US stock futures tumble on fears over Dubai debt

By TIM PARADIS

posted: ONE MINUTE AGO

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NEW YORK -U.S. stock futures plunged Friday as a wave of fear swept through world markets over concerns that financial trouble in the Middle Eastern city-state of Dubai will upend a global economic recovery.

Stock futures fell more than 2 percent but pulled off their worst levels as stocks in Europe strengthened, while Treasury prices jumped sharply. The dollar gained against most other major currencies as investors sought safety following steep drops in overseas markets. Commodities prices tumbled.

U.S. markets were closed Thursday for Thanksgiving. Major stock indexes finished at 13-month highs on Wednesday.

Investors are worried that a default by a government investment company in Dubai over $60 billion in debt payments could have a ripple effect in world financial markets. The fear is that losses in the small emirate, which has drawn wealthy tourists from around the globe in the past decade with its Las Vegas-in-the-Middle East appeal, could imperil a nascent economic rebound.

Worries about bad debt are fresh in investors' minds after the collapse of the U.S. brokerage Lehman Brothers in September last year pushed the world overnight deeper into recession as banks halted lending on fears of a domino effect of bad loans.

"I think this is a sign of things to come," said Dave Rovelli, managing director of trading at brokerage Canaccord Adams in New York. "Commercial real estate continues to go lower. People are going to continue to default on debt payments."

Investors are being forced to ask whether the troubles in Dubai will usher in a new period of financial instability and put in danger an eight-month rally in the stock market. However, the ability of world markets to digest the troubles in Dubai without widespread panic could also boost investor confidence in the recovery in the financial markets in the past year.

The latest trouble on Wall Street come as the U.S. kicks off the unofficial start to the holiday shopping season. Investors will be tracking news from retailers for insights into how much consumers will spend in the coming month. Consumer spending is the biggest driver of the U.S. economy.

Dow Jones industrial average futures fell 210, or 2 percent, to 10,232. Standard & Poor's 500 index futures fell 29.50, or 2.7 percent, at 1,079.40. Nasdaq 100 index futures slid 44.50, or 2.5 percent, to 1,749.75.

Trading volume had been expected to be light ahead of a shortened trading session. Light volume can trigger big swings in markets. Stock markets close three hours early, at 1 p.m. EST. Bond markets close at 2 p.m.

Investors rushed into the safety of U.S. government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.22 percent from 3.28 percent late Wednesday. The yield on the three-month T-bill rose to 0.04 percent from 0.03 percent.

The ICE Futures U.S. dollar index, which measures the greenback against a basket of foreign currencies, jumped 0.7 percent. The dollar gained against the yen, which is also a safe-haven currency. Earlier, the yen rose to a 14-year high against the dollar.

Commodities, which are priced in dollars, fell as the dollar gained. The move reflected an unwinding of trades that relied on a weak dollar to finance purchases of higher-yielding assets. Spooked traders reversing the so-called "carry trade" were demanding safe-haven assets.

Investors have been pushing into riskier assets for months as they seek higher returns. U.S. interest rates are at record lows, making riskier investments like stocks an enticing alternative to the paltry earnings of safer investments like government debt.

Light, sweet crude fell $4.07 to $73.89 in electronic trading ahead of the open of the New York Mercantile Exchange.

European markets, which fell more than 3 percent Thursday, turned higher after an early slide Friday. In afternoon trading, Britain's FTSE 100 rose 0.2 percent, Germany's DAX index rose 0.3 percent and France's CAC-40 advanced 0.5 percent.

In Asia, Japan's Nikkei stock average slid 3.2 percent. Hong Kong's Hang Seng index tumbled 4.8 percent. South Korea's benchmark dropped 4.7 percent.

The worries about Dubai erupted amid a period of relative calm in U.S. markets. The Chicago Board Options Exchange's Volatility Index, known as the market's fear index, fell Wednesday to its lowest level since August 2008. That signaled investors hadn't been worried about big swings in the market.

The VIX, as it's known, stands around 20, in line with its historical average. It jumped to a record 89.5 in October last year around the height of the financial crisis.

The latest test of the market comes as major stock indicators are up by more than 6 percent this month after stalling last month amid worries about the economy. The S&P 500 index is up 64.2 percent from a 12-year low in March.

Trading volume in November has been light as many professional investors have pulled back from markets in hopes of locking in the big gains for 2009.

Rovelli said investors have been too quick to assume that the financial markets are on the mend.

"We're way ahead of ourselves in this market. We're in the eye of the storm now and we've been in it since March," he said. "Now we're in the back end of the storm."

2009-11-27 09:29:10