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Dubai Rocks Investment Markets

As we wake up this morning we hear news of Dubai unable to pay the interest on its bonds. The announcement was made on Wednesday night, at which time Asia and Europe sold off yesterday. The US market was closed, so we will likely be in catch-up mode this morning on this shortened trading day.

I’ve posted the story below fro the Times of London, but as I write this, the European markets have turned positive. That is a good sign that the investors that have had 36 hours to digest this news have concluded that this isn’t a big enough issue to completely derail the uptrend we’ve seen.

However, since this is a credit market issue, expect any asset that has benefited in a major way from the liquidity in the market (gold, oil, emerging markets, financials) to sell off today. Also watch for a pop up in the dollar as some investors head to the safety of t-bills to let this play out.

The next week will be key to this issue and how extensive its implications are, but today, given that its a shortened trading day in the market and that the junior traders are in charge on Wall Street, anything can happen. However, I’d guess that some of our stop losses will trigger today.

More later on this and other things impacting your investments.

From The Times
November 27, 2009
Dubai in deep water as ripples from debt crisis spread
Patrick Hosking and David Robertson

Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.

Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.

Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.

Although the scale of Dubai’s debts is comparatively modest at $80 billion (£48 billion), the uncertainty spooked the markets, with no one sure who its creditors are. Several banks rushed out statements to reassure investors that their exposure was small.

The FTSE 100 plunged by 171 points to 5,194 — its biggest one-day fall in eight months in one of the most jittery days in the financial markets since the depths of the banking crisis.

The Treasury, the Bank of England and the Financial Services Authority were monitoring events closely and are demanding figures from UK banks on their loan exposures to Dubai.

According to a senior government official, Dubai’s crisis is regarded as modest and manageable for Britain, but there were growing fears that Abu Dhabi, the oil-rich neighbouring emirate that has in the past given rescue loans, would leave Dubai to its fate.

Dubai World, the state-owned corporation that began the panic on Wednesday by demanding a standstill on its interest payments, worsened the mood when it postponed a teleconference for its bond holders, saying the phone lines were overwhelmed.

Gerard Lyons, chief economist with Standard Chartered, said: “The market reaction shows how vulnerable some economies are to the aftermath of the debt binge. This highlights how fragile confidence is.”

The Eid al-Adha religious holiday in the Middle East, and the closure of financial markets in the United States for Thanksgiving, exacerbated the sense of uncertainty in markets that were open for business.

A computer crash at the London Stock Exchange, which by coincidence is 21 per cent owned by the Dubai Government, left dealers unable to trade for three and a half hours.

Shares in HSBC slumped by 5 per cent, wiping £6.2 billion from its value. According to the United Arab Emirates Banks Association, HSBC has £11 billion of loans outstanding to the UAE, of which Dubai is one of seven emirates. HSBC declined to comment.

More than £2.6 billion was slashed from the value of Barclays, while Lloyds and Royal Bank of Scotland, both partly owned by the taxpayer, saw their values fall by £1.7 billion and £1.5 billion respectively.

One analyst said that the fears were overdone because Abu Dhabi would eventually come to the rescue to save the UAE from embarrassment. Dubai World has liabilities of £36 billion, about three quarters of Dubai’s total state debt. Its subsidiary Nakheel built The Palm Islands development, but the property bubble in the emirate burst a year ago, leaving buildings unfinished, debts unpaid and paper fortunes erased.