Stock markets fell across Asia on Friday as investors, spooked by news that Dubai was seeking to suspend some debt repayments, piled out of assets they considered risky.
The Hang Seng index in Hong Kong sagged 4.8 percent and South Korea’s key market gauge, the Kospi, fell 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan dropped 3.2 percent. Banking shares were among the worst hit amid concerns about potential exposure to Dubai’s billions of dollars in debt.
Stock markets in Europe also headed lower during the morning, extending the falls they had suffered during the previous session. And Wall Street — which had been closed Thursday for the U.S. Thanksgiving holiday — was also set for a rocky day when markets reopen Friday.
The root of the latest turmoil was a surprise announcement on Wednesday from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow its main investment vehicle, Dubai World, to suspend its debt repayments for six months.
The announcement — the global high finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.
“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.
“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”
Still, the news stunned investors and caused markets around the world to swoon even as analysts struggled to explain which fears of contagion were legitimate and which were overwrought.
Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its $59 billion debt, worries about the sovereign debt of Middle Eastern countries swimming in oil reserves were unfounded.
Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”
Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday: “Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far. I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”
Still, in the mentality of the market, guilt by association can be a powerful force. Referring to the unexpected move by Dubai World, Mr. Davidson said, “It will tarnish the reputation of the Gulf region a bit, and it will certainly make investors more bearish again about emerging markets.”
Bank shares were among the worst hit by the global nervousness amid concerns that some might have sizeable exposures to the affected debt.
In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai, and Standard Chartered added that it would issue a statement “if there was anything material to disclose.”
Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”
Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn. When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors. At least that is what investors had assumed.
The shock announcement on Wednesday upended the assumption that Dubai would stand behind Dubai World and that other emirates, especially Abu Dhabi, would stand behind Dubai.
Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.
Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”
And Mr. Wolter of RBS said he believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.
On Friday, the price of oil, already undermined by the uncertain outlook for global recovery, fell to below $74 per barrel.
On the foreign exchange markets, the Japanese yen briefly hit ¥84.82 to the dollar — its strongest level against the U.S. currency in 14 years — prompting the country’s finance minister, Hirohisa Fujii, to say that he was “extremely nervous and watching the market carefully.”
“There’s no doubt the market has moved too far in one direction. Moves right now are extreme, and it would be possible to take appropriate measures,” he added, according to Reuters.
The dollar’s weakness has been broad-based, but is causing especial jitters Japan, whose economy is still struggling to emerge from a deep recession. A strong yen — which makes exporters’ good more expensive for consumers in the United States — is something Japan’s export-oriented economy can ill afford.
By late afternoon in Tokyo, the dollar had recouped some ground to trade at around ¥86.30, but it remains strong in comparison to earlier this year.
The dollar has fallen against Japanese currency for years, in part because of longstanding worries about the United States’ chronic trade imbalances and debt.
At the same time, the yen often strengthens in times of uncertainty, when Japanese investors tend to pull back on overseas investments and move their assets back to Japan. This explains why the yen has continued to appreciate despite the fact that the Japanese economy is in a deep funk, and interest rates there are ultra-low, said Patrick Bennett, a strategist at Société Générale in Hong Kong.
Mr. Bennett said he expected politicians to “ratchet up their tone” before potentially intervening in the markets. At the same time, he said, many exporters had by now learned to live with a stronger yen, meaning that the fall-out for them — and the overall economy — may not be as overwhelmingly negative as is commonly believed.
The Hang Seng index in Hong Kong sagged 4.8 percent and South Korea’s key market gauge, the Kospi, fell 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan dropped 3.2 percent. Banking shares were among the worst hit amid concerns about potential exposure to Dubai’s billions of dollars in debt.
Stock markets in Europe also headed lower during the morning, extending the falls they had suffered during the previous session. And Wall Street — which had been closed Thursday for the U.S. Thanksgiving holiday — was also set for a rocky day when markets reopen Friday.
The root of the latest turmoil was a surprise announcement on Wednesday from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow its main investment vehicle, Dubai World, to suspend its debt repayments for six months.
The announcement — the global high finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.
“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.
“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”
Still, the news stunned investors and caused markets around the world to swoon even as analysts struggled to explain which fears of contagion were legitimate and which were overwrought.
Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its $59 billion debt, worries about the sovereign debt of Middle Eastern countries swimming in oil reserves were unfounded.
Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”
Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday: “Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far. I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”
Still, in the mentality of the market, guilt by association can be a powerful force. Referring to the unexpected move by Dubai World, Mr. Davidson said, “It will tarnish the reputation of the Gulf region a bit, and it will certainly make investors more bearish again about emerging markets.”
Bank shares were among the worst hit by the global nervousness amid concerns that some might have sizeable exposures to the affected debt.
In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai, and Standard Chartered added that it would issue a statement “if there was anything material to disclose.”
Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”
Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn. When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors. At least that is what investors had assumed.
The shock announcement on Wednesday upended the assumption that Dubai would stand behind Dubai World and that other emirates, especially Abu Dhabi, would stand behind Dubai.
Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.
Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”
And Mr. Wolter of RBS said he believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.
On Friday, the price of oil, already undermined by the uncertain outlook for global recovery, fell to below $74 per barrel.
On the foreign exchange markets, the Japanese yen briefly hit ¥84.82 to the dollar — its strongest level against the U.S. currency in 14 years — prompting the country’s finance minister, Hirohisa Fujii, to say that he was “extremely nervous and watching the market carefully.”
“There’s no doubt the market has moved too far in one direction. Moves right now are extreme, and it would be possible to take appropriate measures,” he added, according to Reuters.
The dollar’s weakness has been broad-based, but is causing especial jitters Japan, whose economy is still struggling to emerge from a deep recession. A strong yen — which makes exporters’ good more expensive for consumers in the United States — is something Japan’s export-oriented economy can ill afford.
By late afternoon in Tokyo, the dollar had recouped some ground to trade at around ¥86.30, but it remains strong in comparison to earlier this year.
The dollar has fallen against Japanese currency for years, in part because of longstanding worries about the United States’ chronic trade imbalances and debt.
At the same time, the yen often strengthens in times of uncertainty, when Japanese investors tend to pull back on overseas investments and move their assets back to Japan. This explains why the yen has continued to appreciate despite the fact that the Japanese economy is in a deep funk, and interest rates there are ultra-low, said Patrick Bennett, a strategist at Société Générale in Hong Kong.
Mr. Bennett said he expected politicians to “ratchet up their tone” before potentially intervening in the markets. At the same time, he said, many exporters had by now learned to live with a stronger yen, meaning that the fall-out for them — and the overall economy — may not be as overwhelmingly negative as is commonly believed.
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