Small caps seen sharply lower on financial fears

SmallCapInvestor.com Staff | Sep 15, 2008 8:56am EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks are expected to open sharply lower this morning following the lead of Asian and European markets. U.S. stock index futures are down 2.5% to 3.5% in pre-market trading.

The weekend bankruptcy filing of U.S. investment bank Lehman Brothers Holding Inc. (NYSE:LEH) combined with the acquisition of Merrill Lynch & Co. (NYSE:MER) by Bank of America Corp. (NYSE:BAC) rattled global markets. Fears about the stability of other major financial institutions are widespread this morning. Many traders will be watching the stock of American International Group Inc. (NYSE:AIG), which is trading 40% lower in pre-market transactions. AIG tumbled after The New York Times reported the insurer asked the Fed for a $40 billion bridge loan. Speculation is widespread this morning that credit agencies may downgrade the debt of American International Group Inc. Over the weekend AIG rejected an offer from J.C Flowers & Co. that would have given the buyout firm an option to acquire the entire company.

Two-year Treasury notes fell below 2% for the first time since April on speculation the Federal Reserve will need to lower interest rates to bolster financial institutions battered by $514 billion of credit losses and asset write-downs from the subprime-mortgage market's collapse. Gold, up 2%, is one of the only commodity markets trading higher this morning. Oil is trading over $6 lower, while the dollar dropped the most in a decade against the yen and fell versus the euro, pound and Swiss franc.

The U.S. Federal Reserve announced emergency measures over the weekend including accepting stock as collateral for cash loans for the first time in its 90-year history. The central banks of the other Group of Seven industrialized nations said they are closely monitoring markets are and ready to act if necessary.

The Russell 2000 (NYSE:IWM) is likely to open at the key support level of 700. A weak close below that level today would be considered an early warning of another leg down toward the July lows. Conversely, with central banks watching the markets closely this morning, the opening prices at recent trading range lows may prove to be attractive buying levels to risk takers.