By ALEX FRANGOS

Asian markets opened predictably lower on Monday following S&P's downgrade of the U.S. credit rating on the weekend. The WSJ's Isabella Steger talks to Jim McCafferty of RBS about regional market reaction and which sectors are proving defensive in this environment.

Asian markets saw their initial losses deepen in midday trading Monday as investors grew skeptical following the historic downgrade of U.S. debt and moves to shore up European debt over the weekend. Gold also rose to a new nominal record near $1,700 an ounce.

But 10-year U.S. Treasury yields fell in midday Asian trading despite worries that the downgrade would trim investor appetite for U.S. debt.

While risk-off sentiment will drive demand for U.S. Treasuries now, Asian sovereign debt, especially from Indonesia and South Korea, will become more attractive. The WSJ's Isabella Steger discusses with Credit Agricole strategist Frances Cheung.

By midday, Japan's Nikkei Stock Average had fallen 2.1%, while Hong Kong's Hang Seng Index was down 4.1%. Australia's S&P/ASX 200 shed 2.4% to a fresh two-year low, and China's Shanghai Composite fell 3.7%.

Markets seen as most exposed to U.S. growth were off sharply. Korea's Kospi Index dropped 4.1% and its currency, unlike most, fell against the dollar.

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Reuters

An employee of the Tokyo Stock Exchange watched a stock index board as she waited for the opening on Monday.

Investors and analysts said after last week's sharp selloff, prices of many assets had already partially taken into account a possible downgrade, along with lowered prospects for global economic growth.

"For share markets the downgrade should have been discounted already, but it adds to uncertainty and reinforces the pressure for premature fiscal tightening in the U.S. It's also a blow to U.S. confidence," said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney.

In a sign that investors continue to see U.S. debt as a safe haven despite Standard & Poor's downgrade late Friday, the 10-year Treasury yield fell in Singapore trading, to 2.55%, from Friday's New York close of 2.563%, while the yield on two-year Treasurys fell to 0.272% from 0.292% late Friday.

The dollar continued to take the brunt of investors' ire over the situation in the U.S. Against the Japanese yen it fell 0.27% to ¥78.01, and was down nearly 0.5% against the euro to $1.436, a signal that investors cheered an announcement by the European Central Bank that it would extend its bond buying program to help avert debt worries in two of Europe's larger economies, Italy and Spain.

Nymex crude-oil futures for September delivery fell $2.80, or 3.2%, to $84.08 a barrel in electronic trading. Spot gold soared $43.80, or 2.6%, to $1,707.20 a troy ounce, after hitting a fresh record of $1,716.50 earlier in the day.

Over the weekend, investors set up trades to take advantage of the suddenly changed landscape, in which the U.S. has lost its preeminent status and fears of a global of slowdown have intensified.

Gareth Berry, UBS currency strategist told clients to sell the Australian dollar, often seen as a proxy for global growth and a favorite among foreign exchange traders.

"S&P's decision to strip the U.S. of its AAA rating on Friday night is likely to trigger a sharp increase in risk aversion which may continue over the coming days. Consequently the Australian dollar may find itself under significant downside pressure," he wrote in a note. He advised clients to expect the Australian dollar to fall to parity with the U.S. dollar. The Australian dollar rose slightly Monday to $1.043, but is down sharply from its high of $1.10 in late July.

Anticipation for continued market turmoil was high. In Hong Kong, the head of the Hong Kong Monetary Authority, which oversees the territory's currency peg to the U.S. dollar, called a early morning press conference to calm investors.

Norman Chan, the HKMA's chief executive said he doesn't expect the S&P downgrade to place significant pressure on the U.S. dollar, as the new double-A-plus rating is still "very high." He said the U.S. dollar remains the "world's most important settling currency for international trade and financial products."

Mr. Chan said that while economic growth has slowed faster than expectations, he thinks the risk of a double-dip recession in the U.S. isn't high.