Market wrap: Stocks are set to open deep in the red this morning after the threat of a sovereign default in Dubai sent overseas markets tumbling.
European markets plunged after the Gulf state announced a six-month stand-still on repayments of a state-run conglomerate's debts. The news was a nasty reminder that the after-effects of the global financial crisis linger in pockets of the financial world. There was an immediate flight to safety in response, with global equities falling and U.S. government bond prices rising.
With U.S. markets closed for the Thanksgiving Day public holiday, local traders will take their lead from Europe and Canada. European markets suffered their biggest one-day drop since April on worries about their banks' exposure to Dubai. Analysts at Credit Suisse estimated that European banks could have as much as $40 billion of exposure to Dubai. Britain’s FTSE slumped 3.18%, Germany’s DAX 3.25% and France’s CAC 3.41%. The falls wiped out most of this month's gains.
Falls in Canada was more restrained. The major indexes were recently down around 1.5% in late afternoon trade.
The conglomerate at the centre of the scare, government-owned Dubai World, has interests in real estate, ports and the leisure industry and carries around $60 billion in liabilities. Credit agencies immediately downgraded the debt of a range of Dubai-related firms after the restructuring announcement. The cost of insurance against default immediately rose for other Middle Eastern and emerging-market countries, while central and eastern European currencies fell.
"I don't see this as a massive issue but it's another warning to where the world got itself last year with loose monetary conditions [and] loose lending," said a British market strategist quoted on MarketWatch. "And, in a few cases, the problems are still out there and we could continue to see these kinds of nasty surprises".
Gold was trading near yesterday's record high. Gold for December delivery hit a high of $1,195 an ounce overnight and was recently at $1,188 an ounce in thin electronic trade on Globex.
Oil slid on speculation that yesterday's big advance wasn’t supported by inventory levels. Crude futures were recently trading at $76.21 a barrel, down 2.25%.
Base metals were undermined by rising stockpiles and a rebound in the U.S. dollar. In London, copper suffered its largest fall since October, down 2.3%. Tin fell 0.5%, aluminum 1.9%, nickel 2.5% and lead 2.1%.
Local futures trading stopped at midnight because of the US holiday and does not reflect the full extent of the falls in Europe. The SPI futures index closed 41 points lower at 4677.
TRADING THEMES TODAY
DUBAI: Any analyst worth his salt will be trying to work out right now which companies in Australia have exposure to Dubai. Leighton will be in the firing line today. Banks? Dunno, but financial stocks are still likely to get hit hard today as investors reduce their exposure to potential problem sectors. The news filtered onto Asian markets yesterday and our index took a little of its medicine then, but there's obviously more to come. This seems likely to be a short sharp shock, rather than the start of a new chapter in the GFC, but the next few days could be ugly.
BOUNCE TRADES: There's nothing like panic for creating opportunities. Look for oversold shares in uptrends pulling back to support levels in the first half-hour of trade and finding a base. Given the level of uncertainty today, I'll limit any purchases to shares that are so oversold that Blind Freddy can see the opportunity.
ECONOMIC NEWS: Nothing significant scheduled here or in the US. Trading in the U.S. tonight stops at 1 pm EST.
