Small caps seen sharply lower on financial fears

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 . . .

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