US downgrade, European worries may slam stocks

Updated: 7:30 a.m. ETMonday

Here's what the futures markets are saying about Standard & Poor's downgrade of U.S. debt and Europe's debt problems: Better take cover.

The Dow Jones industrials ($INDU) are looking at opening down some 230 points or 2.7%. The Standard & Poor's 500 Index ($INX)? Down some 2.8%. The Nasdaq-100 Index ($NDX.X) may drop some 2.6%. 

Gold (-GC) for December delivery was trading $57 higher, or 3.5%, to $1,709 an ounce. It was the first time gold had traded above $1,700 an ounce. 

"We are in uncharted territory and, therefore, should all brace for volatility over a number of days if not weeks," Mohamed El-Erian, CEO and co-chief investment officer of the bond mutual fund company Pimco, told The Associated Press.

Meanwhile, the G-7 nations -- the most developed industrial countries -- pledged to in a statement to "take all necessary measures to support financial stability and growth."

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If you're a consumer, you could take a little cheer from crude oil (-CL). It was down more than $2.67, or 3.1%, to $84.21 a barrel at 9:20 p.m. ET. That means retail pump prices will be heading lower.

The declines are a reflection of the worry about the S&P downgrade -- and warnings of more ratings cuts. And they reflect worry that Europe's debt problems are spinning out of control. Speculators are able to push bonds of Spain, Italy, Portugal, Greece and Ireland lower at well.

Plus -- and this is more important -- they reflect growing fears that the domestic economy may be sliding back into recession. Reports over the last 10 days have painted a broad picture of a increasing weakness.

Friday's jobs report did little to help matters. The national unemployment fell to 9.1% in July from 9.2% in June. Nonfarm payrolls grew by 117,000, but that's not enough to bring the unemployment rate meaningfully down.

Markets tumbled badly last week, with the Dow off 5.8%, the S&P 500 off 7.2% and the Nasdaq Composite Index down 8.1%.

The weak markets are also a reaction to the European Central Bank's decision late Sunday to buy Spanish and Italian bonds. In fact, this may be a far bigger story than Standard & Poor's decision. The move is part of an increasingly forceful campaign by policymakers around the world to prevent deteriorating public finances and slower growth from provoking another financial crisis

European stocks may get pummeled as well, with German, British and French stocks looking at opening down 1.7% or more.

Japan's Nikkei 225 Index ($JP:N225) was off more than 2% in late trading. Australian shares were off 2.6%. China's Shanghai Composite Index was off 3.5%.

A game-changing move in Europe

Some analysts said that Italy, which is fast losing investor confidence, posed a threat to the financial system too great for any one economic superpower to cope with alone, The New York Times said late Sunday. That meant a coordinated effort is needed.

"They just can’t allow the Italian economy to go down the tubes," Uri Dadush, a senior associate at the Carnegie Endowment for International Peace, told The Times. That would produce a market reaction as bad as the 2008 collapse of investment house Lehman Brothers. The Lehman Brothers failure turned a nasty market correction into one of the worst market routs ever.

The ECB intervention to prop up Italy and Spain in the face of repeated market assaults on debt issued by both governments is a watershed in Europe's handling of the financial crisis, The Wall Street Journal noted Sunday. The bank had been insisting that the main responsibility for action lies with national governments.

A decision to buy Italian and Spanish bonds basically concedes that the euro's member states are unable or unwilling to respond effectively. That means the ECB is the lead firefighter -- and the eurozone's lender of last resort. That could reshape the future of Europe's monetary union.

Is a rally getting ready to erupt?

The market turmoil may actually help produce a big rally this week.

"If history is any indication, investors are going to make far too much of the U.S. downgrade. And, with any luck, that will result in a huge decline in the early part of the session Monday," Canadian hedge-fund manager Terry Bedford wrote clients late Sunday. "Buy that decline.  Don't think about it, buy it."

Market technician Tom McClellan of the McClellan Market Report also sees a short rebound this week because copper prices are holding firm.

A weak market after a crummy week

Only two of the 30 Dow stocks finished with gains last week. There were no winners for the week among Nasdaq-100 stocks. Nor were there any winners among stocks in the Dow Jones Transportation Average ($DJT), the Philadelphia Semiconductor Index ($SOX) or the Philadelphia Banking Index ($BKX).

Only one stock among the 40 in the Standard Poor's Retail Index ($RLX) had a gain: RadioShack (RSH), up 0.5%.

Last week's 7.2% decline in the S&P 500 cost investors about $850 billion. The index has fallen 12% since peaking on April 29. The cost to shareholders: about $1.48 trillion.

Worldwide, more than $5.4 trillion in global equity value has been erased since July 26, Bloomberg News said.