Dubai gets last minute aid from Abu Dhabi

Abu Dhabi gave US$10bn in loan to Dubai for repaying part of the debt held by Dubai World and its property unit Nakheel. Out of this, US$4.1bn will be used to repay Nakheel's Islamic bond, or sukuk, that matures. The remainder of the funds will be used to finance Dubai World's needs up until the end of April 2010. "We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheikh Ahmed bin Saaed al-Maktoum said in a statement. "Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come," Saaed al-Maktoum said. Abu Dhabi is the largest member of the United Arab Emirates federation and a major oil exporter.

Dubai rocked world markets in late November when it requested a freeze on debt payments by Dubai World in order to restructure the conglomerate. Nakheel's bond had been seen by many as a litmus test for Dubai's ability to repay more than US$80bn of government and corporate debt. Media speculation that Nakheel's debt woes could soon be over helped boost shares in Dubai last week. In its statement, Dubai said that it will focus on addressing the concerns of Dubai World's creditors and will start discussions with creditors and contractors shortly. Separately, reports stated that the United Arab Emirates (UAE) central bank will be there to inject liquidity as needed into banks that face exposure to Dubai World

Wall Street joins world in reacting to Dubai crisis

Early gains in the week help indices register little weekly losses

It was a holiday shortened week at Wall Street that ended on Friday, 27 November, 2009 with US market being closed on Thursday, 26 November, 2009 on account of Thanksgiving Holiday and half day closed the following the day. But due to weakness in the later part of the week, indices suffered little losses for the week, though market had managed a strong start on Monday, 23 November, 2009. But news of Dubai's debt crisis rattled Wall Street once again.

For the week, Dow ended lower by 8.24 points (0.1%) at 10,309.92. Nasdaq ended lower by 7.6 points (0.4%) at 2138.44. S&P 500 ended almost unchanged at 1091.49. Sector wise, financial led the pack of losers while healthcare and telecom led the pack of gainers.

Market made off to a good start on Monday, 23 November, 2009, following a weak dollar and better thane expected housing report. Market managed to cling to its gains for the following two days – Tuesday and Wednesday. Among economic reports expected for the week, the housing data showed that home sales in October rose 10.1% to 6.1 million homes, greatly outpacing expectations of 5.7 million as the first-time home buyers tax credit provided much of the incentive for the increase.

The world stock markets revisited last year's stock market crisis partly on Wednesday, 25 November, 2009 after news hit the wires that the Dubai government asked creditors, which reportedly include many European banks, particularly in the United Kingdom, to defer payments on some $20 billion in debt coming due over the next 18 months. Reportedly, Dubai World, the largest corporate entity in the Persian Gulf emirate, asked creditors last Wednesday for a six-month stay on repayment of $60 billion in debts. Indices across the world just plunged soon after the news.

Wall Street reacted a little late to the news with market being closed on Thursday, 26 November, 2009. In the US market on Friday, 27 November, sellers moved concertedly to pressure stocks amid news of credit troubles in Dubai. Their actions gave the stock market its worst single-session percentage drop of the month and caused volatility to spike.

On that day, The Dow Jones Industrial Average ended lower by 154.48 points at 10309.92. Nasdaq ended lower by 37.61 points at 2138.44. S&P 500 ended lower by 19.13 points at 1091.51. Losses were broad based, too. In fact, all 30 Dow components logged a loss. Broader market pressure and weakness among commodities took their toll on the materials sector and the energy sector. The two led declines for most of the session.

Crude prices fell at Nymex on Friday, 27 November, 2009. Prices fell as the debt concerns in Dubai further troubled investors. The rising dollar also pressured the crude oil prices.

On Friday, crude-oil futures for light sweet crude for January delivery closed at $76.05/barrel (lower by $1.91 or 2.4%). Earlier during the day, the contract dropped to a low of $72.39. For the week, crude ended lower by 1.8%.

Yellow metal prices ended their nine day consecutive winning streak and ended lower on Friday, 27 November, 2009. Prices fell as the debt concerns in Dubai further troubled investors. The rising dollar also pressured the precious metal prices. Silver prices also ended substantially lower.

On Friday, gold for December delivery ended at $1,174.2, lower by $12.8 (1.1%) an ounce on the New York Mercantile Exchange. Earlier during the day, it rose to a high of $1,195 and also fell to a low of $1,130. In the previous nine sessions, gold gained more than 7%. For the week, gold gained 2.6%. On a year to date basis, gold price is higher by 33%.

In the currency market on Friday, the dollar headed up against most of the major currencies. The dollar index, which measures the strength of dollar against basket of six other currencies, rose by almost 0.2%.

For the year, Dow, Nasdaq and S&P 500 are higher by 17.5%, 35.6% and 20.8% respectively.

Earnings season has ended for this season at Wall Street and there are no notably Treasury auctions for the coming week. But the economic calendar is full, with the ADP Employment change on Wednesday, 2 December, 2009 preceding the key Nonfarm Payrolls figure and Unemployment Rate on Friday, 4 December, 2009.

Dubai World scare, a trigger for correction?

Is Dubai World's debt repayment problem merely a delayed aftershock of last year's credit crisis or a fresh tremor likely to shake up the financial system? Opinion may be divided on this; but the event is certainly reason for stock market investors to turn more cautious. For this may be just the excuse the market is waiting for, to launch into a much-needed correction.

The initial stock market reaction to the Dubai World crisis has been to batter down companies which have their fortunes directly tied to Dubai or its troubled investment arm.

The stock of Spicejet, in which a subsidiary of Dubai World owns a 13.4 per cent stake, has been marked down and so have the stocks of Bank of Baroda and SBI, which have admitted to retail and corporate loan exposures in Dubai. History, however, suggests that investors need not worry too much about how these individual stocks may fare because of the crisis. The Dubai entities do not have a significant portfolio exposures to Indian stocks. Even if they hold indirect stakes, the past two years have seen numerous instances of troubled financial giants liquidating their stakes in Indian companies.

Despite recurring investor worries about `Bear Stearns' stocks, `Lehman' stocks, `Merrill Lynch' stocks and recently `Galleon' stocks, the impact of the holders' troubles on stock prices has been quite shortlived.

Stocks with good fundamentals have rebounded to pre-crisis levels, finding ready buyers at lower prices. Stocks with little claim to fundamentals have remained battered.

Given that Indian banks emerged relatively unscathed from the much larger credit crisis of last year, investors in banking stocks may have little to fear from the Dubai scare.

SYSTEMIC RISK

It is the broader market ramifications of this event that stock investors need to worry about. Some financial experts are betting on this crisis being quickly contained through a bail-out of Dubai World by other UAE nations. But if this scenario does not play out, it is feared that this may trigger a fresh bout of risk aversion on the part of lenders around the world. Going by what followed last year's credit crisis, this could lead to a sharp spike in the borrowing costs for businesses (and countries) with inferior credit ratings and a drying up of the now-ample liquidity.

This certainly cannot augur well for the many Indian companies which are now relying heavily on foreign funds to repair their debt-leavened balance sheets. This stock market rally has been led mainly by highly leveraged companies from the commodity and realty space, making such a scenario worrisome.

PROFIT-TAKING TIME?

A phase of risk aversion, once it starts, can also have a big impact on the overall liquidity flows into the emerging markets, India included. Remember that it was returning risk appetite on the part of global investors which laid the foundation for this entire stock market rally.

It is rising risk-taking which has prompted global investors to abandon the safer developed markets and money market funds, and to pour money into all manner of risky assets - commodities, emerging market bonds and emerging market stocks - over the past eight months. The returns from these assets have by now exceeded everybody's wildest expectations.

The temptation to take money off the table and lock into those sizeable profits, is, therefore, bound to be quite high. The Dubai scare has also cropped up at a time when the global markets are being assailed by fresh doubts about the sustainability of the ongoing economic recovery. Will governments be able to exit from their big-ticket stimulus spending?

Will the "recovery" sustain once the props of stimulus are removed? Is consumer confidence robust enough to carry the baton from here on? If the answer to any of these questions turns out to be a "No", then the current stock market rally, which is built on optimism, would certainly be due for a pause.

Indian investors also need to weigh a few additional factors on the scale. At over 21 times trailing earnings, the BSE Sensex is already quite close to the inflexion point at which previous bull markets (of 2007- 08 and 1999-00) halted. With topline growth proving elusive for many companies, even in the recent September quarter, doubts are beginning to emerge on whether Corporate India can deliver on these high expectations.

But, most important, irrespective of how its own corporate or economic fundamentals look, India has always proved to be a high Beta market in the global scheme of things. It races ahead of most other markets when the going is good, but takes a merciless battering when liquidity flows suffer the mildest blip. That may be reason enough for Indian stock market investors to take some money off the table now.

via BL

Dubai…than sinking feeling!

Dubai, till recently the magnet for international investment, is now repelling bulls world over. That sinking feeling came yet again as debt problems in Dubai took its toll on financial markets world over. Safe-haven bonds rose and the rupee fell against the dollar. The debate of whether we are out of the woods or not will only gain further momentum again.

In what appears to be the biggest sovereign default since Argentina in 2001, Dubai has sought debt standstill agreement at its Dubai World holding company or in other words, a six-month reprieve on debt payments.

Dubai Inc as it is nick-named, is deep in debt of $80 billion and needs a bailout from Abu Dhabi.

Meanwhile, RBI governor, Duvvri Subbarao, said the RBI will study the situation in Dubai and if necessary communicate about what the implications likely are.

Speaking to reporters in Hyderabad, the RBI governor said, "We should not react to instant news like this. One lesson of the crisis is that we must study the developments, and I think we must measure the extent of the problem there and how it impacts India."