Dubai's Debt Renews Fear of Financial Crisis

http://online.wsj.com/article/SB10001424052748703499404574560502164593652.html

 

• NOVEMBER 27, 2009, 8:15 A.M. ET

Asia Falls on Dubai World; Yen Surges

By ALEX FRANGOS

HONG KONG -- Markets across Asia fell sharply Friday reacting to fears that Dubai's credit problems show the global financial sector is not yet healed.

Japan's Nikkei 225 Average fell 3.2% to 9081.52, its lowest close since July, Australia's S&P/ASX 200 ended down 2.9%, South Korea's Kospi dropped 4.7% and Taiwan's Taiex gave up 3.2%.

Some of the region's indexes took a big hit Friday as the impact of credit problems at Dubai World spreads. Hong Kong bureau chief Peter Stein talks to markets and economics reporter Alex Frangos about the underlying causes of concern in Asia.

In Hong Kong the Hang Seng Index plunged 4.8%, or 1075 points, to 21134.50, led down by banking stocks. HSBC Holdings shares in Hong Kong fell 7.6% and Standard Chartered shares closed down 8.6% on news the banks were directly exposed to Dubai's debt problems. China's Shanghai Composite lost 2.4%, while India's Sensex gave up 3.7%.

The Asian declines, combined with Europe's fall Thursday, augur for a lower opening in New York Friday after the Thanksgiving holiday. Dow Jones Industrial Average futures plunged 297 points lower in screen trade. Markets in Singapore, Malaysia and Indonesia were shut for a holiday.

Financial stocks took a hit as investors became jittery about banks' potential exposure to Dubai World's debt, and other debt issued in Dubai, even though a number of banks across the region said they had negligible exposure.

The news seems to have rattled a market already skeptical about the sharp rise in share prices in recent months. Financial instability in Vietnam and widening bond spreads in Greece and Spain have revived concerns that the global financial system is overleveraged.

"Market movements often need a catalyst and the market movement was ready to happen anyway," says Denis Gould, director of investment in Asia for AXA Investment Managers. "The structural problems with the global economy are still there…You just needed a piece of news on a quiet day when America was out," he said.

Those fears caused government bond yields to tumble as investors shifted out of stocks and commodities and into the safe haven of bonds. The yield on Japan's five-year government bond dropped 0.035 percentage points to 0.535%, the lowest level since 2005. Oil futures fell 3.5% to 74.45 in electronic trading.

The fear of European banking trouble hit Korean shares particularly hard. Local banks and businesses have some exposure to Dubai, but more importantly rely on loans generated from European banks who are now under pressure. Korean construction that are active in the Middle East also fell on the news out of the Dubai.

"People are more worried about the size of European financial firms' exposure to Dubai debt," said Choi Seong-lak, an analyst at SK Securities.

The return of risk aversion spread to currency markets where investors battered the euro. It fell 1.2% against the yen and 0.5% against the dollar, to $1.4847. The dollar gained against most currencies, especially those seen as proxies for economic growth such as emerging market Asian and commodity-linked economies. The Australian dollar fell 1.87% to US$0.8962. The dollar rose 1.43% against the Korean won and 2.1% against the South African rand.

The dollar's rise had one notable exception. The yen continued its surge against the dollar briefly trading below 85 yen before government officials ratcheted up talks that Japan might intervene in currency markets to prevent the yen from strengthening further. The dollar was down 0.73% to 85.86 yen in afternoon trading.

Spot gold was recently trading at $1,144.60 per troy ounce, down $47.50 a troy ounce from the London afternoon fixing.