TREMORS FROM the shock request by Dubai’s flagship government-owned holding company for a debt standstill reverberated in global equity markets yesterday, triggering a steep sell-off in Asia and heavy losses on Wall Street.
While European markets staged a modest but nervous rally after heavy sell-offs this week, investor sentiment remained jittery amid a scramble to assess the broader fallout of the problems of Dubai World, the developer of some of the world’s most ambitious property projects on the sands of United Arab Emirates.
Despite the global volatility, Dublin’s Iseq held its own, advancing 1.9 per cent on the day to close at 2,845.66, slightly outperforming other European markets.
In line with its European counterparts, the index was sharply down on opening, following overnight falls in foreign-exchange markets. It picked up during the morning, gathering pace at lunchtime as the US markets opened.
Ian Huggard of Bloxham Stockbrokers noted a “buy-in-dip” mentality throughout the day, with buyers coming in on weakness.
The resurgence of risk trading seen throughout the day was, he said, due to the overall feeling among investors that this was “not an emerging markets issue, but a Dubai issue”.
The difference in the yield between Irish and comparable US and German government bonds increased slightly after big gains on Thursday.
“There is still nervousness,” said Chris Furness, strategist at 4Cast consultancy. “This has made people recognise the risk of a systemic global ripple.”
Tokyo suffered a 3.2 per cent fall as a flight to safety by spooked investors pushed the yen to 14-year highs, damaging Japan’s export competitiveness.
US markets, closed on Thursday for Thanksgiving, sold off heavily in a shortened trading session yesterday. The SP 500 closed 1.72 per cent down at 1,094.33.
However, a rally in the stocks of European banks exposed to Dubai helped spur gains with the FTSE Eurofirst 300 rising 1.2 per cent on the day.
Market watchers said the investor fears had been heightened by a continuing lack of hard information coming out of the Gulf.
“Right now, none of us know where the story might go over the next week,” said Steven Major, global head of fixed income strategy at HSBC.
Amid concerns that markets in the Gulf will be hammered when they reopen on Monday – and that pressure will mount on banks with exposure to Dubai – investors are now looking to Abu Dhabi, the main financial powerhouse in the UAE federation, to calm regional and international nerves.
The Dubai World debt crisis has undermined the long-held assumption that Abu Dhabi and the UAE federation would always bail out Dubai. So far there has been no statement from the federal government or from Abu Dhabi.
Yesterday the $3.5 billion (€2.3 billion) of sukuk bonds issued by Dubai World subsidiary Nakheel traded at 40 per cent of their face value – almost half their Thursday price.
They are due for redemption on December 14th.
HSBC has the biggest loan exposure to the UAE, according to the Emirates Banks Association, with outstanding loans at the end of last year of $17 billion.
However, analysts at Goldman Sachs said that, although no specific figures were available for lending to Dubai or Dubai World, their “worst-case loss estimate” for HSBC was $511 million.
– (Additional reporting copyright The Financial Times Limited 2009)
