Dubai debt fears, dollar slide hit world markets hard

LONDON - Markets tend to be relatively quiet when Wall Street is closed for a holiday, such as U.S. Thanksgiving Day on Thursday.

LONDON - Markets tend to be relatively quiet when Wall Street is closed for a holiday, such as U.S. Thanksgiving Day on Thursday.

Not so this year as the rest of the world digested the stunning news from Dubai that the government's flagship investment company was in financial trouble. The blood-letting started in Asia on news late Wednesday that the Dubai government planned to restructure Dubai World, which has developed a slew of extravagant real estate projects and is thought to have debts totalling around US$60 billion.

It also announced a request for a six-month standstill on repayments of its massive debt.

That stoked fears of a potential default and contagion around the global financial system, particularly in banks and emerging markets.

The Shanghai index fell 3.6 per cent, Hong Kong's Hang Seng shed 1.8 per cent and Japan's Nikkei 225 stock average fell 0.6 per cent. European markets followed suit, with London's FTSE 100 index down 3.18 per cent and Frankfurt's DAX dropping 3.25 per cent.

In Canada, the Toronto stock market plunged 200.1 points to 11,436.8, while the Canadian dollar shed 1.35 cents to 94.3 cents US as the loonie was caught up in an investor flight to traditional safe havens.

Doug Porter, deputy chief economist at BMO Capital Markets, said a flight to safety was behind the loonie's weakness Thursday.

He said the markets have been oscillating back and forth in their willingness to assume risk, including investments in stocks, commodities and commodity-based currencies like the loonie.

"This is the kind of news that has caused investors to lighten up on any kind of risky assets and the Canadian dollar has been swept up on that, no question," he said.

Benchmark crude for January delivery was down $1.71 to $76.25 in electronic trading late Thursday afternoon on the New York Mercantile Exchange.

"Fear of sovereign default in the Middle East rattled the markets," said Jane Foley, research director at Forex.com.

Banks bore the brunt of the selling in Europe, amid fears of potential exposure to Dubai.

In London, Royal Bank of Scotland PLC was down nearly eight per cent, making it the biggest faller on the FTSE. In Germany, Deutsche Bank was the biggest decliner on the DAX, down around six per cent.

In Toronto, Manulife Financial (TSX:MFC) and Fairfax Financial (TSX:FFH) issued statements saying they do not have exposure to Dubai World. A source close to Sun Life Financial (TSX:SLF) said the insurer also doesn't have exposure.

Manulife was off 10 cents to $18.50 and Sun Life was off 30 cents to $29, while Fairfax gained 49 cents to $368.

BMO Capital's Porter said the Dubai request for a standstill in repayments was one of these risks that has been "out there" for some time.

"But I guess the broad opinion had been that somehow they would pull through, whether through support from Abu Dhabi or they might have the financial resources to get over this."

Looking back to the middle of the decade there was no place in the world that was seeing runaway growth of the kind Dubai was enjoying, Porter said, adding that it made "China look like a relative tortoise."

But it wasn't backed up by oil money because, unlike its neighbours, Dubai is not an oil producer. "I think this was the ultimate house of cards that was at risk of tumbling," Porter said.

Meanwhile, across all markets there has been a growing awareness that investors may use the upcoming year-end to lock-in whatever profits have been made over the last 12 months.

Gold has been one of the biggest high-flyers over the last few months, having gained over 10 per cent in November alone. It continued to rise Thursday as investors bought it up as a safe haven. The December bullion contract moved up $5.80 from Wednesday's latest record close to US$1,192.

-With files from The Canadian Press

 
 
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