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Paris and Fed: No wonder it's a torrid time for markets

We are coming off the worst week for U.S. markets since August with the Dow and S&P 500 on track for a losing year. Meanwhile, the euro is trading at its lowest against the dollar in seven months. Investors are selling on almost 90 percent certainty the U.S. central bank will raise interest rates next month for the first time in close to 10 years.

But let's keep things in perspective – U.S. markets are more or less only 5 percent away from the records they hit last summer. So by far the most concerning issue I see from the impending hike in U.S. borrowing rates is the debt bubble in emerging economies.

Developing countries have gorged on cheap debt for the past decade, swelling on average to 195 percent of gross domestic product (GDP) on average up from 150 percent in 2009, according to The Economist newspaper. What happens when they have to pay more to continue borrowing?

Spencer Platt | Getty Images

It may get especially ugly for those countries that spend more outside their borders than they take in. Luckily the biggest of them all -- China -- takes in more money from selling their goods overseas and foreign investment dollars coming in than they deploy outside of the country.

But don't forget in 1997 – it was a tiny nation called Thailand and their seldom internationally traded currency which caused the Asian financial crisis. And given we are in such a globally connected world where one part could catch the flu and the rest could suffer from a protracted cold.

Meanwhile in Europe this week the focus will naturally be on the traumatic and tragic events in Paris. Security dominated over any other topic at the G-20 meeting of the world's biggest economies in Turkey this weekend. But will the horrific events have a lasting economic impact?

The majority say no. Markets were already heading in a downward drift when the news unfolded on Friday. This just pushed investors to reduce risk even further.

When it comes to European policy – news that at least one person involved in the Paris attacks came into Europe via Greece and Turkey as a refugee will only push the migrant debate front and center. It could add more fuel to the fire and heighten the risks that the European Union might break apart.

U.K. Prime Minister David Cameron may even be more forceful in his threat to drop his European membership in order to keep the U.K. safe. Will Angela Merkel be able to finish her term with her country so divided on allowing refugees into Germany? Perhaps France's Prime Minister Francois Hollande might be able to catch a second supportive political wind by being a strong leader in his nation's time of need.

Susan Li is co-anchor for Worldwide Exchange. Follow her on @SusanLiTV

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