U.S. indexes fell 1.5% or more Friday on news that the emirate's main investment vehicle is seeking to suspend repayments on $59 billion
U.S. stock indexes and major commodity futures closed lower Friday as Wall Street scrambled to catch up with steep sell-offs that occurred overseas during the Thanksgiving holiday while U.S. exchanges were closed.
Reports that Dubai World, the emirate's investment vehicle, was seeking to suspend repayments on all or part of its $59 billion in debt sent stocks in Europe down more than 3% on Thursday; Asian markets made similar drops Friday. The news sent investors into Treasuries, cash and other less-risky investments, though stocks in the U.S. were well off their worst levels.
In the U.S., investors were also paying close attention to retail sales as the holiday shopping season kicks off with "Black Friday".
"Based on our visits and store associate comments - we believe sales are meeting or exceeding plan for Black Friday (important as gauge of discretionary demand)," wrote analysts from Stifel Financial in a note Friday.
On Friday, the 30-stock Dow Jones industrial average finsihed lower by 154.48 points, or 1.48%, at 10,309.92. The broad Standard & Poor's 500-stock index was down 19.14 points, or 1.72%, at 1,091.49. The tech-heavy Nasdaq composite index lost 37.61 points, or 1.73%, to 2,138.44.
U.S. equity markets closed at 1:00 p.m. ET Friday.
European stocks regained equilibrium after earlier losses. The FTSE 100 index of leading British shares was up 51.60 points, or 0.99%, at 5,245.73, while Germany's DAX added 71.44 points, or 1.27%, to 5,693.28. The CAC-40 in France was 42.22 points, or 1.15%, higher at 3,721.45. On Thursday, Europe's main indexes slid over 3%, with banks, especially those thought to have exposure to Dubai such as Barclays PLC, HSBC PLC and Standard Chartered PLC, particularly badly hit.
Asian stocks were hammered as they played catch-up following the big losses in Europe in the previous session. Hong Kong's Hang Seng closed 1,075.91 points, or 4.8%, lower at 21,134.50, while South Korea's benchmark plummeted 4.7% to 1,524.50. Elsewhere in Asia, Japan's Nikkei 225 stock average fell 301.72 points, or 3.2%, to 9,081.52 while Australia's index dropped 2.9%. China's main Shanghai stock measure was off 2.4%.
Treasuries were holding large gains Friday as investors panicked over news of Dubai World's debt rescheduling effort, resulting in a huge flight to safety trade Thursday while U.S. markets were shuttered. On Friday, the 10-year note was higher in price at 101-09/32 for a yield of 3.229%, while the 30-year bond was higher at 102-26/32 for a yield of 4.212%.
The U.S. dollar index was higher at 75.02. Earlier, the dollar slid to a new 14-year low of 84.81 yen amid mounting expectations that the Bank of Japan may intervene in the markets by buying dollars or selling yen after Japan's finance minister Hirohisa Fujii said he was "extremely nervous" about the movements in the yen and that the "market had moved too far in one direction."
In times of uncertainty, the dollar is considered to be more of a safe haven currency. Investors are also concerned about the exposure of European banks to Dubai.
On Thursday, the Swiss National Bank reportedly intervened to buy dollars to prevent the export-sapping appreciation of the Swiss franc. That seems to have worked -- for now, at least -- as the dollar has moved back above parity, trading 0.9% higher at 1.0118 Swiss francs.
The British pound has also been battered amid fears about the exposure of Britain's banks to the region. The pound was down 0.9% at $1.6375.
Another currency losing some of its shine was the euro, which fell 0.8%.
Oil, meanwhile, tracked developments in stock markets and West Texas Intermediate crude oil futures fell to $75.72 a barrel in electronic trading on the New York Mercantile Exchange. The uncertainty over the situation in Dubai and its implications for other countries has sparked a flight to safety that is weighing heavily on oil prices.
Gold futures were also lower, at $1,178.10 per ounce, though well above session lows.
Market confidence has been hit hard by Wednesday's news that Dubai World, a government investment company, has asked creditors if it can postpone its forthcoming payments until May. That stoked fears, mainly in Europe on Thursday, of a potential default and contagion around the global financial system, particularly in emerging markets.
Action Economic notes that the Dubai situation carries echoes of the 1998 Russian default -- although Dubai is not technically in default -- an event that was a consequence of the Asian financial crisis of 1997 and which took a year to happen after the Asia crisis erupted in mid-1997.
Dubai's unilateral demand for a debt repayment moratorium will continue to overhang financial market sentiment. Focus will be on whether Dubai's creditors accept its proposal, says Action Economics; if not, a "fire sale" of assets may ensue.
Reuters reports that banks outside the Gulf played down their exposure to Dubai debt on Friday after fears of default shook global markets, and European leaders said the world economy was now strong enough to cope with the setback.
There were no data releases or other major events on Friday's U.S. calendar, leaving the focus squarely on the Dubai situation, though traders were also look to retail sales as the Christmas shopping season officially begins.
"It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested but for the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course," said Jane Foley, research director at Forex.com.
Across all markets, there is a growing awareness that investors may use the upcoming year-end to lock-in whatever profits have been made over the last 12 months.
"Market cynics have been looking for a correction in the equity market, which has blazed the trail in the past seven months," said David Buik, markets analyst at BGC Partners.
"However they have been unable to find sufficient reasons to nail their flag to the mast, by taking profits, whilst alternative asset classes were unattractive options -- well they certainly found an excuse yesterday with the Dubai debt debacle," he added.