Dubai default fears spook investors

[FarCenter]

By Jamie Chisholm, Global Markets Commentator - http://www.ft.com/cms/s/0/554a5c30-da50-11de-9c32-00144feabdc0.html

Published: November 26 2009 07:09 | Last updated: November 26 2009 14:29

14:20 GMT. Global stock markets endured heavy selling on Thursday as investors were spooked by the spectre of a default by Dubai and after a febrile foreign exchange market saw the yen surge to a 14-year high against the dollar.

The turmoil caused a flight to less risky assets. Gold, which had challenged $1,200 in Asian trading, fell back from its highs and money flowed into havens such as German government bonds.

US markets are closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 1.4 per cent.

In Europe, the FTSE 100 lost 2.1 per cent at 5,249.9, while the FTSE Eurofirst 300 fell 2.4 per cent to 997.4. Initial weakness was blamed on a sell-off in Asia that appeared to be prompted by the yen’s sudden rise.

But as the European trading day progressed it became clear it was Dubai World’s difficulties that had hit a particular nerve because it reminded investors of the lingering damage wrought by the financial crisis.

Banking stocks tumbled on concern about their potential exposure to Dubai. Indeed, the cost of insuring against default by the emirate jumped, with Reuters reporting the Dubai five-year credit default swap being quoted as high as 500-550 basis points. This means it would cost about $500,000 a year to insure $10m of Dubai’s debt. On Tuesday it would have cost about $360,000.

Greek and Irish government five-year credit default swaps also moved higher as nations with supposedly precarious fiscal positions were punished. In contrast, investors sought out comparative haven assets, pushing the yield on the German Bund down by 6 basis points to 3.18 per cent.
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Debt rattle
Americans are having their turkey, but it is the markets that are getting stuffed. The debt worries surrounding Dubai have led investors to reduce their risk appetite. Gold, oil, equities, and commodity currencies are down. Haven currencies and triple-A government debt are up. But the crucial test will come when the US markets reopen on Friday. Only then will we know whether Dubai is the genuine catalyst for the long-mooted risky asset correction.

[exboyfil]

1. Maybe my short position will work out

Short, cash, and U.S. Treasury TIPS

[FreakinDJ]

2. I'm over 24% growth in the last 8 months in the Market

Short Position - probably not as well

[exboyfil]

4. My short was actually a long until pretty recently

When S&P500 hit 1050 I exited and took the short position. Actually I followed the bouncing ball before this recent runup and did pretty well (going to short on an up day and back to a long on a down day). Got off sequence, and I am hoping the market will save me.

[AngryAmish]

3. I'm long in beans

Not futures, actual beans. I have a pile 17 foot high in my back yard.