As emerging markets begin to rattle the United States, the "Fear Index" – the CBOE Volatility Index, which measures the market's expectation of volatility in the next 30 days – has spiked. At one point on Monday, it traded close to 19; a week before, it was in the 12 range. That's the highest it's been in three months.
Wall Street legend Art Cashin, Director of Floor Operations at UBS, says the world won't truly know the effects of the emerging markets shakeup for at least another several days.
"The great fear here is contagion," says Cashin. "In an age of globalization, all the markets appear to be intertwined."
(Read: Turkey: What's going on and why you should care)
Cashin says the many are recalling events from 14 years ago during the 1997 Asian financial crisis. After the collapse of the Thai baht, markets in neighboring Southeast Asian nations fell into turmoil. That, in turn also led to political and social unrest. Markets in other parts of the world, including the United States, were also negatively affected. The term "contagion" was originally coined to describe the chain of events.
"A thing that looked isolated at the time turned into actually a multi-year problem for markets," says Cashin. "Contagion is a great concern. It won't be evident until probably we get a week more into this."
Cashin says there are two things all traders should look at first in the morning.
"First is the yield on the [US Treasury] 10-year [bond]," says Cashin. "And then, right behind it in today's environment, I would look to see what the Japanese yen was doing."
The reason Cashin looks at the Japanese yen is because it is frequently used in carry trades. Since Japanese interest rates are some of the lowest in the world (the benchmark 10-year Japanese Government Bond yields 0.62%), traders often borrow yen to finance the purchase of higher-yielding securities. The hope, of course, is that changes in the yen's exchange rate don't offset gains in the high-yielding security.
(Read: Asian stocks stabilize after selloff; Fed meeting watched)
"That's become a financing currency," says Cashin about the Japanese yen. "It impacts markets all around it."
To see the rest of Art Cashin's interview on Talking Numbers about the threat of contagion to the markets, watch the video above.
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