Credit Crisis: Tuesday's Market Preview Is Not Pretty

To state the obvious, it is shaping up to be a difficult return for U.S. markets after the Labor Day break as European stock plunge and the European Central Bank (ECB) loses some of the control it has been exercising on the Euro-zone's sovereign bond market.

The best way to understand what is going on is through the following simplified sequence: banks-sovereigns-policies.

Specifically:

• Banks stocks led the debacle on European bourses Monday, with drops of some 5 to 12 percent in a single day.

The jury is still out as to whether the ECB "allowed" the yield to rise, as a way of putting pressure on the Italian authorities (and other European fiscal agencies) to get their act together, or whether the ECB itself is getting "overwhelmed" by market dynamics. But either way, European markets are troubled.

The perspective in Europe is that the ECB is showing less willingness/effectiveness (you pick, one or both of these interpretations) in delivering on a signaled policy objective. It also does not help -- in fact, it hurts, and does so materially -- that too many European policymakers and politicians are out there with so many confusing and, in some cases, conflicting remarks.

Once again, already fragile U.S. markets will be influenced by developments on the other side of the Atlantic -- and in a week in which there is great anticipation for President Obama's "mission critical" speech on the American economy.

Europe's deepening debt and growth crisis amplifies the importance of President Obama's effort to deal with America's deepening unemployment and growth crisis, and does so by raising both the stakes and the challenges for the president.

Tighten those seat belts. It will be a bumpy and volatile week as markets are held hostage to policy developments in both America and Europe.

Mohamed El-Erian is chief executive officer and co-chief investment officer of Pacific Investment Management Co.

This piece was cross-posted from CNBC.com.

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