Friday, November 27, 2009

U.S., Emerging Market Stocks Slide as Bonds Advance on Dubai

By Mark Gilbert and Paul Sillitoe

Nov. 27 (Bloomberg) -- U.S. and emerging-market stocks slumped and commodities dropped the most since July as Dubai’s attempt to delay debt repayments unnerved investors. Treasuries and the dollar rose while credit-default swaps surged.

The Standard & Poor’s 500 Index slid 1.3 percent at 10:57 a.m. in New York and the MSCI Emerging Markets Index slipped 2.1 percent. The Chicago Board Options Exchange Volatility Index, the equity-derivatives benchmark known as the VIX, surged 18 percent to 24.07. Two-year Treasury yields fell to the lowest level since December. Oil and gold tumbled as the Dollar Index advanced. Credit-default swaps tied to debt sold by Dubai rose 134 basis points to 675, according to CMA DataVision.

“The world’s going to test now how much this means to people’s risk-taking attitude,” said Donald Ross, the Cleveland- based global strategist for Titanium Asset Management Corp., which manages $9 billion. “This is a big enough deal for people to question how far and how fast we’ve come.”

Dubai World, the government investment company burdened by $59 billion of liabilities, sought this week to delay repayment on much of its debt. The yen pared its advance after Japan’s Finance Minister Hirohisa Fujii said he may contact the U.S. and Europe to act on currencies, signaling concern that the yen’s ascent will hurt the economy by crimping exports.

U.S. stock exchanges close at 1 p.m. in New York, three hours early.

Asia, Europe Stocks

The MSCI Asia Pacific Index slid 3.2 percent, the biggest drop since March, extending a rout in Europe yesterday that sent the Dow Jones Stoxx 600 Index to its steepest one-day slump since April. The MSCI World Index fell 0.6 percent, bringing its two-day drop to 2 percent. The Dow Jones Industrial Average slid 1.2 percent, after U.S. markets were closed yesterday for Thanksgiving.

South Korea’s Kospi index slid 4.7 percent and Taiwan’s Taiex lost 3.2 percent. Samsung Engineering Co. tumbled 9.8 percent, leading declines among construction stocks in Seoul on concern orders may slow in the United Arab Emirates, the biggest overseas market for South Korean builders.

Dubai’s attempt to delay debt payments prompted investors to buy assets deemed safe and sell riskier ones. Treasury two- year notes rallied, driving their yields down 0.05 percentage point to 0.70 percent, the lowest payout in 11 months. The VIX, which tends to rise when investors are less willing to take risks, jumped as much as 27 percent in the biggest intraday gain since Oct. 30.

‘Risk Aversion’

“We’re bound to see a rise in risk aversion,” Arnab Das, the head of market research and strategy at Roubini Global Economics, said in an interview from London “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses.”

The MSCI World has rallied 68 percent since March 9, and the S&P 500 has climbed 62 percent in the steepest rally since the Great Depression. The rebound came as the Federal Reserve spent, lent or guaranteed $11.6 trillion and held interest rates near zero to unlock credit markets and end the first simultaneous recessions in the U.S., Europe and Japan since World War II.

Europe’s Stoxx 600 reversed a decline of as much as 1.8 percent and gained 1.3 percent, paring its two-day decline to 1.9 percent. Royal Bank of Scotland Group Plc, which was Dubai World’s biggest loan arranger since January 2007 according to JPMorgan Chase & Co., gained 5.9 percent in London after plunging 7.8 percent yesterday.

Oil, Gold Drop

Oil fell 3.3 percent to $75.36 a barrel in New York. Gold lost 0.9 percent to $1,177.80 an ounce, falling for the first time in 10 days.

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG.

“If Dubai has to default, that could start a wave of defaults in other areas,” Mark Mobius, the chairman of Templeton Asset Management Ltd. who oversees $25 billion in emerging-market assets, said in an interview on Bloomberg Television from Hanoi. “This may be the trigger to allow for the market to take a rest and pull back.”

Debt Swaps

Credit-default swaps on emerging-market government and corporate bonds jumped, with contracts on Qatar adding 15 basis points to 129 and Abu Dhabi rising 24 to 184, according to CMA DataVision prices. Default swaps on DP World Ltd., the Middle East’s biggest port operator, rose 201 basis points to 810, according to CMA. Sellers also are requiring a 12 percent payment in advance. Swaps on Malaysian government bonds rose 16 basis points to 120 and those on Thailand climbed 14 to 124.

Default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The cost to protect U.S. corporate bonds from default rose to the highest in almost a month as Dubai attempts to delay debt repayments, trading in a benchmark credit derivatives index shows.

U.S. Swaps

Contracts on the Markit CDX North America Investment-Grade Index, used to speculate on the creditworthiness of 125 companies in the U.S. and Canada or to protect against losses on their debt, rose five basis points to a midprice of about 107.5 basis points as of 10:22 a.m. in New York, according to Phoenix Partners Group. The index rose to the highest since Nov. 2, according to CMA DataVision.

Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.

“One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.

Writedowns and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg.

Dollar Gains

The dollar rose against most major counterparts as Dubai’s attempt to delay debt spurred investors to sell higher-yielding assets funded with the currency.

The yen declined against the dollar after touching a 14- year high on speculation Japan will intervene after Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported. The dollar’s gain was reduced as global equity markets pared losses.

“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The Bank of Japan may sell the yen “and buy Treasuries, which will be a plus for Treasuries,” he said. Central banks intervene by buying or selling their currencies after sudden movements.