Dubai debt fears stalk world markets

By PAN PYLAS

posted: 21 HOURS 6 MINUTES AGO

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LONDON -European stock markets rebounded Friday after Wall Street didn't fall as much as feared on the news that Dubai is having trouble handling its debt.

Because U.S. markets were closed for Thanksgiving Day on Thursday, they are only reacting now to the fears that Dubai's debt problems may affect the wider financial system.

In Europe, the FTSE 100 index of leading British shares closed up 51.60 points, or 1 percent, at 5,245.73 while Germany's DAX rose 71.44 points, or 1.3 percent, at 5,685.61. The CAC-40 in France ended 42.22 points, or 1.2 percent, higher at 3,721.45.

On Wall Street, the Dow Jones industrial average was down 137.40 points, or 1.3 percent, at 10,327 around midday New York time while the broader Standard & Poor's 500 index fell 15.64 points, or 1.4 percent, to 1,094.99. Futures markets had earlier been pricing in 2 percent plus declines on the two indexes.

Though hefty, the losses in the U.S. paled in comparison to those posted earlier in Asia, when indexes in Hong Kong and South Korea tumbled 5 percent in response to the previous day's Dubai-related losses in Europe.

"The story for most of today has been one of continued recovery, clawing back a portion of the losses seen on Thursday...a fairly orderly opening to U.S. markets has also helped calm nerves," said Anthony Grech, market strategist at IG Index.

"So far the recovery has been an encouraging one and shows that even after eight months of strongly rising stock markets, the appetite still seems to be out there to buy into the dips," Grech added.

Confidence about the world economy was hit hard by the news that Dubai World, a government investment company with around $60 billion worth of debt, has asked creditors if it can postpone forthcoming payments until May. Investors are wondering whether the current uncertainty surrounding the emirate has brought the eight-month equities bull run to an end.

Analysts said more clarity about the long-term impact of Dubai's troubles would likely emerge next week, when Wall Street is back to normal trading hours following the Thanksgiving Day holiday. U.S. markets are only open for half the day Friday.

"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.

Investors were also keeping a close eye on associated developments in the currency markets after the dollar slid to a new 14-year low of 84.81 yen.

However, the dollar climbed back off its lows to 86.87 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."

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 percent 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 nearly one percent earlier but recovered some ground alongside the better than expected performance in stock markets to be trading only 0.1 percent lower at $1.6495.

Another currency that has been struggling since the Dubai news broke is the euro, which was down a further 0.4 percent to $1.4963 — 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.

Earlier, Asian stocks were particularly badly hit 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 percent, lower at 21,134.50, while South Korea's benchmark plummeted 4.7 percent to 1,524.50.

Elsewhere in Asia, Japan's Nikkei 225 stock average fell 3.2 percent to 9,081.52 while Australia's index dropped 2.9 percent. China's main Shanghai stock measure was off 2.4 percent.

Indexes in emerging markets avoided a second day of losses, with Russia and Brazil up about 1 percent.

Oil, meanwhile, tracked developments in stock markets and benchmark crude for January delivery fell $2.21 to $75.75 a barrel in electronic trading on the New York Mercantile Exchange.

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AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

2009-11-27 11:57:16