that S&P showed "terrible judgment" and "stunning lack of knowledge" in its decision to cut America's debt rating from AAA to AA-plus. But David Beers, S&P's head of sovereign debt ratings, defended the decision in a separate CNBC appearance and said "we still see risk to the downside" for America's credit rating. (Beers further deflected criticism by noting his team is separate from the one at S&P that put AAA ratings on subprime mortgages and other securities of dubious merit.)

Warren Buffett told Bloomberg TV that America "merits a quadruple-A rating" and that he doesn't expect a 'double-dip' recession. Still, "financial markets create their own dynamics," the Oracle of Omaha admits.

PIMCO's Mohamed El-Erian said the loss of America's triple-A rating means "things will be different" because the global financial system was "built on the assumption of AAA at its core." U.S. creditors have a right to be "nervous," he said, suggesting the downgrade will prompt sovereign wealth funds (like China's) to seek diversification away from Treasuries. (On a related note, I can't help think the loss of AAA is the latest step toward the dollar losing its reserve status, albeit not imminently thanks to Europe's implosion and a lack of other alternatives.)

Former Fed chairman Alan Greenspan told NBC's Meet the Press that S&P's downgrade "hit a nerve that there's something basically bad going on, and it's hit the self-esteem of the United States, the psyche." Without a trace of irony or self-awareness, Greenspan also said there is "zero probability" of a U.S. default "because we can always print money" to pay our debts. (Did I mention gold was trading at another new high? )

Stay tuned for additional coverage Monday morning and throughout the coming day.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com